Scientific Industries (SCND) Risk Factors

The Company continuously invests in the development and marketing of new Benchtop Laboratory Equipment products with a view to increase revenues and reduce the Company's dependence on the Vortex-Genie 2 Mixer, including the Torbal line of products. However, gross revenues derived from non-Vortex-Genie Benchtop Laboratory Equipment products including Torbal products only amounted to $4,419,100 (49% of the segment's sales and 45% of total revenues) for fiscal 2021; and $3,712,800 (55% of the segment's sales and 48% of total revenues) for fiscal 2020. The segment's ability to compete will depend upon the Company's success in continuing to develop and market new laboratory equipment as to which no assurance can be given. The Company relies heavily on distributors and their catalogs to market the majority of its Benchtop Laboratory Equipment products, as is customary in the industry. Accordingly, sales of new products are heavily dependent on the distributors' decision to include and retain a new product in their catalogs and on their websites. It may be at least 24 to 36 months between the completion of development of a product and the distribution of the catalog in which it is first offered; furthermore, not all distributors feature the Company's products in their catalogs. The success of the Company's Bioprocessing Systems operations will depend heavily on its ability to successfully develop, produce, and market new products. Commencing in the last quarter of fiscal year ended June 30, 2019, the Company began to commit substantial resources to its Bioprocessing Systems operations in the form of employees, materials, supplies, marketing, and facilities to accelerate its product development efforts and marketing activities. Bioprocessing products are of a complex nature in an industry that the Company has not traditionally operated in and have taken much longer to develop than previously anticipated. In addition, they will be subject to beta testing by end users, which could result in design and/or production changes which could further delay development time. On April 29, 2021, the Company acquired Aquila in an effort to further accelerate product development of its bioprocessing products. The Company is incurring substantial product development costs related to its Bioprocessing Operations. No assurance can be given that the Company will be successful with its new product development or that its sales and marketing programs will be sufficient to develop additional commercially feasible products which will be accepted by the marketplace, or that any distributor will include or retain any such products in its catalogs and websites.

Orders for the Company's products depend in part, on the customer's ability to secure funds to finance purchases, especially government funding for research activities. Availability of funds can be affected by budgetary constraints. Factors including a general economic recession, a European crisis, slowdown in Asian economies, or a major terrorist attack may have a negative impact on the availability of funding including government or academic grants to potential customers. Please also see the separate COVID-19 pandemic related discussion in this "Risk Factors" section below. As discussed in Item 1, sales to overseas customers, including sales in China, account for approximately 43% of the Company's net revenues. The high value of the U.S. dollar relative to foreign currencies can have a negative impact on sales because the Company's products, which are paid in U.S. dollars, become more expensive to overseas customers. The ongoing tariffs have not had a material impact on the Company, other than slightly higher component costs which the Company has been able to manage through alternative sources and passing on some of the increases through price increases. The current situation with inflationary pressures and higher transportation costs is resulting in significantly higher costs for some of the Company's components. Continuation of tariffs and/or increased trade tensions and inflationary pressures could have a negative effect on the Company's future gross margins, if the Company is unable to pass such cost increases to its customers.

The challenges posed by the COVID-19 pandemic on the global economy began to take effect and impact the Company's operations at the end of the third quarter of the year ended June 30, 2020. At that time, the Company took appropriate action and put plans in place to diminish the effects of COVID-19 on its operations, enabling the Company to continue to operate with minor or temporary disruptions to its operations. The Company took immediate action as it pertains to COVID-19 preparedness by implementing the Center for Disease Control's guidelines for employers in order to protect the Company's employees' health and safety, with actions such as implementing work from home, social distancing in the workplace, requiring self-quarantine for any employee showing symptoms, wearing face coverings, and training employees on maintaining a healthy work environment. The Bioprocessing Systems Operations' SBI facility was shut down temporarily due to state mandates, however, the impact on operations was immaterial, and the Company has been able to retain its employees without furloughs or layoffs, in part, due to the Company' receipt of two loans under the Federal Government's Paycheck Protection Program ("PPP"). The Company received $563,800 and $433,800 in April 2020 and March 2021, respectively, under this program administered by the U.S. Small Business Administration through its bank. The first loan was forgiven in June 2021 except for $32,700 which was repaid. The remaining loan bears interest at 1% per annum and matures in March 2026 and contains no collateral or guarantee requirements. The Company expects to apply and receive forgiveness for the majority of the second loan. The Bioprocessing Systems Operations' German operation, which was acquired on April 29, 2021, was negatively impacted in its ability to secure new orders because Aquila had historically relied on face-to-face meetings at trade shows for its sales opportunities. While it has participated in virtual trade shows, management believes that certain sales opportunities are lost as a result. The Company has not experienced and does not anticipate any material impact on its ability to collect its accounts receivable due to the nature of its customers, which are primarily distributors of laboratory equipment and supplies which have benefitted from the Pandemic due to the nature of the products and have the ability to pay. However, there is a delay in the receipt of a receivable related to the Company's discontinued operations due to the delay to complete the related installation as a result of the pandemic. The Company has not experienced and does not anticipate any material impairment to its tangible and intangible assets, system of internal controls, or delivery and distribution of its products as a result of COVID-19, however the ultimate impact of COVID-19 on the Company's business, results of operations, financial condition and cash flows is dependent on future developments, including the duration or worsening of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. The Company is currently experiencing some delays from its supply chain which is having an impact on delayed delivery of some products, however this is deemed temporary and does not affect the Company's major product – the Vortex-Genie 2. In addition, due to the travel restrictions imposed by the United States and other governments worldwide, Company personnel may be restricted from traveling to conduct its operations including site visits, customer visits and installations, vendor facility visits, and other sales and marketing related travel that can negatively impact the Company.

Substantially all of the Company's sales are in US dollars. As a result of the acquisition of Aquila, the Company is now subject to foreign exchange rate risk, both transactional and translational, which may negatively affect our financial performance. Transactional foreign exchange exposures result from exchange rate fluctuations, including in respect of the U.S. dollar and the Euro. Translational foreign exchange exposures result from exchange rate fluctuations in the conversion of the entity's functional currency to U.S. dollars, consistent with the Company's reporting currency, and may affect the reported value of the Company's assets and liabilities and its income and expenses. In particular, the Company's translational exposure may be impacted by movements in the exchange rate between the Euro against the U.S. dollar.

The Company has no patent protection for its principal Benchtop Laboratory Equipment product, the Vortex-Genie 2 Mixer, or the Torbal products other than the VIVID pill counter, and it has 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's patents related to its Bioprocessing Systems Operations pertaining to non-invasive sensor technology, which it licenses from University of Maryland Baltimore County, expired in August 2021 and December 2023, and as a result, the Company expects a material reduction in license fees during calendar year 2021 and none past December 2023. The Company has some patent protection on certain of its products under development and other applications pending. The Company's Bioprocessing Operations through its newly acquired Aquila division holds several patents primarily in Germany and across Europe related to its products and underlying technology, and has several patent applications pending in Germany, the European Union, and the United States of America. There can be no assurance that any patent issued, licensed or sublicensed to the Company provides or will provide the Company with competitive advantages or will not be challenged by third parties. Furthermore, there can be no assurance that others will not independently develop similar products or design around the Company's patents. Any of the foregoing activities could have a material adverse effect on the Company. Moreover, enforcement by the Company of its patent or license rights may require substantial litigation costs.

The Company has a limited number of Benchtop Laboratory Equipment products with one product, the Vortex-Genie 2 Mixer, accounting for approximately 51% and 45% of Benchtop Laboratory Equipment sales, for fiscal 2021 and fiscal 2020 (47% and 39% of total net revenues for fiscal 2021 and fiscal 2020, respectively).

The Company purchases all its components from outside suppliers and relies on a few suppliers for some components, mostly due to cost considerations. Most of the Company's suppliers, including its U.S. 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, such as current and potential future tariffs, and the COVID-19 pandemic. 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. The Company is currently experiencing some delays in delivery of electronic components due to shortages of underlying raw materials, however these shortages pertain to low volume Benchtop Laboratory Equipment products and to the Company's knowledge are not expected to have a material impact on the Company's revenues. The Company also seeks to mitigate the effect of the tariffs on its component costs through supplier negotiations, however, alternate suppliers are not always feasible for various reasons including complexity and cost of toolings. A shortage of components beyond what it is currently experiencing or vendor inability to deliver due to shipping and cargo issues could halt production and have a material negative effect on the Company's operations.