General. Scientific Industries, Inc., a Delaware corporation (the "Company"), formed in 1954, designs, manufactures, and markets a variety of laboratory equipment. The Company's products are generally used for research purposes in laboratories of universities, hospitals, pharmaceutical companies, clinics, medical device manufacturers and other related industries.
Recent Developments. During the last quarter of the year ended June 30, 2006 ("fiscal 2006"), the Company was advised by Fisher Scientific International ("Fisher"), its principal distributor and customer (sales to Fisher represented 20% and 23% of the Company's net sales for the fiscal years ended June 30, 2006 and June 30, 2005, respectively) that it would no longer purchase for distribution the Company's products which the Company believes is a result of a change of focus to sales of Fisher's private label products. The Company has increased its efforts to increase sales to its other distributors, and directly to additional customers, and to appoint other distributors to mitigate the adverse effect the discontinuance has raised. No assurance can be given that such efforts will be successful.
In June 2006, the Company received a nonexclusive sublicense to develop, produce and sell a line of bioreactor vessels with integral sensors for pH and oxygen in volumes of 250 milliliters up to 5 liters for laboratory systems under a license from the University of Maryland, Baltimore County, the patent holder. The Company is engaged in the development of certain products which incorporate the disposable sensor technology. No representation can be made that any material sales will result from the sublicense.
In August, 2006, the Company agreed in principle to acquire the outstanding capital stock of a privately held company engaged in the production and sale of catalyst research instruments. The consummation of the acquisition is subject to negotiation and execution of a stock purchase agreement. The agreement is to provide a purchase consideration of $400,000 in cash, 125,000 shares of the Company's Common Stock and contingent payments based on the annual sales of the acquired business during a four year period following the acquisition. Sales of the privately held company were approximately $1,366,000 for the year ended December 31, 2005 (unaudited). No assurance can be given that the proposed acquisition will be effected or, that if effected, the acquired operation will be beneficial to the Company's operating results.
Products. The Company's products principally consist of laboratory mixers, rotators/rockers, refrigerated incubators, and magnetic stirrers.
Mixers and Disruptors. The Company's primary product is the Vortex-Genie(R) 2 Mixer. 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. Sales of the Vortex-Genie 2 Mixer (excluding accessories) represented approximately 72% of the Company's revenues for fiscal 2006 as compared with 75% of the Company's revenues for the year ended June 30, 2005 ("fiscal 2005").
The Company expanded its mixers line to include, in the year ended June 30, 2002 ("fiscal 2002"), the Vortex-Genie 2T, a mixer with an integral timer, the Vortex-Genie 1, a high speed touch mixer, and the Disruptor Genie(R), a patented cell disruptor. In fiscal 2004, the Company introduced the MicroPlate Genie , another specialty mixer designed specifically to mix and vortex the contents of microplates, and at the end of fiscal 2005, launched the Multi-MicroPlate Genie . A digital version of the Vortex-Genie(R) 2 is planned for launching shortly.
Other Products. The Company's Roto-Shake Genie(R), a patented benchtop multi-purpose rotator/rocker was designed by the Company to rotate and rock a wide variety of containers which are magnetically attached to the unit's magnetized platform. The Enviro-Genie(R) Refrigerated Incubator and the BioReactor Genie(TM) Cell Culture Chamber (introduced during fiscal 2003) are multi-functional benchtop environmental chambers designed to perform various functions under controlled environmental conditions of temperature.
During fiscal 2004, the Company launched the MagStir Genie(R), a new patented magnetic stirrer, which is programmable and offers a unique low to high speed range. The MultiMagStir Genie , a four-place magnetic stirrer was launched in fiscal 2005. Other magnetic stirrers are currently under development for introduction during the year ending June 30, 2007 ("fiscal 2007").
Product Development. The Company designs and develops substantially all of its products. Its personnel formulate plans and concepts for new products and improvements or modifications to existing products. It also engages outside consultants to augment its capabilities in such areas as industrial and electronics design.
Marketing. The Company's products are generally distributed and marketed through an established network of domestic and foreign laboratory equipment distributors. See "Major Customers" below. In general, it takes two to three years for a new product to begin generating meaningful sales in the industry due to the catalog distribution system.
The Company also markets its products through attendance at industry trade shows, trade publication advertising, brochures and catalogs, and to a limited extent, in view of the type of customer for the Company's products, its own web site.
Assembly and Production Materials. The Company's production operation principally involves assembly of components supplied by various domestic and international independent suppliers. The Company does not have any sole suppliers, except as to a few components where it is not feasible to have multiple suppliers and alternative suppliers are available. Over the last two fiscal years, the Company has purchased a substantial portion of components from overseas factories, with a substantial part of such purchases effected through a U.S. vendor. (The vendor accounted for approximately 44% and 35% for fiscal 2006 and fiscal 2005, respectively, of the Company's material purchases.) See "Risk
Factors - The Company is Heavily Dependent on Outside Suppliers for the Components of Its Products".
Patents, Trademarks, Licenses and Franchises. The Company holds several United States patents relating to existing products. It licensed one of its patents, a patent on a utilitarian feature of its Vortex-Genie 2 Mixer on a non-exclusive, royalty-free basis to Henry Troemner, LLC, ("Troemner"), under an agreement dated December 1, 1999 settling a lawsuit instituted by the Company in April, 1999. The patent and license expired on November 2, 2005; however, there has been no adverse effect as a result of the patent expiration. The Company's patent for the TurboMix(TM), an accessory to the existing Vortex-Genie 2 Mixer, expires in September 2015. Its patent on the Roto-Shake Genie expires in July 2016. A recent patent granted on its MagStir Genie and MultiMagStir Genie expires in November 2022.
The Company has various proprietary marks, including BioReactor Genie(TM), Disruptor Beads(TM), Disruptor Genie(R), Enviro-Genie(R), Genie(TM), MagStir Genie(R), MultiMagStir Genie(R), MicroPlate Genie(TM), Multi-MicroPlate Genie(TM), Roto-Shake Genie(R), TurboMix(TM), and Vortex-Genie(R), each of which it considers important to the success of the related product. The Company also has several trademark applications pending. No representation can be made that any application will be granted or as to the protection, if any, it will provide if granted.
See "Recent Developments" above for a recently acquired sublicense as to bioreactor vessels.
Foreign Sales. The Company's foreign sales, all of which were to various distributors outside the United States (principally Asia and Europe) accounted for approximately 44% of the Company's net sales for each of fiscal 2006 and fiscal 2005. 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.
Major Customers. Sales, mostly of the Vortex-Genie 2 Mixer, to two of the Company's two major customers, represented in the aggregate approximately 37% and 40% of net sales for fiscal 2006 and for fiscal 2005, respectively. See "Recent Developments" above for discontinuance of purchases by the Company's principal customer and distributor. A third customer, also a distributor of the Company's products, accounted for 10% of net sales for each of fiscal 2006 and 2005 of the Company's net sales.
Backlog. The Company's backlog is not significant because the Company's current line of products is comprised of standard catalog items. The typical lead time for order fulfillment is not more than two weeks.
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 in the United States derives from private label brand mixers offered by the two largest laboratory equipment distributors in the United States, who dominate the end user market, one of which is Fisher (see "Recent Developments" above). The Company believes it is a factor in the market for vortex mixers in the United States and is widely recognized in the international vortex mixers market.
In the general area of laboratory equipment, the Company's major competitors are Troemner (private label supplier to the two largest laboratory equipment distributors in the U.S. and Europe), Barnstead/Thermolyne Corporation, (an Apogent Technologies company owned by Fisher Scientific International), IKA-Werke GmbH & Co. KG, a German company, and Heidolph Instruments GmbH, a German company.
Research and Development. In connection with the development of new products, the Company incurred research and development expenses of $316,500 during fiscal 2006 compared to $350,200 during fiscal 2005. The Company expects its expenditures in fiscal 2007 for research and development will not be materially different from previous years, except for the expanded efforts with respect to the development of a line of bioreactor vessels under a sublicense.
Government and Environmental Regulation. The Company's products and claims with respect thereto have not required approval of the Food and Drug Administration or any other government approval. The Company's manufacturing operations, like those of the industry in general, are subject to numerous existing and proposed, if adopted, federal, state, and local regulations to protect the environment, to establish occupational safety and health standards and to cover other matters. The Company believes that 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 25, 2006, the Company employed 18 persons of whom 17 were full-time, including its two executive officers. None of the Company's employees is represented by any unions.
RISK FACTORS
IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, IMPORTANT RISK FACTORS ARE IDENTIFIED BELOW THAT COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO SUCH FUTURE PERIODS IN ANY CURRENT STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE ANY FORWARD-LOOKING ANNOUNCEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
DEPENDENCE ON MAJOR CUSTOMERS
The industry is dominated in the U.S. by two major laboratory equipment distributors, Fisher Scientific International and VWR International. During the fourth quarter of fiscal 2006, the Company was informed by Fisher Scientific that it would no longer market the Company's products. As a result, significantly lower sales of the Company's products were effected to such distributor during the fourth quarter of fiscal 2006 and none are expected in the future. Sales to this major customer, mostly the Vortex-Genie 2 Mixer, accounted for approximately 20% and 23% of total net sales for fiscal 2006 and fiscal 2005, respectively. Although the Company has increased its direct selling efforts and increased distribution through its other existing distributors and new distributors, due to Fisher Scientific's dominance of the end user market, it is unlikely that it will be able to recoup a material portion of the lost revenues. The Company's then second largest customer, (and currently its largest customer) accounted for approximately 17% of the Company's net sales in each of fiscal 2006 and 2005. A third customer, an overseas distributor of the Company's products, accounted for approximately 10% for each of fiscal 2006 and 2005. A material reduction in sales to the foregoing distributors will have an adverse effect on the results of operations of the Company.
THE COMPANY OFFERS A LIMITED NUMBER OF PRODUCTS WITH SALES OF ONE PRODUCT ACCOUNTING FOR A SUBSTANTIAL PORTION OF ITS REVENUES
The Company currently offers for sale a limited number of products. Sales of its Vortex-Genie 2 Mixer accounted for approximately 72% and 75% of the Company's sales for fiscal 2006 and fiscal 2005, respectively. See "Dependence on Major Customers" above.
THE COMPANY IS A SMALL PARTICIPANT IN ITS HIGHLY COMPETITIVE INDUSTRY
The laboratory products industry is highly competitive. Although the Company's principal product, the Vortex-Genie 2 Mixer, has been widely accepted, the Company's annual net sales ($3,465,200 for fiscal 2006 and $3,593,000 for fiscal 2005) are significantly less than the annual revenues of many of its competitors in the industry. Its principal competitors are substantially larger and have much greater financial, production and marketing resources than the Company. In the past few years, there have been continuous new entrants into the vortex mixer market, including the manufacturer of the industry's two largest distributors' private label mixers.
THE COMPANY'S ABILITY TO GROW AND COMPETE EFFECTIVELY IS IN PART DEPENDENT ON ITS ABILITY TO DEVELOP AND EFFECTIVELY MARKET NEW PRODUCTS
In the recent past, the Company began pursuing a program to develop and market new laboratory equipment with a view to increasing its revenues and reducing its dependence on the Vortex-Genie 2 Mixer. As result, the Company first developed and introduced during the fiscal year ended June 30, 1999 the Roto-Shake Genie rotator/rocker and then in the fiscal year ended June 30, 2001 the Enviro-Genie refrigerated incubator. During fiscal 2002, the Company began selling three new products which generally target the vortex mixer market - the Vortex-Genie 1 touch mixer, the Vortex-Genie 2T timed mixer, and the Disruptor Genie cell disruptor. More recently, the Company introduced the MagStir Genie and MultiMagStir Genie magnetic stirrers and the MicroPlate Genie and Multi-MicroPlate Genie microplate mixers, with additional products soon to be launched and others currently under development.
Revenues derived from new products (those other than the Vortex-Genie 2, but excluding accessories) amounted to $737,100 and $669,500, respectively, for fiscal 2006 and fiscal 2005. The Company historically has relied primarily on its distributors and their catalogs to market its products. Sales of new products are heavily dependent on the distributors' decision to include a new product in the distributors' catalogs and their continued inclusion in the catalogs and on their websites, since the majority of the end users purchase through distributors. Accordingly, it may be at least 24 to 36 months between the completion of development of a product and the distribution of the catalog in which it is first offered.
In the beginning of calendar 2003, the Company also began taking a more aggressive approach towards the marketing of its products, allocating more resources for marketing staff, advertising, promotions, website, and miscellaneous other selling and marketing tools. No assurance can be given that the amounts allocated by the Company for its development and marketing programs will prove beneficial or that distributors will include any particular product in their catalogs and websites.
In June 2006, the Company received a nonexclusive sublicense to develop, produce and sell a line of bioreactor vessels with integral sensors for pH and oxygen in volumes of 250 milliliters up to 5 liters for laboratory systems under a license from the University of Maryland, Baltimore County, the patent holder. The Company is engaged in the development of certain products which incorporate the disposable sensor technology.
No assurance can be made that such development will be completed or that it will result in material revenues.
THE COMPANY IS HEAVILY DEPENDENT ON OUTSIDE SUPPLIERS FOR THE COMPONENTS OF ITS PRODUCTS
While the Company believes there are several suppliers available for all of its components, it presently relies on one source for several components. Purchases through a United States vendor from one overseas supplier accounted for approximately 44% and 35% of the cost of purchased materials for fiscal 2006 and fiscal 2005, respectively. While the Company believes there are other sources for the materials readily available, the disruption or termination of the operations of this source or other sources could have an adverse effect, hopefully of short duration, on the Company's results of operations. To diminish this risk, the Company keeps higher than normal quantities on-hand of such components, and has added several alternate suppliers during the past two years. Furthermore, the Company intends to continue purchasing components from overseas factories directly or indirectly. Such reliance could increase the risks of the Company's operations including those arising from government controls, foreign conditions, custom duties, changes in both foreign and United States government policies, and the reliability and financial condition of such suppliers.
THE COMPANY'S ABILITY TO COMPETE DEPENDS IN PART ON ITS ABILITY TO SECURE AND MAINTAIN PROPRIETARY RIGHTS TO ITS PRODUCTS
The Company's ability to compete depends in part on its ability to secure and maintain proprietary rights to its products. The Company's design patent on a feature of its Vortex-Genie 2 Mixer, its principal product, expired in November 2005. Although the Company has not experienced any adverse effect from the expiration of this patent, there is no assurance as to future effect. A new patent was granted to the Company during the year for one of its new products. A recently acquired sublicense with respect to a line of bioreactor vessels, which the Company has commenced developing, will be dependent on the validity of the licensor's patents.
There can be no assurance that the Company will be successful in obtaining additional patents, that any patent issued or licensed to the Company provides or will provide the Company with competitive advantages or will not be challenged by third parties or that the patents of others will not prevent the commercialization of products developed by the Company. Furthermore, there can be no assurance that others will not independently develop similar products or design around the patents related to the Company's products. Any of the foregoing activities could have a material adverse effect on the Company. Moreover, there is no assurance that the enforcement by the Company of its patent rights will not result in substantial litigation costs.
POSSIBLE MATERIAL INVESTMENT TO ACQUIRE NEW OPERATION
In August, 2006, the Company agreed in principle to acquire the outstanding capital stock of a privately held company engaged in the production and sale of catalyst research instruments. The consummation of the acquisition is subject to negotiation and execution of a stock purchase agreement. The agreement is to provide a purchase consideration of $400,000 in cash, 125,000 shares of the Company's Common Stock and contingent payments based on the annual sales of the acquired business during a four year period following the acquisition. Sales of the privately held company were approximately $1,366,000 (unaudited) for the year ended December 31, 2005. While the skills required are somewhat comparable to those of the Company's, the development and marketing of the products of the operation to be acquired will initially depend on the skills of the acquired company's employees. No assurance can be given that the acquisition will be effected or, that if effected, that it will prove beneficial to the Company's results or financial condition.
THE COMPANY HAS LIMITED MANAGEMENT RESOURCES
The loss of the services of Ms. Helena Santos, the Company's Chief Executive and Financial Officer, and President, or Mr. Robert Nichols, the Company's Executive Vice President or any material expansion of the Company's operations could place a significant additional strain on the Company's limited management resources and could be materially adverse to the Company's results and financial condition.
THE COMMON STOCK OF THE COMPANY IS THINLY TRADED AND IS SUBJECT TO VOLATILITY
The Common Stock of the Company is traded on the Over-the-Counter Bulletin Board and, historically, has been thinly traded. As of August 25, 2006, there were only 1,000,352 shares of Common Stock of the Company outstanding, of which 317,915 shares are held by the directors and officers of the Company. There have been a number of trading days during fiscal 2006 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.
Recent Developments. During the last quarter of the year ended June 30, 2006 ("fiscal 2006"), the Company was advised by Fisher Scientific International ("Fisher"), its principal distributor and customer (sales to Fisher represented 20% and 23% of the Company's net sales for the fiscal years ended June 30, 2006 and June 30, 2005, respectively) that it would no longer purchase for distribution the Company's products which the Company believes is a result of a change of focus to sales of Fisher's private label products. The Company has increased its efforts to increase sales to its other distributors, and directly to additional customers, and to appoint other distributors to mitigate the adverse effect the discontinuance has raised. No assurance can be given that such efforts will be successful.
In June 2006, the Company received a nonexclusive sublicense to develop, produce and sell a line of bioreactor vessels with integral sensors for pH and oxygen in volumes of 250 milliliters up to 5 liters for laboratory systems under a license from the University of Maryland, Baltimore County, the patent holder. The Company is engaged in the development of certain products which incorporate the disposable sensor technology. No representation can be made that any material sales will result from the sublicense.
In August, 2006, the Company agreed in principle to acquire the outstanding capital stock of a privately held company engaged in the production and sale of catalyst research instruments. The consummation of the acquisition is subject to negotiation and execution of a stock purchase agreement. The agreement is to provide a purchase consideration of $400,000 in cash, 125,000 shares of the Company's Common Stock and contingent payments based on the annual sales of the acquired business during a four year period following the acquisition. Sales of the privately held company were approximately $1,366,000 for the year ended December 31, 2005 (unaudited). No assurance can be given that the proposed acquisition will be effected or, that if effected, the acquired operation will be beneficial to the Company's operating results.
Products. The Company's products principally consist of laboratory mixers, rotators/rockers, refrigerated incubators, and magnetic stirrers.
Mixers and Disruptors. The Company's primary product is the Vortex-Genie(R) 2 Mixer. 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. Sales of the Vortex-Genie 2 Mixer (excluding accessories) represented approximately 72% of the Company's revenues for fiscal 2006 as compared with 75% of the Company's revenues for the year ended June 30, 2005 ("fiscal 2005").
The Company expanded its mixers line to include, in the year ended June 30, 2002 ("fiscal 2002"), the Vortex-Genie 2T, a mixer with an integral timer, the Vortex-Genie 1, a high speed touch mixer, and the Disruptor Genie(R), a patented cell disruptor. In fiscal 2004, the Company introduced the MicroPlate Genie , another specialty mixer designed specifically to mix and vortex the contents of microplates, and at the end of fiscal 2005, launched the Multi-MicroPlate Genie . A digital version of the Vortex-Genie(R) 2 is planned for launching shortly.
Other Products. The Company's Roto-Shake Genie(R), a patented benchtop multi-purpose rotator/rocker was designed by the Company to rotate and rock a wide variety of containers which are magnetically attached to the unit's magnetized platform. The Enviro-Genie(R) Refrigerated Incubator and the BioReactor Genie(TM) Cell Culture Chamber (introduced during fiscal 2003) are multi-functional benchtop environmental chambers designed to perform various functions under controlled environmental conditions of temperature.
During fiscal 2004, the Company launched the MagStir Genie(R), a new patented magnetic stirrer, which is programmable and offers a unique low to high speed range. The MultiMagStir Genie , a four-place magnetic stirrer was launched in fiscal 2005. Other magnetic stirrers are currently under development for introduction during the year ending June 30, 2007 ("fiscal 2007").
Product Development. The Company designs and develops substantially all of its products. Its personnel formulate plans and concepts for new products and improvements or modifications to existing products. It also engages outside consultants to augment its capabilities in such areas as industrial and electronics design.
Marketing. The Company's products are generally distributed and marketed through an established network of domestic and foreign laboratory equipment distributors. See "Major Customers" below. In general, it takes two to three years for a new product to begin generating meaningful sales in the industry due to the catalog distribution system.
The Company also markets its products through attendance at industry trade shows, trade publication advertising, brochures and catalogs, and to a limited extent, in view of the type of customer for the Company's products, its own web site.
Assembly and Production Materials. The Company's production operation principally involves assembly of components supplied by various domestic and international independent suppliers. The Company does not have any sole suppliers, except as to a few components where it is not feasible to have multiple suppliers and alternative suppliers are available. Over the last two fiscal years, the Company has purchased a substantial portion of components from overseas factories, with a substantial part of such purchases effected through a U.S. vendor. (The vendor accounted for approximately 44% and 35% for fiscal 2006 and fiscal 2005, respectively, of the Company's material purchases.) See "Risk
Factors - The Company is Heavily Dependent on Outside Suppliers for the Components of Its Products".
Patents, Trademarks, Licenses and Franchises. The Company holds several United States patents relating to existing products. It licensed one of its patents, a patent on a utilitarian feature of its Vortex-Genie 2 Mixer on a non-exclusive, royalty-free basis to Henry Troemner, LLC, ("Troemner"), under an agreement dated December 1, 1999 settling a lawsuit instituted by the Company in April, 1999. The patent and license expired on November 2, 2005; however, there has been no adverse effect as a result of the patent expiration. The Company's patent for the TurboMix(TM), an accessory to the existing Vortex-Genie 2 Mixer, expires in September 2015. Its patent on the Roto-Shake Genie expires in July 2016. A recent patent granted on its MagStir Genie and MultiMagStir Genie expires in November 2022.
The Company has various proprietary marks, including BioReactor Genie(TM), Disruptor Beads(TM), Disruptor Genie(R), Enviro-Genie(R), Genie(TM), MagStir Genie(R), MultiMagStir Genie(R), MicroPlate Genie(TM), Multi-MicroPlate Genie(TM), Roto-Shake Genie(R), TurboMix(TM), and Vortex-Genie(R), each of which it considers important to the success of the related product. The Company also has several trademark applications pending. No representation can be made that any application will be granted or as to the protection, if any, it will provide if granted.
See "Recent Developments" above for a recently acquired sublicense as to bioreactor vessels.
Foreign Sales. The Company's foreign sales, all of which were to various distributors outside the United States (principally Asia and Europe) accounted for approximately 44% of the Company's net sales for each of fiscal 2006 and fiscal 2005. 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.
Major Customers. Sales, mostly of the Vortex-Genie 2 Mixer, to two of the Company's two major customers, represented in the aggregate approximately 37% and 40% of net sales for fiscal 2006 and for fiscal 2005, respectively. See "Recent Developments" above for discontinuance of purchases by the Company's principal customer and distributor. A third customer, also a distributor of the Company's products, accounted for 10% of net sales for each of fiscal 2006 and 2005 of the Company's net sales.
Backlog. The Company's backlog is not significant because the Company's current line of products is comprised of standard catalog items. The typical lead time for order fulfillment is not more than two weeks.
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 in the United States derives from private label brand mixers offered by the two largest laboratory equipment distributors in the United States, who dominate the end user market, one of which is Fisher (see "Recent Developments" above). The Company believes it is a factor in the market for vortex mixers in the United States and is widely recognized in the international vortex mixers market.
In the general area of laboratory equipment, the Company's major competitors are Troemner (private label supplier to the two largest laboratory equipment distributors in the U.S. and Europe), Barnstead/Thermolyne Corporation, (an Apogent Technologies company owned by Fisher Scientific International), IKA-Werke GmbH & Co. KG, a German company, and Heidolph Instruments GmbH, a German company.
Research and Development. In connection with the development of new products, the Company incurred research and development expenses of $316,500 during fiscal 2006 compared to $350,200 during fiscal 2005. The Company expects its expenditures in fiscal 2007 for research and development will not be materially different from previous years, except for the expanded efforts with respect to the development of a line of bioreactor vessels under a sublicense.
Government and Environmental Regulation. The Company's products and claims with respect thereto have not required approval of the Food and Drug Administration or any other government approval. The Company's manufacturing operations, like those of the industry in general, are subject to numerous existing and proposed, if adopted, federal, state, and local regulations to protect the environment, to establish occupational safety and health standards and to cover other matters. The Company believes that 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 25, 2006, the Company employed 18 persons of whom 17 were full-time, including its two executive officers. None of the Company's employees is represented by any unions.
RISK FACTORS
IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, IMPORTANT RISK FACTORS ARE IDENTIFIED BELOW THAT COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO SUCH FUTURE PERIODS IN ANY CURRENT STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE ANY FORWARD-LOOKING ANNOUNCEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
DEPENDENCE ON MAJOR CUSTOMERS
The industry is dominated in the U.S. by two major laboratory equipment distributors, Fisher Scientific International and VWR International. During the fourth quarter of fiscal 2006, the Company was informed by Fisher Scientific that it would no longer market the Company's products. As a result, significantly lower sales of the Company's products were effected to such distributor during the fourth quarter of fiscal 2006 and none are expected in the future. Sales to this major customer, mostly the Vortex-Genie 2 Mixer, accounted for approximately 20% and 23% of total net sales for fiscal 2006 and fiscal 2005, respectively. Although the Company has increased its direct selling efforts and increased distribution through its other existing distributors and new distributors, due to Fisher Scientific's dominance of the end user market, it is unlikely that it will be able to recoup a material portion of the lost revenues. The Company's then second largest customer, (and currently its largest customer) accounted for approximately 17% of the Company's net sales in each of fiscal 2006 and 2005. A third customer, an overseas distributor of the Company's products, accounted for approximately 10% for each of fiscal 2006 and 2005. A material reduction in sales to the foregoing distributors will have an adverse effect on the results of operations of the Company.
THE COMPANY OFFERS A LIMITED NUMBER OF PRODUCTS WITH SALES OF ONE PRODUCT ACCOUNTING FOR A SUBSTANTIAL PORTION OF ITS REVENUES
The Company currently offers for sale a limited number of products. Sales of its Vortex-Genie 2 Mixer accounted for approximately 72% and 75% of the Company's sales for fiscal 2006 and fiscal 2005, respectively. See "Dependence on Major Customers" above.
THE COMPANY IS A SMALL PARTICIPANT IN ITS HIGHLY COMPETITIVE INDUSTRY
The laboratory products industry is highly competitive. Although the Company's principal product, the Vortex-Genie 2 Mixer, has been widely accepted, the Company's annual net sales ($3,465,200 for fiscal 2006 and $3,593,000 for fiscal 2005) are significantly less than the annual revenues of many of its competitors in the industry. Its principal competitors are substantially larger and have much greater financial, production and marketing resources than the Company. In the past few years, there have been continuous new entrants into the vortex mixer market, including the manufacturer of the industry's two largest distributors' private label mixers.
THE COMPANY'S ABILITY TO GROW AND COMPETE EFFECTIVELY IS IN PART DEPENDENT ON ITS ABILITY TO DEVELOP AND EFFECTIVELY MARKET NEW PRODUCTS
In the recent past, the Company began pursuing a program to develop and market new laboratory equipment with a view to increasing its revenues and reducing its dependence on the Vortex-Genie 2 Mixer. As result, the Company first developed and introduced during the fiscal year ended June 30, 1999 the Roto-Shake Genie rotator/rocker and then in the fiscal year ended June 30, 2001 the Enviro-Genie refrigerated incubator. During fiscal 2002, the Company began selling three new products which generally target the vortex mixer market - the Vortex-Genie 1 touch mixer, the Vortex-Genie 2T timed mixer, and the Disruptor Genie cell disruptor. More recently, the Company introduced the MagStir Genie and MultiMagStir Genie magnetic stirrers and the MicroPlate Genie and Multi-MicroPlate Genie microplate mixers, with additional products soon to be launched and others currently under development.
Revenues derived from new products (those other than the Vortex-Genie 2, but excluding accessories) amounted to $737,100 and $669,500, respectively, for fiscal 2006 and fiscal 2005. The Company historically has relied primarily on its distributors and their catalogs to market its products. Sales of new products are heavily dependent on the distributors' decision to include a new product in the distributors' catalogs and their continued inclusion in the catalogs and on their websites, since the majority of the end users purchase through distributors. Accordingly, it may be at least 24 to 36 months between the completion of development of a product and the distribution of the catalog in which it is first offered.
In the beginning of calendar 2003, the Company also began taking a more aggressive approach towards the marketing of its products, allocating more resources for marketing staff, advertising, promotions, website, and miscellaneous other selling and marketing tools. No assurance can be given that the amounts allocated by the Company for its development and marketing programs will prove beneficial or that distributors will include any particular product in their catalogs and websites.
In June 2006, the Company received a nonexclusive sublicense to develop, produce and sell a line of bioreactor vessels with integral sensors for pH and oxygen in volumes of 250 milliliters up to 5 liters for laboratory systems under a license from the University of Maryland, Baltimore County, the patent holder. The Company is engaged in the development of certain products which incorporate the disposable sensor technology.
No assurance can be made that such development will be completed or that it will result in material revenues.
THE COMPANY IS HEAVILY DEPENDENT ON OUTSIDE SUPPLIERS FOR THE COMPONENTS OF ITS PRODUCTS
While the Company believes there are several suppliers available for all of its components, it presently relies on one source for several components. Purchases through a United States vendor from one overseas supplier accounted for approximately 44% and 35% of the cost of purchased materials for fiscal 2006 and fiscal 2005, respectively. While the Company believes there are other sources for the materials readily available, the disruption or termination of the operations of this source or other sources could have an adverse effect, hopefully of short duration, on the Company's results of operations. To diminish this risk, the Company keeps higher than normal quantities on-hand of such components, and has added several alternate suppliers during the past two years. Furthermore, the Company intends to continue purchasing components from overseas factories directly or indirectly. Such reliance could increase the risks of the Company's operations including those arising from government controls, foreign conditions, custom duties, changes in both foreign and United States government policies, and the reliability and financial condition of such suppliers.
THE COMPANY'S ABILITY TO COMPETE DEPENDS IN PART ON ITS ABILITY TO SECURE AND MAINTAIN PROPRIETARY RIGHTS TO ITS PRODUCTS
The Company's ability to compete depends in part on its ability to secure and maintain proprietary rights to its products. The Company's design patent on a feature of its Vortex-Genie 2 Mixer, its principal product, expired in November 2005. Although the Company has not experienced any adverse effect from the expiration of this patent, there is no assurance as to future effect. A new patent was granted to the Company during the year for one of its new products. A recently acquired sublicense with respect to a line of bioreactor vessels, which the Company has commenced developing, will be dependent on the validity of the licensor's patents.
There can be no assurance that the Company will be successful in obtaining additional patents, that any patent issued or licensed to the Company provides or will provide the Company with competitive advantages or will not be challenged by third parties or that the patents of others will not prevent the commercialization of products developed by the Company. Furthermore, there can be no assurance that others will not independently develop similar products or design around the patents related to the Company's products. Any of the foregoing activities could have a material adverse effect on the Company. Moreover, there is no assurance that the enforcement by the Company of its patent rights will not result in substantial litigation costs.
POSSIBLE MATERIAL INVESTMENT TO ACQUIRE NEW OPERATION
In August, 2006, the Company agreed in principle to acquire the outstanding capital stock of a privately held company engaged in the production and sale of catalyst research instruments. The consummation of the acquisition is subject to negotiation and execution of a stock purchase agreement. The agreement is to provide a purchase consideration of $400,000 in cash, 125,000 shares of the Company's Common Stock and contingent payments based on the annual sales of the acquired business during a four year period following the acquisition. Sales of the privately held company were approximately $1,366,000 (unaudited) for the year ended December 31, 2005. While the skills required are somewhat comparable to those of the Company's, the development and marketing of the products of the operation to be acquired will initially depend on the skills of the acquired company's employees. No assurance can be given that the acquisition will be effected or, that if effected, that it will prove beneficial to the Company's results or financial condition.
THE COMPANY HAS LIMITED MANAGEMENT RESOURCES
The loss of the services of Ms. Helena Santos, the Company's Chief Executive and Financial Officer, and President, or Mr. Robert Nichols, the Company's Executive Vice President or any material expansion of the Company's operations could place a significant additional strain on the Company's limited management resources and could be materially adverse to the Company's results and financial condition.
THE COMMON STOCK OF THE COMPANY IS THINLY TRADED AND IS SUBJECT TO VOLATILITY
The Common Stock of the Company is traded on the Over-the-Counter Bulletin Board and, historically, has been thinly traded. As of August 25, 2006, there were only 1,000,352 shares of Common Stock of the Company outstanding, of which 317,915 shares are held by the directors and officers of the Company. There have been a number of trading days during fiscal 2006 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.
