UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
__________
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2011
___________________
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_____ _____
Commission file number 0-6658
SCIENTIFIC INDUSTRIES, INC.
_________________________________________
(Exact Name of Registrant in Its Charter)
Delaware 04-2217279
_______________________________ __________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
70 Orville Drive, Bohemia, New York 11716
________________________________________ __________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 567-4700
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
___________________ _________________________________________
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.05 per share
______________________________________
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [ x ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [ ] No [ x ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ x ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act) Yes [ ] No [ x ]
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such
stock, as of August 19, 2011 is $3,703,400.
The number of shares outstanding of the registrant?s common stock,
par value $.05 per share ("Common Stock") as of August 19, 2011 is
1,196,577 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
SCIENTIFIC INDUSTRIES, INC.
Table of Contents
PART I
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 8
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT?S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 13
ITEM 9A. CONTROLS AND PROCEDURES 13
ITEM 9B. OTHER INFORMATION 14
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE 15
ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE 22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 23
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 24
SIGNATURES 28
EXHIBIT-31. CERTIFICATION 29
EXHIBIT-32. CERTIFICATION 31
3
Forward Looking Statements. The Company and its
representatives may from time to time make written or oral forward-
looking statements with respect to the Company's annual or long-term
goals, including statements contained in its filings with the Securities
and Exchange Commission and in its reports to stockholders.
The words or phrases "will likely result," "are expected
to," "will continue to," "is anticipated," "estimate," "project" or similar
expressions identify "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Readers are cautioned not to place undue
reliance on any such forward-looking statements, which speak only
as of the date made.
PART I
Item 1. Business.
General. Incorporated in 1954, Scientific Industries,
Inc., a Delaware corporation (which along with its subsidiaries, the
"Company"), is engaged in the design, manufacture, and marketing of
standard benchtop laboratory equipment ("Benchtop Laboratory Equipment")
and since November 2006, upon the acquisition of the outstanding shares
of Altamira Instruments, Inc., a Delaware corporation ("Altamira")
customized catalyst research instruments ("Catalyst Research
Instruments"). The Company's products are used primarily for research
purposes by universities, hospitals, pharmaceutical companies, clinics,
medical device manufacturers, petrochemical companies and other
related industries.
See "Proposed Acquisition" for the possible expansion of
the Company's operation in the bioprocessing field.
Operating Segments. The Company views its operations as
two segments: the manufacture and marketing of standard Benchtop
Laboratory Equipment for research in university, hospital and
industrial laboratories sold primarily through laboratory equipment
distributors, and the manufacture and marketing of custom-made
Catalyst Research Instruments for universities, government laboratories,
and chemical and petrochemical companies. For certain financial
information regarding the Company's operating segments, see Note 2 to
the consolidated financial statements included under Item 8.
Products.
Benchtop Laboratory Equipment. The Company's Benchtop
Laboratory Equipment products consist of mixers and shakers, rotators/
rockers, refrigerated and shaking incubators, and magnetic stirrers.
Sales of the Vortex-Genie (R) 2 Mixer, the Company's principal product,
excluding accessories, represented approximately 52% and 41% of the
Company's total sales for the fiscal years ended June 30, 2011
("fiscal 2011") and June 30, 2010 ("fiscal 2010"), respectively, or
68%, of the segment's sales for each of fiscal 2011 and fiscal 2010.
The vortex mixer is used to mix the contents of test
tubes, beakers, and other various containers by placing such
containers on a rotating cup or other attachments which cause the
contents to be mixed at varying speeds.
The Company's additional mixers and shakers include a
high speed touch mixer; a mixer with an integral timer, a patented cell
disruptor; microplate mixers, a vortex mixer incorporating digital
control and display; a large capacity multi-vessel vortex mixer and
shaker, and a large capacity orbital shaker.
4
The Company also offers various benchtop multi-purpose
rotators and rockers, designed to rotate and rock a wide variety of
containers, and a refrigerated incubator and an incubator shaker,
both of which are multi-functional benchtop environmental chambers
designed to perform various shaking and stirring functions under
controlled environmental conditions.
Its line of magnetic stirrers include a patented
high/low programmable magnetic stirrer; a four-place high/low
programmable magnetic stirrer; a large volume magnetic stirrer
available in analog and digital versions; and a four-place general
purpose stirrer also available in analog and digital versions.
Catalyst Research Instruments. The Catalyst Research
Instrument products are offered through the Company's subsidiary,
Altamira. Its flagship product is the AMI-200(TM), which is used to
perform traditional catalyst characterization experiments on an
unattended basis. The product also features a stand-alone personal
computer to control the instrument and incorporates proprietary
LabVIEW(R)-based software. The Company's AMI-300(TM) Catalyst
Characterization Instrument, introduced in June 2009, incorporates
a sophisticated data handling package and is designed to perform
dynamic temperature-programmed catalyst characterization
experiments. All AMI model instruments are designed or adapted
to a customer's individual requirements.
Its other Catalyst Research Instrument products include
reactor systems, high throughput systems and micro-activity reactors,
including the Company's BenchCAT(TM) custom reactor systems. They
are available with single and multiple reactor paths and with reactor
temperatures up to 1200 degrees Celsius. The systems feature multiple
gas flows, are available in gas and gas/liquid configurations, and
feature one or more stand-alone personal computers with the
LabVIEW(R)-based control software. In June, 2011, the Company
introduced the new MicroBenchCat Microreactor, a fully automated
reactor system.
Product Development. The Company designs and develops
substantially all of its products. Company personnel formulate plans
and concepts for new products and improvements or modifications of
existing products. The Company engages outside consultants to augment
its capabilities in areas such as industrial and electronics design.
Major Customer. Sales, principally of the Vortex-Genie
2 Mixer, to one customer, which is one of the two major distributors of
laboratory equipment, represented 11% of total sales for fiscal 2011,
and 14.6% of Benchtop Laboratory Equipment product sales. For fiscal
2010, sales to the customer accounted for 14.5% of the segment's sales
but less than 10% of total sales. Sales of Catalyst Research
Instrument products are generally pursuant to a few large orders
amounting on average to over $100,000 to a limited number of customers.
In fiscal 2011, sales to two customers, each of which represented at
least 10% of that segment's sales, accounted for an aggregate of 30%
of the segment's sales (7% of total sales). In fiscal 2010, sales to
three different customers, each of which represented at least 10% of
that segment's sales, accounted for an aggregate of 45% of the
segment's total sales (18% of total sales).
Marketing.
Benchtop Laboratory Equipment. The Company's Benchtop
Laboratory Equipment products are generally distributed and marketed
through an established network of domestic and overseas laboratory
equipment distributors, who sell the Company's products through printed
catalogs, websites and sales force. See "Major Customer". The Company
also markets products through attendance at industry trade shows, trade
publication advertising, brochures and catalogs, the Company's website,
and through the efforts of its first sales managers.
In general, due to the reliance on sales through the
catalog distribution system, it takes two to three years for a new
benchtop laboratory equipment product to begin generating meaningful
sales.
5
Catalyst Research Instruments. The Company's Catalyst
Research Instruments are sold directly worldwide to universities,
government laboratories, and chemical and petrochemical companies
through its sales personnel and independent representatives engaged
on a commission basis. Its marketing efforts include attendance at
various trade shows, Altamira's website, outside sales
representatives, and printed materials.
Assembly and Production. The Company has an operating
facility in Bohemia, New York from which its Benchtop Laboratory
Equipment Operations are conducted and another in Pittsburgh,
Pennsylvania from which its Catalyst Research Instruments Operations
are conducted. The Company's production operations principally involve
assembly of components supplied by various domestic and international
independent suppliers.
Patents, Trademarks, and Licenses.
The Company holds several United States patents relating
to its products, including a patent which expires in September 2015
for the TurboMix(TM), an accessory to the Vortex-Genie 2 Mixer, a patent
which expires in July 2016 on the Roto-Shake Genie(R); a patent which
expires in November 2022 on the MagStir Genie(R), MultiMagStir Genie(R),
and Enviro-Genie(R), and a patent which expires in January 2023 on
a biocompatible bag with integral sensors.
The Company has various proprietary marks, including
AMI(TM), BenchCAT(TM), BioGenie(R), Disruptor Beads(TM), Disruptor
Genie(R), Enviro-Genie(R), Genie(TM), MagStir Genie(R), MegaMag
Genie(R), MicroPlate Genie(R), MultiMagStir Genie(R), Multi-MicroPlate
Genie(R), Orbital-Genie(R), QuadMag Genie(R), Roto-Shake Genie(R),
TurboMix(TM), and Vortex-Genie(R), each of which it considers
important to the success of the related product. The Company also
has several trademark applications pending. No representation can
be made that any application will be granted or as to the protection
that any existing or future trademark may provide.
The Company has several licensing agreements for technology
and patents used in the Company's business. A non-exclusive worldwide
sublicense from Fluorometrix Corporation relates to the development,
production and marketing of incubator systems for vessels, including
bags in volumes ranging from 250 milliliters to 5 liters, See "Proposed
Acquisition". The Company also holds a license as to the technology
related to its patent for the Roto-Shake Genie, and a patent related to
its TurboMix attachment for the Vortex-Genie and Disruptor Genie. The
license fees for fiscal 2011 and fiscal 2010 amounted to $11,700 and
$12,900, respectively.
Foreign Sales. The Company's sales to overseas customers,
including distributors, principally in Asia and Europe, accounted for
approximately 54% and 37% of the Company's net sales for fiscal 2011
and fiscal 2010, respectively. Such sales are paid in United States
dollars and are therefore not subject to risks of currency fluctuation,
foreign duties and customs.
Seasonality. The Company does not consider its business
to be seasonal.
Backlog. The backlog for Benchtop Laboratory Equipment
products is not significant because this line of products is comprised
of standard catalog items requiring lead times which usually are not
longer than two weeks. The backlog for Catalyst Research Instrument
products as of June 30, 2011 was $424,600, most of which is expected
to be filled by September 30, 2011, as compared to a backlog of
$454,000 as of June 30, 2010, all of which was filled in Fiscal 2011.
6
Competition. Most of the Company's competitors are
substantially larger and have greater financial, production and
marketing resources than the Company. Competition is generally
based upon technical specifications, price, and product recognition
and acceptance. The Company's main competition for its Benchtop
Laboratory Equipment products in the United States derives from
private label brand mixers offered by the two largest laboratory
equipment distributors in the United States, who dominate the end
user market. The Company believes its vortex mixer products and
trademarks are factors in that market around the world.
The Company's major competitors for its Benchtop
Laboratory Equipment are Henry Troemner, Inc. (a private label supplier
to the two largest laboratory equipment distributors in the U.S. and
Europe), IKA-Werke GmbH & Co. KG, a German company, Benchmark Scientific,
Inc., (a U.S. importer of China-produced products) and Heidolph
Instruments GmbH, a German company.
The primary competition for the Company's Catalyst Research
Instrument products is in the form of instruments produced internally
by research laboratory staffs of potential customers. Competitors in
the United States include Quantachrome Instruments, and Micromeritics
Instrument Corporation, each a privately-held company.
Research and Development. The Company incurred research
and development expenses, the majority of which related to new Benchtop
Laboratory Equipment products, of $324,400 during fiscal 2011 compared
to $343,800 during fiscal 2010. The Company expects research and
development expenditures in the fiscal year ending June 30, 2012 to
be at the approximate same level of those for fiscal 2011, except for
expenditures related to the proposed acquisition described under
"Proposed Acquisition".
Government and Environmental Regulation. The Company's
products and claims with respect thereto have not required approval
of the Food and Drug Administration or any other government approval.
The Company's manufacturing operations, like those of the industry
in general, are subject to numerous existing and proposed, if
adopted, federal, state, and local regulations to protect the
environment, establish occupational safety and health standards and
cover other matters. The Company believes that its operations are
in compliance with existing laws and regulations and the cost to
comply is not significant to the Company.
Employees. As of August 19, 2011, the Company employed
29 persons (18 for the Benchtop Laboratory Equipment Operations
and 11 for the Catalyst Research Instruments Operations) of whom
25 were full-time, including its three executive officers. None
of the Company's employees are represented by any union.
Proposed Acquisition. In May 2011, the Company agreed
in principle to acquire from Fluorometrix Corporation, a small
privately held corporation, substantially all of its assets consisting
principally of an exclusive license (the "License") from the University
of Maryland Baltimore County ("UMBC") with respect to the related
rights and know-how under a patent held by UMBC entitled
"Microbioreactor Apparatus and Technology for High Throughout
Bioprocessing" and related sublicenses granted thereunder, including
the sublicense referred to under "Patents, Trademarks and Licenses"
held by the Company, with respect to the exclusive world-wide rights
to the product and service income from any bioprocessing application
but not limited to bioreactor systems, disposable reactor, shaker and
other flash system.
The proposed acquisition consideration, if consummated,
will be approximately $900,000 payable in cash, a promissory note and
shares of common stock, plus a contingent amount payable
of the net fees and royalties received by the Company and its
subsidiaries under the License and sublicenses acquired. The design
and development of methods, systems, processes and products by the
Company under the License, is to be done pursuant to a research and
development agreement with a company affiliated with the President
of the assignor.
7
No assurance can be given that the proposed acquisition
will be consummated or if consummated as to its final terms. If
consummated, that any products, methods, systems or processes will
be successfully developed or that any material royalties and fees
will be generated under the License and sublicenses.
Available Information. The Company's Annual Report to
Stockholders for fiscal 2011, includes its Annual Report on Form 10-K.
The Annual Report will be mailed to security holders together
with the Company's proxy material and solicitation as it relates to
the Company's 2011 Annual Meeting of Stockholders. All the Company's
reports, including Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and other information filed
with, or furnished to, the Securities and Exchange Commission
(the "SEC" or the "Commission"), including amendments to such reports,
are available on the SEC's website that contains such reports, proxy
and information statements, and other information regarding companies
that file electronically with the Commission. This information is
available at www.sec.gov. In addition, all the Company's public
filings can be accessed through the Company's website at
http://scientificindustries.com/stockfinancialinfo.html.
Item 1A. Risk Factors.
In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, important risk
factors are identified below that could affect the Company's
financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or
statements expressed with respect to such future periods in any
current statements. The Company undertakes no obligation to
publicly revise any forward-looking announcements to reflect
future events or circumstances.
Dependence on a Major Customer
______________________________
The laboratory equipment industry is dominated in the
U.S. by two major laboratory equipment distributors, one of which,
is the Company's largest customer for the Company's Benchtop
Laboratory Equipment products. Sales to this customer, accounted
for 14.6% and 14.5%, respectively, of the sales of the Benchtop
Laboratory Equipment Operations for fiscal 2011 and fiscal 2010.
No representation can be made that the Company will
be successful in continuing to retain this customer, the loss of
which could have an adverse effect on future operating results of
the Company.
One Benchtop Laboratory Equipment Product Accounts for a
Substantial Portion of Revenues
________________________________________________________
The Company has a limited number of Benchtop Laboratory
Equipment products with one product, the Vortex-Genie 2 Mixer,
accounting for approximately 68% of Benchtop Laboratory Equipment
sales, for both fiscal 2011 and fiscal 2010, and 52% and 41% of
total sales for fiscal 2011 and fiscal 2010, respectively.
The Company is a Small Participant in Each of the Industries in
Which It Operates
_______________________________________________________________
The Benchtop Laboratory Equipment industry is highly
competitive. Although the Vortex-Genie 2 Mixer has been widely
accepted, the annual sales of the Benchtop Laboratory Equipment
products ($4,525,100 for fiscal 2011 and $4,272,700 for fiscal
2010) are significantly lower than the annual sales of many of
its competitors in the industry. The principal competitors are
substantially larger with much greater financial, production and
marketing resources than the Company. There are constant new
entrants into the vortex mixer market, including products imported
from China.
The production and sale of Catalyst Research Instruments
products is highly competitive. Altamira's competitors include
several companies with greater resources and many laboratories which
produce their own instruments.
8
The Company's Ability to Grow and Compete Effectively Depends In Part
on Its Ability to Develop and Effectively Market New Products
_____________________________________________________________________
Over the past ten years, the Company has continuously
invested in the development and marketing of new Benchtop Laboratory
Equipment products with a view to increasing revenues and reducing
the Company's dependence on the Vortex-Genie 2 Mixer. Gross revenues
derived from new Benchtop Laboratory Equipment products (those other
than the Vortex-Genie 2 Mixer) increased to $1,484,000 for fiscal
2011 from $1,389,400, for fiscal 2010. However, the segment's ability
to compete will depend upon the Company's success in continuing to
develop and market new laboratory equipment as to which no assurance
can be given.
The Company relies primarily on distributors and their
catalogs to market its Benchtop Laboratory Equipment products, as
is customary in the industry. Accordingly, sales of new products are
heavily dependent on the distributors' decision to include and retain
a new product in the distributors' catalogs and on their websites.
It may be at least 24 to 36 months between the completion of
development of a product and the distribution of the catalog in which
it is first offered, and not all distributors feature the
Company's products in their catalogs. In fiscal 2010, the Company
hired a new sales manager to bolster its sales efforts in the United
States, and in May 2011, the Company engaged a consultant overseas
as its European Sales Manager.
The Company's Catalyst Research Instruments line of
products consists of only a few products. The ability of the
Company to compete in this segment and expand the line will depend
on its ability to make engineering improvements to existing products
and develop and add new products incorporating more current
technology. Over the last two years the Company has introduced
two new catalyst research products to increase its product
offerings and has continuously looked to expand its outside
sales force.
No assurance can be given that the amounts allocated
by the Company for its new product development and sales and marketing
programs will be sufficient to develop additional commercially
feasible products or that distributors will include or retain any
particular product in their catalogs and websites.
The Company May Be Subject to General Economic, Political, and
Social Factors
______________________________________________________________
Orders for the Company's products, particularly its
Catalyst Research Instruments products, depend in part, on the
customer's ability to secure funds to finance purchases.
Availability of funds can be affected by budgetary constraints.
Factors such as a general economic recession, such as the one which
commenced in fiscal 2009 and negatively affected the Company in
fiscal 2011, or major terrorist attack could have a negative impact
on the availability of funding including government or academic
grants to potential customers.
The Company's ability to secure new Catalyst Research
Instruments orders can also be affected by changes in domestic and
international policies pertaining to energy and the environment, which
could affect funding of potential customers.
The Company is Heavily Dependent on Outside Suppliers for the
Components of Its Products
_____________________________________________________________
The Company purchases all its components from outside
suppliers and relies on a few single suppliers for certain of its
Benchtop Laboratory Equipment products, including the Vortex-Genie 2,
mostly due to cost considerations. To reduce the risk of component
shortages, the Company maintains higher than normal inventories of
such components. Many of the Company's suppliers, including United
States vendors, produce the components directly or indirectly in
overseas factories, and orders are subject to long lead times and
potential other risks related to production in a foreign country.
To minimize the risk of supply shortages, the Company keeps more
than normal quantities on hand of the critical components that
cannot easily be procured or, where feasible and cost effective,
purchases are made from more than one supplier.
9
The Company's Ability to Compete Depends in Part on Its Ability To
Secure and Maintain Proprietary Rights to its Products
__________________________________________________________________
The Company has no patent protection for its principal
Laboratory Equipment products, the Vortex-Genie 2 Mixer, and Catalyst
Research products and limited patent protection on a few other
Benchtop Laboratory Equipment products. There are several
competitive products available in the marketplace possessing
similar technical specifications and design. The Company does not
have any patent protection for any of its Catalyst Research
Instruments products.
If the proposed acquisition of the License and sublicenses
under the UMBC patent is successfully consummated, the Company's
ability to conduct business in the related business will depend
on the ability of the Company and the Licensor to maintain validity
and enforceability of the related patent and to obtain related foreign
patents.
There can be no assurance that any patent issued or
licensed to the Company provides or will provide the Company with
competitive advantages or will not be challenged by third parties.
Furthermore, there can be no assurance that others will not
independently develop similar products or design around the patents.
Any of the foregoing activities could have a material adverse effect
on the Company. Moreover, the enforcement by the Company of its
patent or license rights may require substantial litigation costs.
The Company Has Limited Management Resources
____________________________________________
The loss of the services of any of Ms. Helena Santos,
the Company's Chief Executive and Financial Officer and President,
Mr. Robert Nichols, the Company?s Executive Vice President and Mr.
Brookman March, President of Altamira, or any material expansion
of the Company's operations could place a significant additional
strain on the Company?s limited management resources and could be
materially adverse to the Company's operating results and financial
condition.
The Common Stock of the Company is Thinly Traded and is Subject to
Volatility
__________________________________________________________________
As of August 19, 2011, there were only 1,196,577 shares
of Common Stock of the Company outstanding, of which 331,772 shares
(28%) 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 2011 on which no trades of the
Company's Common Stock were reported. Accordingly, the market price
for the Common Stock is subject to great volatility.
Item 2. Properties.
The Company's executive offices and principal manufacturing
facility for its Benchtop Laboratory Equipment Operations comprise
approximately 25,000 square feet, are located in Bohemia, New York and
held pursuant to a lease expiring in January 2015. The Company's
Catalyst Research Instruments Operations are conducted from an
approximately 6,600 square foot facility in Pittsburgh, Pennsylvania
held pursuant to lease. The Company is negotiating an extension of
the lease term which expired on July 31, 2011. See Note 9 to the
Financial Statements in Item 8. The leased facilities are suitable
and adequate for each of the Company's operations. In the opinion
of management, all properties are adequately covered by insurance.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal
proceedings.
10
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 2011.
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
______________________________________________________________
The Company's Common Stock is traded in the over-the-counter
market. The following table sets forth the low and high bid
quotations for each quarter of fiscal 2010 and fiscal 2011, 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
_________________________ _______ ________
09/30/09 $1.71 $2.78
12/31/09 2.63 3.00
03/31/10 2.63 3.37
06/30/10 2.61 3.36
09/30/10 2.56 3.40
12/31/10 2.85 3.25
03/31/11 3.05 3.30
06/30/11 3.15 3.55
(a) As of August 24, 2011, there were 432 record holders
of the Company's Common Stock.
(b) On December 15, 2010, the Company paid a cash dividend
of $.09 per share to stockholders of record on October 18, 2010. On
December 21, 2009, the Company paid a cash dividend of $.06 per
share to stockholders of record on October 23, 2009. The Company is
not subject to any agreement which prohibits or restricts the Company
from paying dividends on its Common Stock.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Forward-Looking statements. Certain statements contained
in this report are not based on historical facts, but are forward-
looking statements that are based upon various assumptions about future
conditions. Actual events in the future could differ materially from
those described in the forward-looking information. Numerous unknown
factors and future events could cause such differences, including but
not limited to, product demand, market acceptance, success of
marketing strategy, success of expansion efforts, impact of competition,
adverse economic conditions, and other factors affecting the Company's
business that are beyond the Company's control, which are discussed
elsewhere in this report. Consequently, no forward-looking statement
can be guaranteed. The Company undertakes no obligation to publicly
update forward-looking statements, whether as a result of new
information, future events or otherwise. This Management's Discussion
and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Company's financial statements and
the related notes included elsewhere in this report.
11
Overview. The Company's income before income taxes
decreased to $307,200 for fiscal 2011 compared to $777,600 for fiscal
2010, mainly the result of substantially reduced sales of catalyst
research instruments, which the Company believes was the result from
the negative general economic conditions since the end of calendar
year 2008. Due to the nature of the catalyst research instruments
business whereby it can take up to 60 months for an order to
materialize, their business cycles tend to lag the overall economy.
Although customer inquiries and resulting quotations are at a high
level, there is still uncertainty as to future sales of catalyst
research instruments due to the continued economic uncertainty.
Strategically, the Company is focusing on non-Government customers
and emerging markets such as China, India and Brazil. The Company
continues to monitor global economic uncertainties and other risks
that may affect its business, however, it cannot predict with
certainty the magnitude or duration of the impact.
Results of Operations. Net sales for fiscal 2011
decreased by $1,200,300 (17.0%) to $5,869,800 as compared with
$7,070,100 for fiscal 2010. Net sales of Benchtop Laboratory
Equipment products increased by $252,400 (5.9%), the result of
increased sales to U.S. and overseas customers. Net sales of
Catalyst Research Instruments products decreased by $1,452,700
(51.9%) due to a decrease in orders resulting from a lack of
customer funding. Sales of this segment?s products are comprised
of a small number of large orders, typically averaging more than
$100,000 each. As of June 30, 2011, the order backlog for Catalyst
Research Instrument products was $424,600, all of which the Company
anticipates filling by September 30, 2011, compared with $454,000
as of June 30, 2010.
The gross profit percentage for fiscal 2011 increased
to 41.0% compared to 38.8% for fiscal 2010, due primarily to sales
mix of the operating segments and slightly higher margins for the
Benchtop Laboratory Equipment Operations.
General and administrative expenses for fiscal 2011
increased by $76,900 (7.0%) to $1,175,100 compared to $1,098,200
for fiscal 2010, primarily the result of an increase in expenses
incurred to investigate potential business opportunities in fields
other than those of the two segments.
Selling expenses for fiscal 2011 increased by $84,400
(15.2%) to $638,500 from $554,100 for fiscal 2010, primarily due to
an increase in sales commissions paid to independent sales
representatives and travel expenses by the Catalyst Research
Instruments Operations.
Research and development expenses decreased by $19,400
(5.6%) to $324,400 compared to $343,800 for fiscal 2010, primarily
the result of lower cost new product development projects by the
Catalyst Research Instruments Operations.
Other income increased by $2,500 (7.4%) to $36,400 for
fiscal 2011 from $33,900 for fiscal 2010, primarily because of
subrental income earned by the Benchtop Laboratory Equipment
Operations.
The lower income tax expense for fiscal 2011 of
$79,600 compared to $237,900 for fiscal 2010 was due to lower income.
As a result of the foregoing, net income for fiscal
2011 was $227,600, a decrease of $312,100 (57.8%) from $539,700 for
fiscal 2010.
Liquidity and Capital Resources. Cash and cash
equivalents increased by $275,100 (43.5%) to $907,800 as of June
30, 2011 from $632,700 as of June 30, 2010.
12
Net cash provided by operating activities was $652,500
for fiscal 2011 as compared to $115,300 for fiscal 2010, due mainly to
the higher collection of accounts receivable balances. Cash used
in investing activities increased from $154,500 to $269,700, primarily
due to the higher amount of additional consideration paid for the last
payment period for the acquisition of Altamira and purchases of new
factory equipment. Cash used in financing activities increased to
$107,700 for fiscal 2011 from $66,500 for fiscal 2010 mainly due to
the higher cash dividend paid in fiscal 2011.
The Company's working capital of $3,724,000 as of June
30, 2011 increased by $211,300 (6.0%) from the working capital of
$3,512,700 as of June 30, 2010, primarily the result of operating
income and the lesser contingent consideration for the acquisition
of Altamira Instruments, Inc., payment of which ended in November 2010.
The Company has a line of credit with its bank,
JPMorgan Chase Bank, N.A. which provides for maximum borrowings of
up to $700,000, to bear interest at 3.08 percentage points above the
LIBOR Index, which was approximately 3.25% at June 30, 2011 and is to
be secured by a pledge of collateral consisting of the inventory,
accounts, chattel paper, equipment and general intangibles of the
Company. Outstanding amounts are due and payable by June 13, 2013
with a requirement that the Company is to reduce the outstanding
principal balance to zero during the 30 day period ending on the
anniversary date of the promissory note. As of September 9, 2011,
no borrowings under the line have been made.
Management believes that the Company will be able to
meet, absent a material capital expenditure, its cash flow needs
including those it expects to incur if the proposed acquisition of
the bioprocessing License and sublicenses is successfully consummated,
during the 12 months ending June 30, 2012 from its available financial
resources including its cash and investment securities, and operations.
Capital Expenditures. During fiscal 2011, the Company
incurred $63,600 in capital expenditures. The Company expects that based
on its current operations, its capital expenditures will not be
materially higher for the fiscal year ending June 30, 2012, except for
payments to be made in connection with the acquisition, if consummated,
of the bioprocessing License and sublicenses.
Off-Balance Sheet Arrangements. None.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements required by this item are attached
hereto on pages F1-F21.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. As of
the end of the period covered by this Annual Report on Form 10-K, based
on an evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934), the Chief Executive and Chief Financial Officer
of the Company has concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Company in its Exchange Act reports is recorded,
processed, summarized and reported within the applicable time periods
specified by the SEC's rules and forms. The Company also concluded
that information required to be disclosed in such reports is accumulated
and communicated to the Company's management, including its principal
executive and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
13
Management's Annual Report on Internal Control Over Financial
Reporting. Management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as
such term is defined in Securities Exchange Act Rule 13a-15(f) and
15d-15(f). The Company's internal controls over financial reporting are
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.
The Chief Executive and Chief Financial Officer of the
Company conducted an evaluation of the effectiveness of the Company's
internal controls over financial reporting as of June 30, 2011 based on
the criteria set forth by the Committee of Sponsoring Organizations of
the Tread way 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, 2011, the Company's internal controls over financial
reporting were effective based on these criteria.
This annual report does not include an attestation
report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was
not subject to attestation by the Company's registered public accounting
firm pursuant to the rules of the Securities and Exchange Commission
that permit the Company to provide only management's report in this
annual report.
Changes in Internal Control Over Financial Reporting.
There was no change in the Company's internal controls over financial
reporting that occurred during the most recent fiscal quarter that
materially affected or is reasonably likely to materially affect the
Company's internal controls over financial reporting.
Inherent Limitations on Effectiveness of Controls. The
Company's management, including its Chief Executive and Chief Financial
Officer, believes that its disclosure controls and procedures and
internal controls over financial reporting are designed to provide
reasonable assurance of achieving their objectives and are effective
at the reasonable assurance level. However, management does not expect
that its disclosure controls and procedures or its internal control over
financial reporting will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances
of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty,
and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people or by management
override of the controls. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with policies or
procedures may deteriorate. Because of the inherent limitations in a
cost effective control system, misstatements due to error or fraud
may occur and not be detected.
Item 9B. Other Information.
Not applicable.
14
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Following the death in July 2011 of Mr. Joseph I. Kesselman,
a Director, the Board of Directors in September 2011 set five as the
number of Directors of the Company.
The Company has the following five Directors:
Joseph G. Cremonese (age 75), 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 Proteomics, Inc., a
producer of recombinant proteins for medical research. Prior to
1991, he had been employed by Fisher Scientific, the largest U.S.
distributor of laboratory equipment.
Roger B. Knowles (age 86), a Director since 1965, is
retired. During the past five years he had been, although not
currently, involved in liquidating various real estate and
manufacturing concerns.
Grace S. Morin (age 63), a Director since December
4, 2006, had been President, Director and principal stockholder
of Altamira Instruments, Inc. from December 2003 until its
acquisition in November 2006 by the Company. Ms. Morin had
been employed by Altamira to supervise its administrative
functions at the Pittsburgh, Pennsylvania facility as a full-time
employee through March 31, 2009 and since that date as a part-time
consultant. Prior to December 2003, she was a general business
consultant for two years, and prior thereto a member of senior
management of a designer of gas flow environmental engineered
products for approximately four years.
Helena R. Santos (age 47), a Director since 2009,
has been employed by the Company since 1994, and has served since
August 2002 as its President, Chief Executive Officer and Treasurer.
She had served as Vice President, Controller from 1997 and as
Secretary from May 2001. Ms. Santos was an internal auditor with
a major defense contractor from March 1991 to April 1994. She had
been previously employed in public accounting.
James S. Segasture (age 75), 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 following: the fiscal year ending June 30,
2011 - two Directors (Messrs. Cremonese and Knowles, Class C), the
fiscal year ending June 30, 2012 - two Directors (Ms. Santos and Mr.
Segasture, Class A), and the fiscal year ending June 30, 2013 - one
director (Ms. Morin).
Board Committees
Mr. Joseph I. Kesselman had been until his death in July
2011 a member of the Stock Option Committee and the Compensation
Committee.
James S. Segasture is currently the sole member of the
Company's Stock Option Committee, which administers the Company's
2002 Stock Option Plan ("2002 Plan"). The members of the Committee
serve at the discretion of the Board.
Grace S. Morin, and James S. Segasture are the current
members of the Company's Compensation Committee serving at the
discretion of the Board. The Committee administers the Company's
compensation policies.
15
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 have sufficient
knowledge to properly evaluate and analyze the Company's financial
statements.
Executive Officers
Helena R. Santos, CPA (age 47), employed by the Company
since 1994, has served since August 2002 as President, Chief Executive
Officer and Treasurer. See "Directors" for additional background
information.
Robert P. Nichols (age 50), employed by the Company since
February 1998, has served since August 2002 as Executive Vice President.
Previously, he had been since May 2001 Vice President, Engineering.
Prior to joining the Company, Mr. Nichols was an Engineer Manager with
Bay Side Motion Group, a precision motion equipment manufacturer from
January 1996 to February 1998.
Brookman P. March (age 66) has been Director of Sales and
Marketing of Altamira, which conducts the Catalyst Research Instruments
operation since November 30, 2006 and its President since July 2008.
He had been Vice President and a Director of Altamira from December
2003 until it was acquired by the Company. Mr. March is the husband
of Ms. Morin, a Director.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that, for fiscal 2011, its officers,
directors and 10% stockholders timely complied with all filing
requirements of Section 16(a) of the Securities Exchange Act of 1934,
as amended.
Code of Ethics
We have adopted a code of ethics that applies to our
Executive Officers and Directors. A copy of the code of ethics can be
found on our website at www.scientificindustries.com.
Item 11. Executive Compensation.
Compensation Discussion and Analysis. The Compensation
Committee reviews and recommends to the Board of Directors the
compensation to be paid to each executive officer. In making a
determination, the Committee and the Board give material consideration
to the Company's results of operations and financial condition,
competitive factors and the Company's resources. The compensation
at times includes grants of options under its stock option plan to the
named executives. Each officer is employed pursuant to a long-term
employment agreement, containing terms proposed by the Committee
and approved as reasonable by the Board of Directors. The Board is
cognizant that as a relatively small company, the Company has limited
resources and opportunities with respect to recruiting and retaining key
executives. Accordingly, the Company has relied upon long-term
employment agreements and grants of stock options to retain qualified
personnel.
Compensation for each of its executive officers provided
by their employment agreements were based on the foregoing factors and
the operating and financial results of the segments under their
management.
16
The following table summarizes all compensation paid by
the Company to each of its executive officers for the fiscal years ended
June 30, 2011 and 2010.
SUMMARY COMPENSATION TABLE
______________________________________________________________________
Non- Non-
Equity Qualified
Incentive Deferred
Name Plan Comp-
and Stock Option Comp- ensation
Principal Fiscal Salary Bonus Awards Awards ensation Earnings
Position Year ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
______________________________________________________________________
Helena R. 2011 135,000 8,000(1) 0 0 0 0
Santos, 2010 131,500 5,000 0 0 0 0
CEO,
President,
CFO
______________________________________________________________________
Robert P. 2011 123,600 4,400(1 0 0 0 0
Nichols, 2010 121,300 5,000 0 0 0 0
Exec.
V.P.
______________________________________________________________________
Brookman 2011 122,650 5,000(1) 0 2,900(3) 0 0
P. March, 2010 116,900 0 0 8,100(3) 0 0
Director
of Sales
and
Marketing,
and
President of
Altamira
______________________________________________________________________
SUMMARY COMPENSATION TABLE (CONTINUED)
______________________________________________________________________
Changes
in
Pension
Value
and Non-
Qualified All
Name Deferred Other
and Comp- Comp-
Principal Fiscal ensation ensation Total
Position Year Earnings ($) ($)
(a) (b) (i) (j)
______________________________________________________________________
Helena R. 2011 0 2,900(2) 145,900
Santos, 2010 0 2,600(2) 139,100
CEO,
President,
CFO
______________________________________________________________________
Robert P. 2011 0 2,600(2) 130,600
Nichols, 2010 0 2,450(2) 128,700
Exec.
V.P.
______________________________________________________________________
Brookman 2011 0 5,100(2) 135,650
P. March, 2010 0 4,700(2) 129,700
Director
of Sales
and
Marketing,
and
President of
Altamira
______________________________________________________________________
(1) Represents amounts paid during fiscal 2011 earned for fiscal 2010.
(2) The amounts represent the Company's matching contribution under
the Company's 401(k) Plans.
(3) The amounts represent compensation expense for stock options
granted valued utilizing the Black-Scholes-Merton options pricing model,
disregarding estimates of forfeitures related to service-based vesting
considerations. The fiscal 2010 amount includes a 2,000 share stock
option granted as a bonus during fiscal 2010 valued at $4,300.
17
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED JUNE 30, 2011
There were no options granted to officers during fiscal 2011.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
_______________________________________________________________________
Option Awards
_______________________________________________________________________
Number Equity
Number of Incerntive
of Securities Plan Awards:
Securities Under- Number of
Under- lying Securities
lying Un- Unexercised Underlying Option
exercised Options(#) Unexercised Exercise Option
Options(#) Unexerci- Unearned Price Expiration
Name Exercisable sable Options(#) ($) Date
(a) (b) (c) (d) (e) (f)
______________________________________________________________________
Robert P.
Nichols 5,000 0 0 1.25 10/2012
______________________________________________________________________
Brookman P. 4,833 1,667 0 3.07 11/2014
March
_____________________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
______________________________________________________________________
Stock Awards
______________________________________________________________________
Equity
Incentive
Equity Plan
Incentive Awards:
Plan Market or
Awards: Payout
Number of Value of
Market Unearned Unearned
Number Value Shares, Shares,
of Shares of Shares Units or Units or
or Units or Units Other Other
of Stock of Stock Rights Rights
That That That That
Have not Have not Have not Have not
Vested Vested Vested Vested
Name (#) ($) (#) ($)
(a) (g) (h) (i) (j)
______________________________________________________________________
Robert P.
Nichols 0 0 0 0
______________________________________________________________________
Brookman P. 0 0 0 0
March
______________________________________________________________________
No executive officer exercised any options during fiscal 2011.
18
Employment Agreements
In September 2011, The Company entered into new employment
agreements with Ms. Helena R. Santos and Robert P. Nichols extending
their terms of employment to June 30, 2013. The new agreements
increased the annual base salaries for the fiscal years ending June 30,
2012 and June 30, 2013, for Ms. Santos from $135,000 for the fiscal
year ended June 30, 2011 to $138,000 and $141,000 respectively; and
for Mr. Nichols from $123,600 for the fiscal year ended June 30, 2011 to
$126,320 and $129,100 respectively. Bonuses, if any, are to be awarded
at the discretion of the Board of Directors for each of the fiscal
years ending June 30, 2012 and June 30, 2013. For the six month
period ended June 30, 2010 and the year ended June 30, 2011, the Board
of Directors authorized bonuses of $8,000 and $4,000, respectively
for Ms. Santos and $4,400 and $3,000, respectively for Mr. Nichols.
In October 2010, the Company entered into a new employment
agreement with Mr. March extending the term through June 30, 2012, which
may be further extended by mutual consent for an additional 12 month
period. The agreement provides for an annual base salary of $121,900
through November 30, 2010 and $128,000 thereafter. Bonuses, if any,
may be awarded at the discretion of the Board of Directors, with respect
to services rendered during the twelve months ended November 30, 2010,
the seven months ended June 30, 2011, and the twelve months ending
June 30, 2012. A bonus of $5,000 was paid to Mr. March during fiscal
2011 as to the twelve month period ended November 30, 2010.
Mr. March is the husband of Grace S. Morin, a Director
of the Company and of Altamira and a former principal stockholder of
Altamira.
Each of the foregoing employment agreements contains
confidentiality and non-competition covenants. The employment
agreements for Ms. Santos and Mr. March contain termination
provisions stipulating that if the Company terminates the employment
other than for death, disability, or cause (defined as (i) conviction
of a felony or (ii) gross neglect or gross misconduct (including
conflict of interest), the Company shall pay severance payments
equal to one year's salary at the rate of the compensation at the
time of termination, and continue to pay the regular benefits provided
by the Company for a period of two years from termination.
Directors' Compensation and Options
DIRECTORS' COMPENSATION
For the Year Ended June 30, 2011
Non-
Equity
Fees Incentive
Earned Plan
or Paid Stock Option Comp-
in Cash Awards Awards ensation
Name ($) ($) ($) ($)
(a) (b) (c) (d) (e)
_____________________________________________________________________
Joseph G.
Cremonese 25,700 0 16,200(2) 0
Joseph
Kesselman(1) 12,700 0 0 0
Roger B.
Knowles 12,700 0 0 0
Grace S.
Morin 12,700 0 0 0
James S.
Segasture 12,700 0 0 0
____________________________________________________________________
DIRECTORS' COMPENSATION (CONTINUED)
Changes
in
Pension
Value and
Non- Non-
qualified qualified
Deferred Deferred All
Compens- Comp- Other
ation ensation Comp-
Earnings Earnings ensation Total
Name ($) ($) ($) ($)
(a) (f) (g) (h) (i)
____________________________________________________________________
Joseph G.
Cremonese 0 0 36,000(3) 77,900
Joseph I.
Kesselman(1) 0 0 0 12,700
Roger B.
Knowles 0 0 0 12,700
Grace S.
Morin 0 0 9,000(4) 21,700
James S.
Segasture 0 0 0 12,700
____________________________________________________________________
(1) Mr. Kesselman died in July 2011.
(2) The amount represents consulting expense recorded in fiscal 2011
for stock options granted in fiscal 2010 and 2011 valued and
expensed utilizing the Black-Scholes-Merton options pricing model
(see Items 12 and 13).
(3) Represents amount paid to his affiliate pursuant to a marketing
consulting agreement (see Items 12 and 13).
(4) Represents compensation received for her administrative services
as a consultant for Altamira (see Items 12 and 13).
The Company pays each Director who is not an employee of
the Company or a subsidiary a quarterly retainer fee of $1,800
(increased in January 2011 from $1,500) and $1,200 (increased from
$1,000 in January 2011) 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 receives an additional fee of
$1,200 (increased in January 2011 from $1,000) per month. During
fiscal 2011, the fees to non-employee Directors aggregated $137,700,
including the consulting fees paid to Mr. Cremonese's affiliate,
and to Ms. Morin.
Pursuant to the Company's 1992 Stock Option Plan
("1992 Plan") options to purchase 3,000 shares of Common Stock at the
then fair market value were granted to each non-employee Director who
was on the Board of Directors on the first business day of each March,
in 1993, 1994, 1995, and 1996, namely Messrs. Borden, Kesselman,
Knowles and Segasture. In addition, in December 1997 and through
December 2001 the Board of Directors granted under the 1992 Plan
annually options to purchase 4,000 shares of Common Stock to each
of them exercisable at the fair market value on the date of grant.
Accordingly, as of June 30, 2011, the Company had granted under
the 1992 Plan to the foregoing four non-employee Directors options
to purchase an aggregate of 128,000 shares of Common Stock, or
options to purchase 32,000 shares of Common Stock to each. The
fair market value per share of Common Stock on the dates of grant
ranged from $0.50 for options granted in 1993 to $2.40 in 2001.
As of June 30, 2011, options under the 1992 Plan with respect to
94,000 shares had been exercised by the Directors and with respect
to 22,000 shares had expired. In addition, they had exercised
options with respect to 48,000 shares granted to them prior to
the adoption of the 1992 Plan.
Under the Company's 2002 Plan, none of the Directors at
the time of the adoption by the Board of Directors of the 2002 Plan
(subsequently approved by stockholders) were eligible to receive
option grants thereunder. Mr. Joseph G. Cremonese who was elected
a Director at the 2002 Annual Meeting of Stockholders, was granted
ten year options on December 1, 2003 to purchase 5,000 shares of
Common Stock at the fair market value of $1.35 per share, on February
20, 2007 to purchase 5,000 shares of Common Stock at the fair market
value of $3.10 per share, and five-year options on September 17, 2009
to purchase 10,000 shares at the fair market value of $1.88 per share,
and on January 7, 2011 to purchase 10,000 shares at the fair market
value of $1.53 per share. The $1.53 option had a total fair value
(as determined by the Black-Scholes-Merton option-pricing model) of
$15,300 which was all recognized as consulting expense in fiscal 2011.
None of the options have been exercised to date.
20
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The following table sets forth, as of June 30, 2011, the
number of shares of Common Stock beneficially owned by (i) each person
known to the Company to beneficially own more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each
named executive officer of the Company, and (iv) all directors and
executive officers as a group. Shares not outstanding but deemed
beneficially owned by virtue of the right of any individual to acquire
shares within 60 days are treated as outstanding only when determining
the amount of and percentage of outstanding shares of Common Stock owned
by such individual. Each person has sole voting and investment power with
respect to the shares shown, except as noted. Except as indicated in the
table, the address for each of the following is c/o Scientific Industries,
Inc., 70 Orville Drive, Bohemia, New York 11716.
Amount and
Name Nature of Beneficial Ownership % of Class
___________________________ ______________________________ __________
Spectrum Laboratories, Inc. 127,986 (1) 10.7%
18617 Broadwick Street
Rancho Dominquez, CA 90220
Lowell A. Kleiman 139,581 (2) 11.7%
16 Walnut Street
Glen Head, NY 11545
Joseph G. Cremonese 76,597 (3) 6.2%
Estate of Joseph I. Kesselman 64,120 (4) 5.3%
Roger B. Knowles 4,000 (5) .3%
Grace S. Morin 89,450 (6) 7.4%
James S. Segasture 174,000 (7) 14.5%
Helena R. Santos 15,779 1.3%
Robert P. Nichols 21,446 (8) 1.8%
Brookman P. March 89,450 (9) 7.4%
All directors and executive
officers as a group (7 persons) 381,272 (10) 30.6%
(1) Based on information reported on Form 3 filed with the Securities
and Exchange Commission on June 27, 2011.
(2) Based on information reported in his Schedule 13D filed with the
Securities and Exchange Commission on October 30, 2002.
(3) 46,597 shares are owned jointly with his wife and 30,000 shares are
issuable upon exercise of options.
(4) Includes 4,000 shares issuable upon exercise of options, 735 shares
owned jointly with his wife, and 16,000 shares owned by his wife.
(5) Represents shares issuable upon exercise of options.
(6) Includes 6,500 shares issuable upon exercise of options held by
her husband.
(7) Includes 4,000 shares issuable upon exercise of options.
(8) Includes 5,000 shares issuable upon exercise of options.
(9) Represents 82,950 shares owned by Ms. Morin, his wife and 6,500
shares issuable upon exercise of options.
(10) Includes 49,500 shares issuable upon exercise of options.
21
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information with respect to Company
options, warrants and rights as of June 30, 2011.
_________________________________________________________________
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 57,001 2.45
Equity
Compensation
plans not approved
by security holders N/A N/A
_________________________________________________________________
Total 57,001 2.45
_________________________________________________________________
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 91,334
Equity
Compensation
plans not approved
by security holders N/A
_________________________________________________________________
Total 91,334
_________________________________________________________________
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Mr. Joseph G. Cremonese, a Director since November 2002,
through his affiliate, Laboratory Innovation Company, Ltd., has been
providing independent marketing consulting services to the Company for
over ten years. The services have been rendered since January 1, 2003
pursuant to a consulting agreement which was extended in January, 2011
through December 31, 2011. The agreement as amended and restated
currently provides that Mr. Cremonese and his affiliate shall render,
at the request of the Company, marketing consulting services of at
least 60, but not more than 96, days per year at the rate of $600 per
day with a monthly payment of $3,000, with the Company's obligation
reduced to the extent the consulting services are less than 60 days
for the 12 month period. The agreement contains confidentiality and
non-competition covenants. The Company paid pursuant to the agreement
$36,000 for each of fiscal 2011 and fiscal 2010.
Ms. Grace S. Morin, was elected a Director in December 2006
upon the sale of her 90.36% ownership interest in Altamira to the
Company in November 2006. Under the purchase agreement Ms. Morin received
(in addition to $361,000 in cash paid and an aggregate of 112,950
shares of the Company's Common Stock issued at the time of acquisition)
an amount equal to a 90.36% share of 5% of net sales of Altamira for
each of five designated periods, subject to possible adjustment.
Accordingly, she received $59,700 for the period which ran from
December 1, 2006 through June 30, 2007, $131,000 for the year ended
June 30, 2008; $97,000 for the year ended June 30, 2009; $126,400
for the year ended June 30, 2010; and $38,000 for the five months
ended November 30, 2010. She also received in fiscal 2008 $36,400 as
reimbursement for the Company's treatment of the transaction as a
purchase of assets for tax purposes.
22
Up until March 31, 2009, Ms. Morin had been employed
by Altamira as an administrative employee. Since April 1, 2009, she
provides consulting services on a part-time basis pursuant to an
agreement expiring March 31, 2012 at the rate of $85 per hour,
resulting in a payment of $9,000 for fiscal 2011. The agreement
contains confidentiality and non-competition covenants.
Item 14. Principal Accountant Fees and Services.
The Company incurred for the services of Nussbaum
Yates Berg Klein & Wolpow, LLP for fiscal 2011 and fiscal 2010:
audit fees of approximately $54,000 and $52,500, respectively, in
connection with the audit of the Company's annual financial
statements and quarterly reviews; and $5,000 for each fiscal year
for the preparation of the Company's corporate tax returns. There
were no other audit related fees or other fees paid to the firm
for the two fiscal years.
In approving the engagement of the independent
registered public accounting firm to perform the audit and non-audit
services, the Board of Directors as the Company's audit committee
evaluates scope and cost of each of the services to be performed
including a determination that the performance of the non-audit
services will not affect the independence of the firm in the
performance of the audit services.
23
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements and Financial Statement Schedules. The
required financial statements of the Company are attached hereto on
pages F1-F21.
Exhibits. The following Exhibits are filed as part of this
report on Form 10-K:
Exhibit Number Exhibit
______________ _______
3 Articles of Incorporation and By-Laws:
3(a) Certificate of Incorporation of the Company as
amended. (Filed as Exhibit 1(a-1) to the Company's General Form for
Registration of Securities on Form 10 dated February 14, 1973 and
incorporated by reference thereto.)
3(b) Certificate of Amendment of the Company's
Certificate of Incorporation, as filed on January 28, 1985.
(Filed as Exhibit 3(a) to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1985 and incorporated by
reference thereto.)
3(c) By-Laws of the Company, as restated and amended.
(Filed as Exhibit 3(ii) to the Company's Current Report on Form 8-K
filed on January 6, 2003 and Exhibit 3(ii) to the Company's Current
Report on Form 8-K filed on December 5, 2007 and incorporated by
reference thereto).
4 Instruments defining the rights of security
holders:
4(a) 2002 Stock Option Plan (Filed as Exhibit 99-1
to the Company's Current Report on Form 8-K filed on November 25, 2002
and incorporated by reference thereto.
10 Material Contracts:
10(a) Lease between Registrant and AIP Associates,
predecessor-in-interest of current lessor, dated October, 1989 with
respect to Company's offices and facilities in Bohemia, New York.
(Filed as Exhibit 10(a) to the Company's Form 10-KSB filed on
September 28, 2005 and incorporated by reference thereto).
10(a)-1 Amendment to lease between Registrant and
REP A10 LLC, successor in interest of AIP Associates, dated
September 1, 2004 (Filed as Exhibit 10A-1 to the Company's Current
Report on Form 8-K filed on September 2, 2004, and incorporated by
reference thereto).
10(a)-2 Second amendment to lease between Registrant
and REP A10 LLC dated November 5, 2007. (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on November 8, 2007,
and incorporated by reference thereto).
10(b) Employment Agreement dated January 1, 2003, by
and between the Company and Ms. Santos (Filed as Exhibit 10(a) to the
Company's Current Report on Form 8-K filed on January 22, 2003, and
incorporated by reference thereto).
10(b)-1 Employment Agreement dated September 1, 2004,
by and between the Company and Ms. Santos (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on September 1, 2004,
and incorporated by reference thereto).
24
10(b)-2 Employment Agreement dated December 29, 2006,
by and between the Company and Ms. Santos (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on December 29, 2006,
and incorporated by reference thereto).
10(b)-3 Employment Agreement dated July 31, 2009 by
and between the Company and Ms. Santos (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on August 7, 2009, and
incorporated by reference thereto).
10(b)-4 Employment Agreement dated May 14, 2010 by
and between the Company and Ms. Santos (filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on May 18, 2010, and
incorporated by reference thereto).
10(b)-5 Employment Agreement dated September 13, 2011
by and between the Company and Ms. Santos.
10(c) Employment Agreement dated January 1, 2003, by
and between the Company and Mr. Robert P. Nichols (Filed as Exhibit
10A-1 to the Company's Current Report on Form 8-K filed on January
22, 2003, and incorporated by reference thereto).
10(c)-1 Employment Agreement dated September 1, 2004,
by and between the Company and Mr. Nichols (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on September 1, 2004,
and incorporated by reference thereto).
10(c)-2 Employment Agreement dated December 29, 2006,
by and between the Company and Mr. Nichols (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on December 29, 2006,
and incorporated by reference thereto).
10(c)-3 Employment Agreement dated July 31, 2009 by
and between the Company and Mr. Nichols (filed as Exhibit 10A-2 to
the Company's Current Report on Form 8-K filed on August 7, 2009,
and incorporated by reference thereto).
10(c)-4 Employment Agreement dated May 14, 2010 by
and between the Company and Mr. Nichols (filed as Exhibit 10A-2 to
the Company's Current Report on Form 8-K filed on May 18, 2010, and
incorporated by reference thereto).
10(c)-5 Employment Agreement dated September 13, 2011
by and between the Company and Mr. Nichols.
10(d) Consulting Agreement dated January 1, 2003 by
and between the Company and Mr. Cremonese and his affiliate, Laboratory
Innovation Company, Ltd., (Filed as Exhibit 10(b) to the Company's
Current Report on Form 8-K filed on January 6, 2003, and
incorporated by reference thereto).
10(d)-1 Amended and Restated Consulting Agreement
dated March 22, 2005, by and between the Company and Mr. Cremonese
and Laboratory Innovation Company, Ltd., (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on March 23, 2005,
and incorporated by reference thereto).
10(d)-2 Second Amended and Restated Consulting
Agreement dated March 15, 2007, by and between the Company and Mr.
Cremonese and Laboratory Innovation Company Ltd., (Filed as Exhibit
10A-1 to the Company's Current Report on Form 8-K filed on March 16,
2007, and incorporated by reference thereto).
25
10(d)-3 Third Amended and Restated Consulting Agreement
dated September 23, 2009, by and between the Company and Mr. Cremonese
and Laboratory Innovation Company, Ltd., (Filed as exhibit 10 to the
Company's Annual Report on Form 10-K field on September 24, 2009, and
incorporated by reference thereto).
10(d)-4 Fourth Amended and Restated Consulting Agreement
dated January 7, 2011 (Filed as Exhibit 10A-1 to the Company's Current
Report on Form 8-K filed on January 18, 2011, and incorporated by
reference thereto).
10(e) Sublicense from Fluorometrix Corporation (Filed
as Exhibit 10(a)1 to the Company's Current Report on Form 8-K filed on
June 14, 2006, and incorporated by reference thereto).
10(f) Stock Purchase Agreement, dated as of November
30, 2006, by and among the Company and Grace Morin, Heather H. Haught
and William D. Chandler (Filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on December 5, 2006, and incorporated by
reference thereto).
10(g) Escrow Agreement, dated as of November 30, 2006,
by and among the Company and Grace Morin, Heather H. Haught and William
D. Chandler (filed as Exhibit 10(a) to the Company's Current Report
on Form 8-K filed on December 5, 2006, and incorporated by
reference thereto).
10(h) Registration Rights Agreement, dated as of
November 30, 2006, by and among the Company and Grace Morin, Heather H.
Haught and William D. Chandler (filed as Exhibit 10(b) to the Company's
Current Report on Form 8-K filed on December 5, 2006, and
incorporated by reference thereto).
10(i) Employment Agreement, dated as of November
30, 2006, between Altamira Instruments, Inc. and Brookman P. March
(Filed as Exhibit 10(c) to the Company's Current Report on Form 8-K
filed on December 5, 2006, and incorporated by reference thereto).
10(i)-1 Employment Agreement, dated as of October 30,
2008, between Altamira Instruments, Inc. and Brookman P. March (Filed
as Exhibit 10A-2 to the Company's Current Report on Form 8-K filed on
October 30, 2008, and incorporated by reference thereto).
10(i)-2 Employment Agreement, dated as of October 1,
2010, between Altamira Instruments, Inc., and Brookman P. March (Filed
as Exhibit 10A-1 to the Company's Current Report on Form 8-K filed on
October 13, 2010, and incorporated by reference thereto).
10(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).
26
10(l) Line of Credit Agreements dated October 30,
2008, by and among the Company and Capital One, N.A. (Filed as Exhibits
10-A1(a) through (f) to the Company's Current Report on Form 8-K
filed on October 30, 2008, and incorporated by reference thereto).
10(l)-1 Restated Promissory Note Agreement dated
January 20, 2010 by and among the Company and Capital One N.A. (Filed
as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on
January 20, 2010, and incorporated by reference thereto).
10(l)-2 Restated Promissory Note Agreement dated
January 5, 2011 by and among the Company and Capital One N.A. (Filed
as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on
January 6, 2011, and incorporated by reference thereto).
10(m) Consulting Agreement dated April 1, 2009 by
and between the Company and Grace Morin (Filed as Exhibit 10A-1
to the Company's Current Report on Form 8-K filed on
April 1, 2009, and incorporated by reference thereto).
10(n) Line of Credit Agreements dated June 14, 2011,
by and among the Company and JPMorgan Chase Bank, N.A. (Filed as
Exhibits 99.1 through 99.3 (to the Company's Current Report on
Form 8-K filed on June 16, 2011, and incorporated by reference
thereto).
14 Code of Ethics (Filed as Exhibit 14 to the
Company's Form 10-KSB filed on September 28, 2007 and incorporated
by reference thereto).
21 Subsidiaries of the Registrant
Scientific Packaging Industries, Inc., a New York corporation, is a
wholly-owned inactive subsidiary of the Company.
Altamira Instruments, Inc., a Delaware Corporation, is a wholly-owned
subsidiary of the Company since November 30, 2006.
31.01 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.01 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
27
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SCIENTIFIC INDUSTRIES, INC.
(Registrant)
/s/ Helena R. Santos
____________________
Helena R. Santos
President, Chief Executive Officer, Treasurer
Chief Financial and Principal Accounting
Officer
Date: September 16, 2011
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Name Title Date
____________________ _________________________ ___________________
/s/ Helena R. Santos President and Treasurer September 16, 2011
____________________
Helena R. Santos (Chief) Executive Officer
and Financial Officer)
and Director
/s/ Joseph G. Cremonese Chairman of the Board September 16, 201
_______________________
Joseph G. Cremonese
/s/ Roger B. Knowles Director September 16, 2011
____________________
Roger B. Knowles
/s/ Grace S. Morin Director September 16, 2011
__________________
Grace S. Morin
/s/ James S. Segasture Director September 16, 2011
______________________
James S. Segasture
28
SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AS OF AND FOR THE
YEARS ENDED JUNE 30, 2011 AND 2010
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
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 and comprehensive
income F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-21
Report of Independent Registered Public Accounting Firm
_______________________________________________________
Board of Directors and Shareholders
Scientific Industries, Inc.
Bohemia, New York
We have audited the accompanying consolidated balance sheets of
Scientific Industries, Inc. and subsidiaries as of June 30, 2011
and 2010, and the related consolidated statements of income,
shareholders' equity and comprehensive income and cash flows for
the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform an audit
of its internal control over financial reporting. Our 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 consolidated financial statements, assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Scientific Industries, Inc.
and subsidiaries as of June 30, 2011 and 2010, and the
consolidated results of their operations and their cash flows
for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Nussbaum Yates Berg Klein & Wolpow, LLP
___________________________________________
Nussbaum Yates Berg Klein & Wolpow, LLP
Melville, New York
September 16, 2011
F-1
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND 2010
ASSETS
2011 2010
_________ _________
Current assets
Cash and cash equivalents $ 907,800 $ 632,700
Investment securities 693,400 665,600
Trade accounts receivable, less
allowance for doubtful accounts
of $11,600 in 2011 and 2010 620,000 1,494,500
Inventories 1,639,800 1,272,600
Prepaid and other current assets 197,700 87,200
Deferred taxes 77,700 73,800
__________ __________
Total current assets 4,136,400 4,226,400
Property and equipment, net 175,100 193,400
Intangible assets, net 112,300 214,200
Goodwill 447,900 405,200
Other assets 25,700 25,700
Deferred taxes 115,800 100,100
__________ __________
Total assets $5,013,200 $5,165,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 128,100 $ 227,700
Accrued expenses and taxes 284,300 486,000
__________ __________
Total current liabilities 412,400 713,700
__________ __________
Shareholders' equity:
Common stock, $.05 par value;
authorized 7,000,000 shares;
issued 1,216,379 shares in 2011
and 2010 60,800 60,800
Additional paid-in capital 1,558,500 1,537,200
Accumulated other comprehensive loss,
unrealized holding loss on
investment securities (21,500) (29,800)
Retained earnings 3,055,400 2,935,500
__________ __________
4,653,200 4,503,700
Less common stock held in treasury at
cost, 19,802 shares 52,400 52,400
__________ __________
Total shareholders' equity 4,600,800 4,451,300
__________ __________
Total liabilities and
shareholders' equity $5,013,200 $5,165,000
========== ==========
See notes to consolidated financial statements.
F-2
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
2011 2010
__________ ____________
Net sales $5,869,800 $7,070,100
Cost of sales 3,461,000 4,330,300
__________ __________
Gross profit 2,408,800 2,739,800
__________ __________
Operating expenses:
General and administrative 1,175,100 1,098,200
Selling 638,500 554,100
Research and development 324,400 343,800
__________ __________
2,138,000 1,996,100
__________ __________
Income from operations 270,800 743,700
__________ __________
Other income:
Interest income 21,900 23,400
Other income 14,500 10,500
__________ __________
36,400 33,900
__________ __________
Income before income taxes 307,200 777,600
__________ __________
Income tax expense (benefit):
Current 104,500 280,100
Deferred (24,900) (42,200)
__________ __________
79,600 237,900
__________ __________
Net income $ 227,600 $ 539,700
========== ==========
Basic earnings per common share $ .19 $ .45
===== =====
Diluted earnings per common share $ .19 $ .45
===== =====
Weighted average common shares
outstanding, basic 1,196,577 1,196,051
========= =========
Weighted average common shares
outstanding, assuming dilution 1,213,482 1,211,895
========= =========
See notes to consolidated financial statements.
F-3
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
Common Stock Additional Accumulated
______________ Paid-in Other Compr-
Shares Amount Capital ehensive Loss
_______ _______ __________ _____________
Balance, July 1, 2009 1,212,379 $60,600 $1,514,300 $ (79,600)
Net income - - - -
Other comprehensive income:
Unrealized holding gain
on investment securities,
net of tax - - - 49,800
Comprehensive income - - - -
Exercise of stock options 4,000 200 5,100 -
Stock-based compensation - - 17,400 -
Income tax benefit of
stock options exercised - - 400 -
Cash dividend paid, $.06
per share - - - -
_________ _______ _________ ___________
Balance, June 30, 2010 1,216,379 60,800 1,537,200 (29,800)
Net income - - - -
Other comprehensive income:
Unrealized holding gain
on investment securities,
net of tax - - - 8,300
Comprehensive income - - - -
Stock-based compensation - - 21,300 -
Income tax benefit of
stock options exercised - - - -
Cash dividend paid, $.09
per share - - - -
_________ _______ __________ ___________
Balance, June 30, 2011 1,216,379 $60,800 $1,558,500 $ (21,500)
========= ======= ========== ===========
See notes to consolidated financial statements.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2011 AND 2010
Retained Treasury Stock Shareholders'
______________
Earnings Shares Amount Equity
__________ ______ _______ ____________
Balance, July 1, 2009 $2,467,600 19,802 $52,400 $3,910,500
__________
Net income 539,700 - - 539,700
Other comprehensive loss:
Unrealized holding loss
on investment securities,
net of tax - - - 49,800
____________
Comprehensive income - - - 589,500
____________
Exercise of stock options - - - 5,300
Stock-based compensation - - - 17,400
Income tax benefit of stock
options exercised - - - 400
Cash dividend paid, $.06
per share (71,800) - - (71,800)
__________ _______ _______ ___________
Balance, June 30, 2010 2,935,500 19,802 52,400 4,451,300
___________
Net income 227,600 - - 227,600
Other comprehensive income:
Unrealized holding gain
on investment securities,
net of tax - - - 8,300
___________
Comprehensive income - - - 235,900
Stock-based compensation - - - 21,300
Cash dividend paid, $.09
per share (107,700) - - (107,700)
__________ _______ ________ ___________
Balance, June 30, 2011 $3,055,400 19,802 $52,400 $4,600,800
========== ======= ======= ===========
See notes to consolidated financial statements.
F-4
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
2011 2010
__________ __________
Operating activities:
Net income $ 227,600 $ 539,700
__________ __________
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 188,400 197,600
Deferred income tax benefit (24,900) (42,200)
Income tax benefit of stock options
exercised - 400
Loss on disposal of asset 4,600 -
Stock-based compensation 21,300 17,400
Changes in operating assets and
liabilities:
Trade accounts receivable 874,500 (687,800)
Inventories (367,200) 325,400
Prepaid and other current assets (110,500) 4,400
Accounts payable (99,600) 90,300
Customer advances - (359,600)
Accrued expenses and taxes (61,700) 29,700
__________ __________
Total adjustments 424,900 (424,400)
__________ __________
Net cash provided by
operating activities 652,500 115,300
__________ ________
Investing activities:
Additional consideration for acquisition
of Altamira Instruments, Inc. (182,600) (107,000)
Purchase of investment securities,
available for sale (14,000) (14,500)
Capital expenditures (63,600) (27,900)
Purchase of intangible assets (9,500) (5,100)
_________ _________
Net cash used in investing activities (269,700) (154,500)
_________ _________
Financing activities:
Proceeds from exercise of stock options - 5,300
Cash dividend paid (107,700) (71,800)
_________ _________
Net cash used in financing activities (107,700) (66,500)
_________ _________
Net increase (decrease) in cash and
cash equivalents 275,100 (105,700)
Cash and cash equivalents, beginning
of year 632,700 738,400
_________ __________
Cash and cash equivalents, end of year $ 907,800 $ 632,700
========= ==========
Supplemental disclosures of cash flow
information:
Cash paid for income taxes $ 298,500 $ 301,200
========= ==========
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
1. Summary of Significant Accounting Policies
Nature of Operations
Scientific Industries, Inc. and its subsidiaries (the "Company") design,
manufacture, and market a variety of benchtop laboratory equipment and
catalyst research instruments. The Company is headquartered in Bohemia,
New York where it produces benchtop laboratory equipment for research
and has another location in Pittsburgh, Pennsylvania, where it produces
a variety of custom-made catalyst research instruments. The equipment
sold by the Company includes mixers, shakers, stirrers, refrigerated
incubators, catalyst characterization instruments, reactor systems and
high throughput systems.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Scientific Industries, Inc., Scientific Packaging Industries, Inc.,
an inactive wholly-owned subsidiary, and Altamira Instruments, Inc.
("Altamira"), a Delaware corporation and wholly-owned subsidiary
(all collectively referred to as the "Company"). All material
intercompany balances and transactions have been eliminated.
Revenue Recognition
Revenue is recognized when all the following criteria are met:
* Receipt of a written purchase order agreement which is
binding on the customer.
* Goods are shipped and title passes.
* Prices are fixed.
* Collectability is reasonably assured.
* All material obligations under the agreement have been
substantially performed.
Substantially all orders are F.O.B. shipping point, all sales are
final without right of return or payment contingencies, and there are
no special sales arrangements or agreements with any customers.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of 90 days or less to be cash equivalents.
On November 9, 2010, the Federal Deposit Insurance Company ("FDIC")
issued a Final Rule providing unlimited insurance coverage of non-
interest bearing transaction accounts, regardless of balance, for the
period December 31, 2010 through December 31, 2012. At June 30, 2011,
the Company held approximately $182,800 of its cash in non-interest
bearing accounts. The remainder of its cash balance is subject to FDIC
insurance limits.
F-6
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
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 collectability. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables,
and the current creditworthiness of the Company's customers. The
Company has recorded allowances for receivables which it considered
uncollectible, including amounts for the resolution of potential
credit and other collection issues such as disputed invoices, customer
satisfaction claims and pricing discrepancies. However, depending on
how such potential issues are resolved, or if the financial condition
of any of the Company's customers was to deteriorate and its ability
to make required payments became impaired, increases in these allowances
may be required. The Company actively manages its accounts receivable
to minimize credit risk. The Company does not obtain collateral for
its accounts receivable.
Customer Advances
In the ordinary course of business, customers of Altamira may make
advance payments for purchase orders issued to Altamira. Such amounts,
when received, are categorized as liabilities under the caption customer
advances.
Investment Securities
Securities available for sale are carried at fair value with unrealized
gains or losses reported in a separate component of shareholders' equity.
Realized gains or losses are determined based on the specific
identification method.
Inventories
Inventories are valued at the lower of cost (determined on first in,
first out basis) or market value, and have been reduced by an allowance
for excess and obsolete inventories. The estimate is based on
management's review of inventories on hand compared to estimated
future usage and sales. Cost of work-in-process and finished goods
inventories include material, labor and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property
and equipment is provided for primarily by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements
are amortized by the straight-line method over the term of the related
lease or the estimated useful lives of the assets, whichever is shorter.
F-7
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
1. Summary of Significant Accounting Policies (Continued)
Intangible Assets
Intangible assets consist of acquired technology, customer relationships,
non-compete agreements, patents, licenses, trademarks and trade names.
All intangible assets are amortized on a straight-line basis over 5
years, except for customer relationships which are amortized on an
accelerated (declining-balance) basis over their estimated useful lives.
The Company continually evaluates the remaining estimated useful lives
of intangible assets that are being amortized to determine whether
events or circumstances warrant a revision to the remaining period of
amortization.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value
of identifiable net assets of companies acquired. Goodwill and
long-lived intangible assets are tested for impairment at least
annually in accordance with the provisions of ACS No. 350,
"Intangibles-Goodwill and Other" ("ASC No. 350"). ASC No. 350
requires that goodwill be tested for impairment at the reporting
unit level (operating segment or one level below an operating segment)
on an annual basis and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. Application of
the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities
to reporting units, assignment of goodwill to reporting units, and
determination of the fair value of each reporting unit. The Company
tests goodwill annually as of June 30, the last day of its fourth
fiscal quarter, of each year unless an event occurs that would cause
the Company to believe the value is impaired at an interim date.
Impairment of Long-Lived Assets
The Company follows the provisions of ASC No. 360-10, "Property, Plant
and Equipment - Impairment or Disposal of Long-Lived Assets ("ASC No.
360-10"). ASC No. 360-10 requires evaluation of the need for an
impairment charge relating to long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If an evaluation for impairment is required,
the estimated future undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a
write down to a new depreciable basis is required. If required, an
impairment charge is recorded based on an estimate of future discounted
cash flows.
F-8
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company and its subsidiaries file a consolidated U.S. federal
income tax return. Income taxes are accounted for under the asset and
liability method. The Company provides for federal, and state income
taxes currently payable, as well as for those deferred due to timing
differences between reporting income and expenses for financial
statement purposes versus tax purposes. Deferred tax assets and
liabilities are recognized for the future tax consequences attribute
to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect of a change in income tax rates is recognized
as income or expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater
than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment
occurs.
Advertising
Advertising costs are expensed as incurred. Advertising expense
amounted to $26,000 and $21,300 for the years ended June 30, 2011
and 2010.
Stock Compensation Plan
The Company has a ten-year stock option plan (the "2002 Plan") which
provides for the grant of options to purchase up to 100,000 shares of
the Company's Common Stock, par value $.05 per share ("Common Stock"),
plus to the extent that options previously granted under the 1992
Stock Option Plan of the Company (the "Prior Plan") expire or terminate
for any reason without having been exercised, then options exercisable
for that same number of shares of Common Stock, up to a maximum of one
hundred sixty one thousand (161,000) shares, may be granted pursuant to
the 2002 Plan. The 2002 Plan provides for the granting of incentive or
non-incentive stock options as defined in the 2002 Plan and options under
the 2002 Plan may be granted until 2012. Incentive stock options may be
granted to employees at an exercise price equal to 100% (or 110% if the
optionee owns directly or indirectly more than 10% of the outstanding
voting stock) of the fair market value of the shares of Common Stock on
the date of the grant. Non-incentive stock options are to be granted at
an exercise price not less than 85% of the fair market value of the
shares of Common Stock on the date of grant. The 2002 Plan also
stipulates that none of the then members of the Board of Directors shall
be eligible to receive option grants under the 2002 Plan. The options
expire at various dates through September 2018. At June 30, 2011,
F-9
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
91,334 shares of Common Stock were available for grant under the 2002
Plan and the Prior Plan.
1. Summary of Significant Accounting Policies (Continued)
Stock Compensation Plan (Continued)
Stock-based compensation is accounted for in accordance with ASC No. 718
"Compensation-Stock Compensation" ("ASC No. 718") which requires
compensation costs related to stock-based payment transactions to be
recognized. With limited exceptions, the amount of compensation cost is
measured based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards are measured at each
reporting period. Compensation costs are recognized over the period
that an employee provides service in exchange for the award. During the
years ended June 30, 2011 and 2010, the Company granted 12,000 and 16,500
options that had a fair value of $19,900 and $20,500, respectively, to
employees and consultants. The fair value of the options granted during
fiscal years 2011 and 2010 were determined using the Black-Scholes-Merton
option-pricing model. The weighted average assumptions used for fiscal
2011 and 2010, respectively, were an expected life of 6 and 5 years;
risk free interest rate of 2.09% and 2.48%; volatility of 73% and 83%;
and dividend yield of 3.0% and 3.47%. The weighted-average value per
share of the options granted in 2011 and 2010 was $1.66 and $1.25,
respectively, and stock-based compensation costs were $21,300 and $17,400
for the years ended June 30, 2011 and 2010, respectively. Stock-based
compensation costs related to nonvested awards to be recognized in the
future are $3,200 and $3,900 as of June 30, 2011 and 2010, respectively.
The Company did not grant any options or warrants as compensation for
goods or services to non-employees, except to a director who was granted
10,000 options that had a fair value of $15,300 and $9,300 in each of
the years ended June 30, 2011 and 2010, respectively, for consulting
services.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the amounts
reported in the financial statements and accompanying notes. The actual
results experienced by the Company may differ materially from
management's estimates.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by
the weighted-average number of shares outstanding. Diluted earnings
per common share includes the dilutive effect of stock options.
F-10
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
1. Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2011-05, "Comprehensive Income
(ASC Topic 220): Presentation of Comprehensive Income," ("ASU No.
2011-05") which amends current comprehensive income guidance. This
accounting update eliminates the option to present the components of
other comprehensive income as part of the statement of stockholders'
equity. Instead, the Company must report comprehensive income in
either a single continuous statement of comprehensive income which
contains two sections, net income and other comprehensive income,
or in two separate but consecutive statements. ASU 2011-05 will be
effective for public companies during the interim and annual periods
beginning after December 15, 2011 with early adoption permitted.
The Company does not expect that the adoption of ASU 2011-05 will
have an impact on its consolidated results of operations, financial
condition or cash flows as it only requires a change in the format
of our current presentation.
In December 2010, the FASB issued ASU No. 2010-29, "Disclosure of
Supplementary Pro Forma Information for Business Combinations." This
standard requires an entity to disclose revenue and earnings of the
combined entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the
comparable prior annual reporting period. ASU No. 2010-29 is effective
prospectively for business combinations that occur on or after the
beginning of the first annual reporting period beginning after December
15, 2010. The Company does not expect that the adoption of ASU
No. 2010-29 will have an impact on its consolidated results of
operations, financial condition or cash flows.
2. 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, 2011:
Net Sales $4,525,100 $1,344,700 $ - $5,869,800
Foreign Sales 2,496,200 663,900 - 3,160,100
Segment Profit 584,400 (313,600) - 270,800
Segment Assets 2,501,000 1,177,400 1,334,800 5,013,200
Long-Lived Asset
Expenditures 39,300 24,300 - 63,600
Depreciation and
Amortization 56,000 132,400 - 188,400
F-12
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
2. Segment Information and Concentrations (Continued)
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
June 30, 2010:
Net Sales $4,272,700 $2,797,400 $ - $7,070,100
Foreign Sales 2,381,000 201,600 - 2,582,600
Segment Profit 553,200 190,500 - 743,700
Segment Assets 2,091,800 1,828,500 1,244,700 5,165,000
Long-Lived Asset
Expenditures 27,900 - - 27,900
Depreciation and
Amortization 59,800 137,800 - 197,600
During the year ended June 30, 2011, one customer accounted for
approximately 11% of the Company's total sales.
Certain information relating to the Company's export sales
follows:
2011 2010
__________ __________
Export sales (principally Europe and Asia) $3,160,100 $2,582,600
3. Fair Value of Financial Instruments
The Financial Accounting Standards Board defines the fair value of
financial instruments as the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value
measurements do not include transaction costs.
The accounting guidance also expands the disclosure requirements around
fair value and establishes a fair value hierarchy for valuation inputs.
The hierarchy prioritizes the inputs into three levels based on the
extent to which inputs used in measuring fair value are observable
in the market. Each fair value measurement is reported in one of the
three levels, which is determined by the lowest level input that is
significant to the fair value measurement in its entirety. These
levels are described below:
Level 1 Inputs that are based upon unadjusted quoted
prices for identical instruments traded in active markets.
Level 2 Quoted prices in markets that are not considered to
be active or financial instruments for which all significant inputs are
observable, either directly or indirectly.
Level 3 Prices or valuation that require inputs that are
both significant to the fair value measurement and unobservable.
F-13
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
3. Fair Value of Financial Instruments (Continued)
The following tables set forth by level within the fair value hierarchy
the Company's financial assets that were accounted for at fair value on
a recurring basis at June 30, 2011 and 2010 according to the valuation
techniques the Company used to determine their fair values:
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2011 Level 1 Level 2 Level 3
_____________ __________ _______ ________
Cash and cash equivalents $ 907,800 $ 907,800 $ - $ -
Available for sale securities 693,400 693,400 - -
---------- ---------- ------- --------
Total $1,601,200 $1,601,200 $ - $ -
========== ========== ======= ========
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2010 Level 1 Level 2 Level 3
_____________ __________ _______ ________
Cash and cash equivalents $ 632,700 $ 632,700 $ - $ -
Available for sale securities 665,600 665,600 - -
---------- ---------- ------- --------
Total $1,298,300 $1,298,300 $ - $ -
========== ========== ======= ========
Investments in marketable securities classified as available-for-sale by
security type at June 30, 2011 and 2010 consisted of the following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2011:
Available for sale:
Equity securities $ 7,800 $ 13,300 $ 5,500
Mutual funds 707,100 680,100 (27,000)
__________ _________ __________
$ 714,900 $ 693,400 $ (21,500)
========== ========= ==========
Unrealized
Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2010:
Available for sale:
Equity securities $ 7,800 $ 9,600 $ 1,800
Mutual funds 687,600 656,000 (31,600)
__________ _________ __________
$ 695,400 $ 665,600 $ (29,800)
========== ========= ==========
F-14
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
4. Inventories
2011 2010
__________ __________
Raw materials $1,051,300 $ 896,400
Work-in-process 408,200 201,400
Finished goods 180,300 174,800
__________ __________
$1,639,800 $1,272,600
========== ==========
5. Property and Equipment
Useful Lives
(Years) 2011 2010
____________ __________ __________
Automobiles 5 $ 21,000 $ 21,000
Computer equipment 3-5 123,400 118,400
Machinery and equipment 3-7 542,800 493,400
Furniture and fixtures 4-10 172,500 169,000
Leasehold improvements 3-5 64,100 64,100
_________ _________
923,800 865,900
Less accumulated depreciation
and amortization 748,700 672,500
_________ _________
$ 175,100 $ 193,400
========= =========
Depreciation expense was $77,000 and $75,800 for the years ended
June 30, 2011 and 2010, respectively.
6. Goodwill and Other Intangible Assets
In conjunction with the acquisition of Altamira, management of the
Company valued the tangible and intangible assets acquired, including
customer relationships, non-compete agreements and technology which
encompasses trade names, trademarks and licenses. The valuation
resulted in an initial negative goodwill of approximately $91,500
on the date of acquisition which was subsequently adjusted to positive
goodwill of $447,900 and $405,200 at June 30, 2011 and 2010, all of
which is deductible for tax purposes. The related agreement
provided for contingent payments to the former shareholders based on
net sales of the Catalyst Research Instrument Operations subject to
certain limits, which were earned and paid. Additional consideration
amounted to approximately $42,700 for the five months ended November
30, 2010 (final payment period) and $139,900 for the year ended June
30, 2010.
F-15
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
6. Goodwill and Other Intangible Assets (Continued)
The components of intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ _________
At June 30, 2011:
Technology 5 yrs. $300,000 $ 275,000 $ 25,000
Customer relationships 10 yrs. 237,000 177,200 59,800
Non-compete agreement 5 yrs. 102,000 93,500 8,500
Other intangible assets 5 yrs. 139,000 120,000 19,000
________ _________ _________
$778,000 $ 665,700 $ 112,300
======== ========= =========
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ __________
At June 30, 2010:
Technology 5 yrs. $300,000 $ 215,000 $ 85,000
Customer relationships 10 yrs. 237,000 157,000 80,000
Non-compete agreement 5 yrs. 102,000 73,100 28,900
Other intangible assets 5 yrs. 129,500 109,200 20,300
________ _________ _________
$768,500 $ 554,300 $ 214,200
======== ========= =========
Total amortization expense was $111,400 and $121,800 in 2011 and 2010.
Estimated future intangible assets amortization expense is as follows:
Fiscal Years
____________
2012 $ 55,500
2013 15,800
2014 12,000
2015 8,400
2016 13,100
Thereafter 7,500
_________
$ 112,300
=========
F-16
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
7. Bank Line of Credit
During the year ended June 30, 2011, the Company replaced its existing
line of credit with Capital One Bank, N.A. with a new line of credit
with JPMorgan Chase Bank, N.A. (the "Bank"), which provides for maximum
borrowings of up to $700,000, to bear interest at 3.08 percentage points
above a defined LIBOR Index, and is to be secured by a pledge of
collateral consisting of the inventory, accounts, chattel paper,
equipment and general intangibles of the Company. Outstanding amounts
are due and payable by June 13, 2013 with a requirement that the
Company is to reduce the outstanding principal balance to zero during
the 30 day period ending on the anniversary date of the Note. The
Company did not use the lines during the years ended June 30, 2011
and 2010, respectively.
8. 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 Catalyst Research
Instrument Operations employee contributions up to 4% of their
compensation. Total employer matching contributions amounted to
$39,300 and $44,300 for the years ended June 30, 2011 and 2010,
respectively.
9. Commitments and Contingencies
The Company is obligated through January 2015 under a noncancelable
operating lease for its Bohemia, New York premises, which requires
minimum annual rental payments plus other expenses, including real
estate taxes and insurance. In accordance with generally accepted
accounting principles, the future minimum annual rental expense,
computed on a straight-line basis, is approximately $209,400 under
the terms of the lease. Rental expense for the Bohemia facility
amounted to approximately $233,700 in 2011 and $229,100 in 2010.
Accrued rent, payable in future years, amounted to $67,500 and
$66,800 at June 30, 2011 and 2010.
The Company was also obligated under an operating lease for its
facility in Pittsburgh, Pennsylvania. The lease, which commenced
on August 1, 2006, had a term of five years through July 31, 2011.
The lease required monthly minimum rental payments of $4,700
monthly with a Company option to renew for an additional five years.
The Company is currently on a month-to-month tenancy while
negotiating a new lease agreement. Total rental expense for the
Pittsburgh facility was $56,000 in each of 2011 and 2010. There
are no other significant expenses related to this lease.
F-17
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
9. Commitments and Contingencies (Continued)
The Company's approximate future minimum rental payments under
all leases are as follows:
Fiscal Years Total
____________ _____________
2012 $ 221,800
2013 225,800
2014 234,800
2015 140,100
__________
$ 822,500
==========
The Company has employment contracts with its President and Executive
Vice President through June 30, 2013, providing for annual base
salaries of $138,000 and $126,300, respectively for the first
twelve month period and $141,000 and $129,100, respectively, for the
second twelve month period. Each contract provides for a
discretionary performance bonus for each of the twelve month periods
ending June 30, 2012 and 2013, respectively. For the year ended
June 30, 2011 and six month period period ended June 30, 2010, the
Board of Directors awarded bonuses of $4,000 and $8,000, respectively
for the President, and $3,000 and $4,400, respectively for the
Executive Vice President.
The Company has an employment contract with the President of Altamira
through June 30, 2012, which may be extended by mutual consent for an
additional year. The contract provides for an annual base salary of
$121,900 through November 30, 2010 and $128,000 for the remainder of
the contract term, plus discretionary bonuses. A bonus of $5,000 was
paid to him during the year ended June 30, 2011 for the twelve month
period ended November 30, 2010. A bonus was also paid during the year
ended June 30, 2010 in the form of a stock option valued at $4,100
using the Black-Scholes-Merton option pricing model.
The Company has a consulting agreement which expires on December 31,
2011 with an affiliate of the Chairman of the Board of Directors for
marketing consulting services. The agreement provides that the
consultant be paid a monthly fee of $3,000 for a certain number of
consulting days as defined in the agreement. Stock options were
granted to him valued at $15,300 and $9,300 during each of the years
ended June 30, 2011 and 2010, respectively. Consulting expense
related to this agreement amounted to $52,200 and $44,300 for the
years ended June 30, 2011 and 2010, respectively.
The Company has a consulting agreement which expires March 31, 2012
with a different member of its Board of Directors for administrative
services. The agreement provides that the consultant will be paid
at the rate of $85 per hour. Consulting expense related to this
agreement amounted to $9,000 and $32,700 for the fiscal years ended
June 30, 2011 and 2010.
F-18
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
10. Income Taxes
The reconciliation of the provision for income taxes at the federal
statutory rate of 35% to the actual tax expense for the applicable
fiscal year was as follows:
2011 2010
__________________ _________________
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
_________ _______ _________ _______
Computed "expected" income tax $107,500 35.0% $272,200 35.0%
Research and development
credits ( 15,000) (4.9) ( 13,300) (1.7)
Other, net ( 12,900) (4.2) ( 21,000) (2.7)
_________ _______ __________ ______
Actual income taxes $ 79,600 25.9% $237,900 30.6%
========= ======= ========== ======
Deferred tax assets and liabilities consist of the following:
2011 2010
__________ __________
Deferred tax assets:
Amortization of intangibles $ 130,500 $ 117,300
Rent accrual 25,700 25,400
Other 77,700 73,800
_________ _________
233,900 216,500
Deferred tax liability:
Depreciation of property
and amortization of goodwill (40,400) (42,600)
__________ __________
Net deferred tax assets $ 193,500 $ 173,900
========== ==========
The breakdown between current and long-term deferred tax assets and
liabilities is as follows:
2011 2010
__________ __________
Current deferred tax assets $ 77,700 $ 73,800
_________ _________
Long-term deferred tax assets 156,200 142,700
Long-term deferred tax liabilities (40,400) (42,600)
__________ __________
Net long-term deferred tax asset 115,800 100,100
__________ __________
Net deferred tax assets $ 193,500 $ 173,900
========== ==========
F-19
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
10. Income Taxes (Continued)
ASC No. 740 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC No. 740 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The impact
of the Company's reassessment of its tax positions in accordance
with ASC No. 740 did not have an effect on the results of operations,
financial condition or liquidity. As of June 30, 2011 and 2010, the
Company did not have any unrecognized tax benefits related to various
federal and state income tax matters.
The Company's policy is to recognize interest and penalties on any
unrecognized tax benefits as a component of income tax expense. As
of the date of adoption of ASC No. 740, the Company did not have any
accrued interest or penalties associated with any unrecognized tax
benefits. The Company is subject to U.S. federal income tax, as well
as various state jurisdictions. The Company is currently open to
audit under the statute of limitations by the federal and state
jurisdictions for the years ending June 30, 2008 through 2010.
The Company does not anticipate any material amount of unrecognized
tax benefits within the next 12 months.
11. Stock Options
Option activity is summarized as follows:
Fiscal 2011 Fiscal 2010
_________________ __________________
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
_______ _______ _______ ________
Shares under option:
Outstanding, beginning of year 45,001 $ 2.24 44,501 $ 1.90
Granted 12,000 3.21 16,500 2.35
Exercised - - ( 4,000) 1.33
Forfeited - - (12,000) 1.52
________ ________
Outstanding, end of year 57,001 2.45 45,001 2.24
________ _______ ________ ________
Options exercisable at year-end 52,833 $ 2.40 34,831 $ 1.88
________ _______ ________ ________
Weighted average fair value per
share of options granted
during fiscal 2011 and 2010 $ 1.66 $ 1.25
======= =======
F-20
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
11. Stock Options (Continued)
As of June 30, 2011 As of June 30, 2011
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$1.25-$2.40 32,001 1.77 $ 1.89 32,000 $ 1.89
$3.07-$3.24 25,000 4.94 $ 3.16 20,833 $ 3.17
________ ________
57,001 52,833
________ ________
As of June 30, 2010 As of June 30, 2010
Options Outstanding Exercisable
_______________________________________________ _____________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$1.25-$1.88 20,001 3.54 $ 1.59 15,000 $ 1.49
$2.40-$3.27 25,000 3.65 $ 2.77 19,831 $ 2.68
________ ________
45,001 34,831
________ ________
12. Earnings Per Common Share
Earnings per common share data was computed as follows:
2011 2010
__________ __________
Net income $ 227,600 $ 539,700
__________ __________
Weighted average common shares
outstanding 1,196,577 1,196,051
Effect of dilutive securities 16,905 15,844
__________ __________
Weighted average dilutive common
shares outstanding 1,213,482 1,211,895
__________ __________
Basic earnings per common share $ .19 $ .45
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Diluted earnings per common share $ .19 $ .45
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