UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission file number: 0-31641
SUPERCONDUCTIVE COMPONENTS, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1210318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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2839 CHARTER STREET, COLUMBUS, OHIO 43228
(Address of principal executive offices, including zip code)
(614) 486-0261
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for at least the
past 90 days. YES X NO
State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 3,425,915 shares of Common Stock, without par value, were outstanding at October 28, 2005.
FORM 10-QSB
SUPERCONDUCTIVE COMPONENTS, INC.
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 2005 (unaudited)
and December 31, 2004 3 - 4
Statements of Operations For the Three Months and Nine Months
Ended September 30, 2005 and 2004 (unaudited) 5
Statements of Cash Flows For the Three Months and Nine Months
Ended September 30, 2005 and 2004 (unaudited) 6 - 7
Notes to Financial Statements (unaudited) 8 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15 - 21
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 22
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits. 22
Signatures. 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 210,344 47,095
Cash, restricted for equipment -- 142,968
Accounts and notes receivable
Trade, less allowance for doubtful accounts of $22,663 and 286,964 167,394
$33,176 respectively
Employees -- 100
Inventories 597,501 535,171
Prepaid expenses 32,351 12,626
----------- ----------
Total current assets 1,127,160 905,354
----------- ----------
PROPERTY AND EQUIPMENT,
AT COST
Machinery and equipment 2,207,705 2,143,791
Furniture and fixtures 23,643 22,586
Leasehold improvements 284,072 280,791
Construction in progress 25,944 52,048
----------- ----------
2,541,364 2,499,216
Less accumulated depreciation (1,789,171) (1,641,356)
----------- ----------
752,193 857,860
----------- ----------
OTHER ASSETS
Deposit 8,755 8,755
Intangibles 34,754 37,070
----------- ----------
Total other assets 43,509 45,825
----------- ----------
TOTAL ASSETS $ 1,922,862 1,809,039
=========== ==========
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
CURRENT LIABILITIES
Capital lease obligation, current portion $ 26,677 $ 33,522
Capital lease obligation, shareholder, current portion 68,428 68,428
Note payable shareholders, current portion 564,197 252,886
Accounts payable 424,260 230,097
Accounts payable, shareholders 7,920 7,920
Accrued contract expenses 177,301 318,939
Accrued personal property taxes 41,007 47,671
Accrued interest, shareholders 64,952 31,891
Deferred contract revenue 8,072 83,739
Accrued expenses 82,090 113,043
----------- -----------
Total current liabilities 1,464,904 1,188,136
----------- -----------
CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION 20,807 38,935
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
SHAREHOLDERS' EQUITY
Convertible preferred stock, Series B, 10% cumulative, nonvoting, no par
value, $10 stated value, optional redemption at 103%; 25,185
issued and outstanding 328,664 309,776
Common stock, no par value, authorized 15,000,000 shares;
2,507,360 and 2,439,360 shares issued and outstanding, respectively 7,677,653 7,541,653
Additional paid-in capital 559,675 558,674
Accumulated deficit (8,128,841) (7,828,135)
----------- -----------
437,151 581,968
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,922,862 $ 1,809,039
=========== ===========
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 AND
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
SALES REVENUE $ 953,494 $ 366,072 $2,064,122 $1,422,716
CONTRACT RESEARCH REVENUE 67,717 84,766 245,683 199,061
---------- ---------- ---------- ----------
1,021,211 450,838 2,309,805 1,621,777
---------- ---------- ---------- ----------
COST OF SALES REVENUE 736,336 387,197 1,586,752 1,250,228
COST OF CONTRACT RESEARCH 67,717 91,607 245,683 214,738
---------- ---------- ---------- ----------
804,053 478,804 1,832,435 1,464,966
---------- ---------- ---------- ----------
GROSS MARGIN 217,158 (27,966) 477,370 156,811
GENERAL AND ADMINISTRATIVE EXPENSES 171,973 174,601 544,177 667,601
SALES AND PROMOTIONAL EXPENSES 56,584 51,942 167,518 185,112
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (11,399) (254,509) (234,325) (695,902)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 803 849 1,473 1,599
Interest expense (27,193) (2,132) (67,402) (19,778)
Debt Conversion Expense -- -- -- (175,362)
Gain (loss) on disposal of equipment -- 40 250 (2,141)
Miscellaneous, net (234) (457) (702) (1,372)
---------- ---------- ---------- ----------
(26,624) (1,700) (66,381) (197,054)
---------- ---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAX (38,023) (256,209) (300,706) (892,956)
INCOME TAX EXPENSE -- -- -- --
---------- ---------- ---------- ----------
NET LOSS (38,023) (256,209) (300,706) (892,956)
DIVIDENDS ON PREFERRED STOCK (6,297) (6,296) (18,889) (18,888)
---------- ---------- ---------- ----------
LOSS APPLICABLE TO COMMON SHARES $ (44,320) $ (262,505) $ (319,595) $ (911,844)
========== ========== ========== ==========
EARNINGS PER SHARE - BASIC AND DILUTED
(Note 2)
NET LOSS PER COMMON SHARE BEFORE
DIVIDENDS ON PREFERRED STOCK
Basic $ (0.02) $ (0.11) $ (0.12) $ (0.42)
========== ========== ========== ==========
Diluted $ (0.02) $ (0.11) $ (0.12) $ (0.42)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE AFTER
DIVIDENDS ON PREFERRED STOCK
Basic $ (0.02) $ (0.11) $ (0.13) $ (0.43)
========== ========== ========== ==========
Diluted $ (0.02) $ (0.11) $ (0.13) $ (0.43)
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,467,686 2,434,947 2,448,906 2,137,667
========== ========== ========== ==========
Diluted 2,467,686 2,434,947 2,448,906 2,137,667
========== ========== ========== ==========
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(300,706) $(892,956)
--------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and accretion 151,798 153,265
Amortization 2,316 2,316
Warrants issued for consulting -- 35,586
Debt conversion expense -- 175,362
(Gain) loss on disposal of equipment (250) 2,141
Inventory reserve (9,968) (6,057)
Provision for doubtful accounts 10,513 18,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (129,983) (21,331)
Inventories (52,361) (57,527)
Prepaid expenses (19,725) 18,629
Other assets -- (891)
Increase (decrease) in liabilities:
Accounts payable 194,163 36,319
Accrued expenses and deferred revenue (193,145) 295,577
--------- ---------
Total adjustments (46,642) 651,389
--------- ---------
Net cash used by operating activities (347,348) (241,567)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment 250 1,602
Purchases of property and equipment (43,648) (424,546)
--------- ---------
Net cash used in investing activities (43,398) (422,944)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable, shareholders 300,000 150,000
Principal payments on notes payable, shareholders -- (150,000)
Proceeds from exercise of common stock options -- 3,500
Proceeds from sale of common stock 136,000 707,115
Principal payments on capital lease obligations (24,973) (29,136)
--------- ---------
Net cash provided by financing activities 411,027 681,479
--------- ---------
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
-------- --------
NET INCREASE IN CASH $ 20,281 $ 16,968
CASH - Beginning of period 190,063 266,940
-------- --------
CASH - End of period $210,344 $283,908
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest, net $ 3,140 $ 4,055
Income taxes $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES
Property and equipment was purchased by capital lease $ -- $ 46,494
Note payable converted to equity $ -- $729,700
Accrued interest converted to equity $ -- $ 25,491
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS ORGANIZATION AND PURPOSE
Superconductive Components, Inc. (the "Company") is an Ohio corporation that was incorporated in May 1987. The Company was formed to develop, manufacture and sell materials using superconductive principles. Operations have since been expanded to include the manufacture and sale of non-superconductive materials. The Company's domestic and international customer base is primarily in the thin film battery, high temperature superconductor, photonics and optical coatings industries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation of the results of operations for the periods presented have been included. The financial statements should be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2004. Interim results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
EQUIPMENT PURCHASED WITH GRANT/CONTRACT FUNDING
The Company received a grant of $517,935 in 2004 from the Ohio Department of Development's Third Frontier Action Fund (TFAF) for the purchase of equipment related to the grant's purpose. Additionally, the Company received $27,500 as part of its contract with the Department of Energy for the purchase of equipment related to the contract's purpose. The Company has elected to record the funds disbursed as a contra asset; therefore, the assets are not reflected in the Company's financial statements. As assets are purchased, the liability initially created when the cash was received is reduced with no revenue being recognized or fixed asset recorded on the balance sheet. At September 30, 2005, the Company has disbursed the entire $545,435. The grant and contract both provide that as long as the Company performs in compliance with the grant/contract, the Company retains the rights to the equipment. Management states that the Company will be in compliance with the requirements and, therefore, will retain the equipment at the end of the contract/grant.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company's pro forma information for the nine months ended September 30, 2005 and 2004 in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" is provided below. For purposes of pro forma disclosures, stock-based compensation is amortized to expense on a straight-line basis over the vesting period. The following table compares the 2005 and 2004 results as reported to the results had the Company adopted the expense recognition provisions of SFAS #123.
September 30, September 30,
2005 2004
------------- -------------
Net loss applicable to common shares:
As reported $(319,595) $(911,844)
Stock-based compensation, net of tax (9,514) (4,678)
--------- ---------
Pro forma net loss under SFAS #123 $(329,109) $(916,522)
Basic and diluted loss per share:
As reported $ (0.13) $ (0.43)
Pro forma under SFAS #123 $ (0.13) $ (0.43)
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For the periods ended September 30, 2005 and 2004, there was no stock-based employee compensation cost included in the determination of net loss as reported.
NOTE 3. INVENTORY
Inventory is comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(unaudited)
Raw materials $ 339,586 $ 340,148
Work-in-progress 190,909 142,390
Finished goods 172,568 168,163
Inventory reserve (105,562) (115,530)
--------- ---------
$ 597,501 $ 535,171
========= =========
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4. COMMON STOCK AND STOCK OPTIONS
The following options were granted under the 1995 Stock Option Plan during the nine months ended September 30, 2005:
GRANT DATE # OPTIONS GRANTED OPTION PRICE ---------- ----------------- ------------ March 7, 2005 90,000 $2.40 |
NOTE 5. EARNINGS PER SHARE
Basic income (loss) per share is calculated as income available to common stockholders divided by the weighted average of common shares outstanding. Diluted earnings per share is calculated as diluted income (loss) available to common stockholders divided by the diluted weighted average number of common shares. Diluted weighted average number of common shares has been calculated using the treasury stock method for Common Stock equivalents, which includes Common Stock issuable pursuant to stock options and Common Stock warrants. At September 30, 2005 and 2004, all Common Stock options and warrants are anti-dilutive due to the net loss. The following is provided to reconcile the earnings per share calculations:
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Loss applicable
to common shares $ (44,320) $ (262,505) $ (319,595) $ (911,844)
========== ========== ========== ==========
Weighted average
common shares
outstanding - basic 2,467,686 2,434,947 2,448,906 2,137,667
Effect of dilutions -
stock options -- -- -- --
---------- ---------- ---------- ----------
Weighted average
shares outstanding -
diluted 2,467,686 2,434,947 2,448,906 2,137,667
========== ========== ========== ==========
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. CAPITAL REQUIREMENTS
The Company's accumulated deficit since inception was $8,128,841 (unaudited) at September 30, 2005. The losses have been financed primarily from additional investments and loans by major shareholders and private offerings of common stock and warrants to purchase common stock in 2004 and 2005. The Company cannot assure that it will be able to raise additional capital in the future to fund its operations.
As of September 30, 2005, cash on-hand was $210,344. Management believes, based on anticipated financing and forecasted sales and expenses, that funding will be adequate to sustain operations through December 2005. During 2004 the Company raised additional funds through offerings of debt and equity. The Company received debt financing of $250,000 in 2004. In 2004, the Company received $517,935 from the State of Ohio's Third Frontier Action Fund to purchase capital equipment required to commercialize the Company's Lithium Thin Film Battery sputtering target-manufacturing process. At September 30, 2005, these funds had been expended.
In 2004, the Company, in a private placement to eight accredited investors sold 300,084 shares of its common stock, without par value, at a purchase price of $2.40 per share. The total offering price paid in cash was $720,200. As part of the private placement, the accredited investors also received warrants to purchase 60,017 shares of the Company's common stock, without par value, at a purchase price of $2.88 per share. Because the Company completed equity financing of at least $500,000 prior to June 30, 2004, the principal and accrued interest totaling $754,846 due on convertible promissory notes issued on June 30, 2003, converted to 314,519 shares of common stock, without par value, at a conversion rate of $2.40 per share. As part of the conversion, the holders of the convertible promissory notes also received warrants to purchase an aggregate of 62,901 shares of the Company's common stock, without par value, at a purchase price of $2.88 per share.
In November of 2004 a director agreed to loan the Company up to $200,000 for working capital, to be drawn by the Company in increments of $50,000. The interest rate is Huntington National Bank's prime rate plus 2%, which accrued and compounded monthly. The loan was secured by the Company's assets and perfected by the filing of a UCC-1 financing statement. For each $50,000 increment drawn on the loan the director received 5,000 warrants to purchase the Company's common stock, without par value, at a purchase price of $2.50 per share and exercisable until November 1, 2009. On November 3, 2004, $100,000 was drawn on the loan. An additional $50,000 was drawn on the loan on January 7, 2005 and also on April 1, 2005. The loan balance (principal and accrued interest) was repaid in October 2005.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. CAPITAL REQUIREMENTS (CONTINUED)
In April of 2005, the same director who agreed to provide a secured loan for $200,000 to the Company in November 2004, agreed to provide an additional $200,000 secured loan to the Company for working capital. The interest rate of 10% accrued and compounded monthly. On April 14, 2005, $100,000 was drawn on this loan. $100,000 was also drawn on the loan on May 20, 2005. Because the Company completed equity financing of at least $500,000 during the fourth quarter of 2005, the principal and accrued interest totaling $209,110 automatically converted to 104,555 shares of common stock, without par value, at a conversion rate of $2.00 per share. As part of the conversion, the director also received warrants to purchase an aggregate of 26,139 shares of the Company's common stock, without par value, at a purchase price of $3.00 per share.
In the third quarter of 2005, the Company, in a private placement to three accredited investors sold 68,000 shares of its common stock, without par value, at a purchase price of $2.00 per share. The total offering price paid in cash was $136,000. As part of the private placement, the accredited investors also received warrants to purchase 17,000 shares of the Company's common stock, without par value, at a purchase price of $3.00 per share exercisable until October 2010.
Through October 14 of the fourth quarter of 2005, the Company, in a private placement to four accredited investors sold 625,000 shares of its common stock, without par value, at a purchase price of $2.00 per share. The total offering price paid in cash was $1,250,000. As part of the private placement, the accredited investors also received warrants to purchase 156,250 shares of the Company's common stock, without par value, at a purchase price of $3.00 per share exercisable until October 2010.
During October 2005, the Company entered into an agreement with the Estate of Edward R. Funk. The Company was indebted to the Estate in the amount of $188,411.71. The Estate agreed to cancel $188,000 of the indebtedness in exchange for 94,000 shares of common stock and warrants to purchase an additional 23,500 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estate $411.71 in full satisfaction of the remaining amount of the indebtedness.
Also, during October 2005, the Company entered into an agreement with the Estate of Ingeborg V. Funk. The Company was indebted to the Estate in the amount of $100,980.21. The Estate agreed to cancel $100,000 of the indebtedness in exchange for 50,000 shares of common stock and warrants to purchase an additional 12,500 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estate $980.21 in full satisfaction of the remaining amount of the indebtedness.
In addition, during October 2005, the Company entered into an agreement with Porter, Wright, Morris & Arthur LLP (PWMA). The Company is indebted to PWMA for legal services rendered by PWMA to the Company. PWMA agreed to cancel $90,000 of the indebtedness in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010.
The Company has incurred substantial operating losses through September 30, 2005, and numerous factors make it necessary for the Company to seek additional capital. In order to
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. CAPITAL REQUIREMENTS (CONTINUED)
support the initiatives envisioned in its business plan, it will need to raise additional funds through the sale of assets, public or private financing, collaborative relationships or other arrangements. The Company's ability to raise additional financing depends on many factors beyond its control, including the state of capital markets, the market price of its common stock and the development or prospects for development of competitive products by others. Because the common stock is not listed on a major stock exchange, many investors may not be willing or allowed to purchase it or may demand steep discounts. The necessary additional financing may not be available or may be available only on terms that would result in further dilution to the current owners of the common stock.
NOTE 7. LEGAL PROCEEDINGS
On October 29, 2004 a complaint was filed in the Franklin County Court of Common Pleas against the Company by Mr. Cavin Carmell, dba University Area Rentals ("University Area Rentals"). The complaint alleges that the Company left its former leased premises in disrepair and violated the terms of its lease. The case is in the latter stages of discovery and trial is set for May 2006. Based upon the discovery provided by University Area Rentals, an estimate of damages claimed is between $50,000 and $60,000. The Company has been vigorously defending itself against the claim.
NOTE 8. SUBSEQUENT EVENT
Subsequent to September 30, 2005, the Company, in a private placement to four accredited investors sold 625,000 shares of its common stock, without par value, at a purchase price of $2.00 per share. The total offering price paid in cash was $1,250,000. As part of the private placement, the accredited investors also received warrants to purchase 156,250 shares of the Company's common stock, without par value, at a purchase price of $3.00 per share exercisable until October 2010.
During October 2005, the Company entered into an agreement with the Estates of Edward R. Funk and Ingeborg V. Funk. The Company was indebted to the Estates in the amount of $289,391.92. The Estates agreed to cancel $288,000 of the indebtedness in exchange for 144,000 shares of common stock and warrants to purchase an additional 36,000 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estates a total of $1,391.92 in full satisfaction of the remaining amount of the indebtedness.
Also, during October 2005, the Company entered into an agreement with Porter, Wright, Morris & Arthur LLP (PWMA). The Company is indebted to PWMA for legal services rendered by PWMA to the Company. PWMA agreed to cancel $90,000 of the indebtedness in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8. SUBSEQUENT EVENT (CONTINUED)
In April of 2005, a director agreed to provide a $200,000 secured loan to the Company for working capital. $100,000 was drawn on this loan on April 14, 2005 and also on May 20, 2005. Because the Company completed equity financing of at least $500,000 during the fourth quarter of 2005, the principal and accrued interest totaling $209,110 automatically converted to 104,555 shares of common stock, without par value, at a conversion rate of $2.00 per share. As part of the conversion, the director also received warrants to purchase an aggregate of 26,139 shares of the Company's common stock, without par value, at a purchase price of $3.00 per share.
In November of 2004, the same director agreed to loan the Company up to $200,000 for working capital, to be drawn by the Company in increments of $50,000. For each $50,000 increment drawn on the loan the director received 5,000 warrants to purchase the Company's common stock, without par value, at a purchase price of $2.50 per share and exercisable until November 1, 2009. On November 3, 2004, $100,000 was drawn on the loan. An additional $50,000 was drawn on the loan on January 7, 2005 and also on April 1, 2005. The loan balance (principal and accrued interest) was repaid in October 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial Statements and Notes contained herein.
The following section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, estimated, projection, outlook) are not statements of historical fact and may be forward looking. Forward-looking statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, including but not limited to economic, competitive, regulatory, growth strategies, available financing and other factors discussed elsewhere in this report and in other documents filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control. Actual results could differ materially from the forward-looking statements made. In light of these risks and uncertainties, there can be no assurance that the results anticipated in the forward-looking information contained in this report will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statements are made or reflect the occurrence of unanticipated events, unless necessary to prevent such statements from becoming misleading. New factors emerge from time to time and it is not possible for management to predict all factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Overview
Superconductive Components, Inc. ("SCI" or the "Company"), an Ohio
corporation, was incorporated in 1987, to develop, manufacture and market
products based on or incorporating high temperature superconductive ("HTS")
materials. The Company presents itself to the market as SCI Engineered
Materials, an operating unit of Superconductive Components, Inc. The
Company views its business as supplying ceramic and metal materials to a
variety of industrial applications including: HTS, Photonics/Optical, and
Thin Film Batteries. The production and sale of HTS materials was the
initial focus of the Company's operations and these materials continue to
be a significant part of the Company's development efforts.
Photonics/Optical currently represents the Company's largest market for its
materials. Thin Film Battery materials is a developing market where
manufacturers of batteries use these materials to produce very small power
supplies, with small quantities of stored energy.
Executive Summary
For the three months ended September 30, 2005, the Company had revenues of $1,021,211. This represented the highest revenue quarter since the first quarter of 2001. This was an increase of $307,676, or 43.1%, over the second quarter of 2005 and $446,152, or 77.6%, over the first quarter of 2005. This amount also represents an increase of $570,373, or 126.5%, over the third quarter of 2004. For the nine months ended September 30, 2005 the Company had revenues of
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$2,309,805. This amount exceeds the total revenues for each of the years of 2004 and 2003. For the nine months ended September 30, 2005, the Company incurred a net loss applicable to common shares of $319,595 compared to a net loss of $911,844 for the same period in 2004. Included in 2004 were non-cash expenses totaling $210,948.
During 2004 the Company relocated its manufacturing to a new, modern facility. During this relocation the Company had significant down time. The Company was quoting long lead times prior to, during and shortly after the move. These long lead times contributed to a reduction in orders. The Company's shipments have increased in 2005, as the Company has been able to provide product with more reasonable lead times. The Company expects gross margins to improve as sales grow. In addition, the Company expects improvement in its gross margins as the sales mix moves to higher margin products. The thin film battery market is poised for significant growth beginning in early 2006.
The Company achieved ISO 9001:2000 certification during the second quarter of 2005. This immediately resulted in the return of a major customer. Orders received in the three months ended September 30, 2005 were $1,004,000 - highest since the third quarter of 2002. Orders in the nine months ended September 30, 2005 of $2,484,000 exceeded the orders received through the same date in 2004 by $740,000. This amount also exceeded the total orders received for the entire year of 2004 of $2,019,000 by $465,000.
During 2005, the Company has received equity funding of $1,386,000 as part of a private placement to accredited investors. $136,000 was received during the third quarter and $1,250,000 was received in October. This totaled to 693,000 shares of common stock issued. In addition, $587,110 of indebtedness was converted to 293,555 shares of common stock during October. These transactions increased outstanding shares of common stock from 2,439,360 at December 31, 2004 to 3,425,915 shares at October 28, 2005.
The Company received notification from the Department of Energy of a Notice of Financial Assistance Award that will provide support for Phase I of an SBIR entitled "Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires, for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin." The award, in an amount of $99,793, is for the nine months ending March 26, 2006. Revenues of $13,945 were recognized during the third quarter of 2005 for this award.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Financial Statements and accompanying notes. Note 2 to the Financial Statements in the Annual Report on Form 10-KSB for the year ended December 31, 2004 describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, and assessing changes in which impairment of certain long-lived assets may occur. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements. The allowance for doubtful accounts is based on our
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. We use the percentage of completion method to account for contracts based on hours incurred, estimated hours to complete and costs incurred with estimates to complete.
Revenue from product sales is recognized upon shipment to customers. Provisions for discounts and returns are provided for in the period the Company ships the discounted item or the period the Company agrees to the return. Deferred revenues represent cash received in advance of the contract revenues earned. Revenue from contract research provided for third parties is recognized on the percentage of completion method.
If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. Depreciable and useful lives estimated for property and equipment, licenses and patents are based on initial expectations of the period of time these assets and intangibles will provide benefit to our Company. Changes in circumstances related to a change in our business, change in technology or other factors could result in these assets becoming impaired, which could adversely affect the value of these assets.
NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2004 (UNAUDITED):
REVENUES
Revenues for the nine months ended September 30, 2005 were $2,309,805 compared to $1,621,777, an increase of $688,028 or 42.4% from the nine months ended September 30, 2004.
Product revenues increased to $2,064,122 in 2005 from $1,422,716 in 2004 or an increase of 45.1%. The increase in revenues for the first nine months is due to the return of two major customers and the addition of new customers.
Contract research revenues were $245,683 in 2005 as compared to $199,061 in
2004. The increase was due to increased work performed on a Phase II Small
Business Innovation Research grant for $523,612 from the Department of
Energy that was awarded in 2003. This award was to develop an advanced
method to manufacture continuous reacted lengths of High Tc Superconductor:
Bismuth Strontium Calcium Copper Oxide - 2212 Wire. Revenues of $231,738
and $181,376 from this grant are included in the first nine months of
revenues for 2005 and 2004, respectively. The Company has been granted a no
cost extension until November 30, 2005 to allow the Company's partners to
complete their work.
GROSS MARGIN
Gross margin in 2005 was $477,370 or 20.7% of total revenue compared to $156,811 or 9.7% in 2004. Gross margin on product revenue was 23.1% in 2005 versus 12.1% in 2004. The increase was due to higher sales, which resulted from increased production that led to improved operating efficiencies. Gross margin on contract research revenue was 0.0% and (7.9%) for the nine
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
months ended September 30, 2005 and 2004, respectively. The negative margin in 2004 was due to the Company's cost share of a contract that was reimbursed at 50% and that ended in 2004.
SELLING EXPENSE
Selling expense in 2005 decreased to $167,518 from $185,112 in 2004, a decline of 9.5%. This was primarily due to a decrease in expenses related to trade shows.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense in 2005 decreased to $544,177 from $667,601 in 2004, or 18.5%. The decrease was due primarily to the relocation of the Company's facility that took place in 2004, of which $73,508 was expensed for this purpose. Non-employee stock warrants were granted as compensation for consulting services, for which $35,586 was expensed in 2004.
RESEARCH AND DEVELOPMENT EXPENSE
Internal research and development costs are expensed as incurred. Internal research and development costs for 2005 were $(16,310) compared to $5,382 in 2004. Internal research and development costs decreased due to an increase in contract research expenses, which resulted in internal expenses being absorbed by the grant into cost of goods sold for contract research.
INTEREST EXPENSE
Interest expense was $67,402 and $19,778 for the nine months ended September 30, 2005 and 2004, respectively. Interest expense to related parties was $64,263 and $14,291 for the nine months ended September 30, 2005 and 2004, respectively. The increase was primarily due to the interest incurred as a result of the notes payable to a director.
LOSS APPLICABLE TO COMMON SHARES
BASIC
Loss applicable to common shares was $319,595 and $911,844 for the nine months ended September 30, 2005 and 2004, respectively. Net loss per common share based on the loss applicable to common shares for the nine months ended September 30, 2005 and 2004 was $0.13 and $0.43, respectively. The loss applicable to common shares includes the net loss from operations and Series B preferred stock dividends. The net loss per common share from operations was $0.12 and $0.42 for the nine months ended September 30, 2005 and 2004, respectively.
Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares. Dividends on the Series B preferred stock totaled $18,889 and $18,888 for the nine months ended September 30, 2005 and 2004, respectively.
Basic loss per common share for the nine months ended September 30, 2005, was $0.13 per share with 2,448,906 weighted average common shares outstanding as compared to $0.43 per share and 2,137,667 weighted average common shares outstanding for the nine months ended September 30, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DILUTED
Diluted loss per common share for the nine months ended September 30, 2005 was $0.13 per share with 2,448,906 average common shares outstanding as compared to $0.43 per share and 2,137,667 weighted average common shares outstanding for the nine months ended September 30, 2004. For the nine months ended September 30, 2005 and 2004, all outstanding common stock equivalents are anti-dilutive due to the net loss.
LIQUIDITY AND WORKING CAPITAL
At September 30, 2005, working capital was $(337,744) compared to $(108,778) at September 30, 2004. The decrease was due to a reduction in cash from operations, as well as a reduction in cash restricted for equipment purchases for the TFAF grant in the amount of $150,469. Also, an increase in notes payable, shareholders, reduced working capital. The Company used cash from operations of approximately $347,000 and $242,000 for the nine months ended September 30, 2005 and September 30, 2004, respectively. Significant non-cash items including depreciation, accretion and amortization, warrants issued for consulting, debt conversion expense, inventory reserve on excess and obsolete inventory, and allowance for doubtful accounts were approximately $155,000 and $378,000, respectively, for the nine months ended September 30, 2005 and 2004. Accounts receivable, inventory and prepaids increased in excess of increases in accounts payable and accrued expenses by approximately $201,000 for the nine months ended September 30, 2005. Accounts payable and accrued expenses increased in excess of increases in accounts receivable, inventory and prepaids by approximately $271,000 for the nine months ended September 30, 2004.
For investing activities, the Company used cash of approximately $43,000 and $423,000, for the nine months ended September 30, 2005 and September 30, 2004, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity and for leasehold improvements for the new facility. Proceeds on sale of equipment totaled $250 and $1,602 for the nine months ended September 30, 2005 and September 30, 2004, respectively.
For financing activity for the nine months ended September 30, 2005, the Company provided cash of approximately $411,000. Cash payments to third parties for capital lease obligations approximated $25,000. Proceeds from notes payable totaled $300,000. Proceeds from sale of common stock were $136,000.
For financing activity for the nine months ended September 30, 2004, the Company provided cash of approximately $681,000. Cash payments to third parties for capital lease obligations approximated $29,000; proceeds from notes payable totaled $150,000. Net proceeds from sale of common stock was $707,000 and proceeds from the exercise of stock options totaled $3,500. Cash payments for notes payable were $150,000.
While certain major shareholders of the Company have advanced funds in the form of secured debt, subordinated debt, accounts payable and guaranteeing bank debt in the past, there is no commitment by these individuals to continue funding the Company or guaranteeing bank debt in the future. The Company will continue to seek new financing or equity financing arrangements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
However, the Company cannot be certain that it will be successful in efforts to raise additional funds.
In November of 2004 a director agreed to loan the Company up to $200,000 for working capital, to be drawn by the Company in increments of $50,000. The interest rate is Huntington National Bank's prime rate plus 2%, which accrued and compounded monthly. The loan was secured by the Company's assets and perfected by the filing of a UCC-1 financing statement. For each $50,000 increment drawn on the loan the director received 5,000 warrants to purchase the Company's common stock, without par value, at a purchase price of $2.50 per share and exercisable until November 1, 2009. On November 3, 2004, $100,000 was drawn on the loan. An additional $50,000 was drawn on the loan on January 7, 2005 and also on April 1, 2005. The loan balance (principal and accrued interest) was repaid in October 2005.
In April of 2005, the same director who agreed to provide a secured loan for $200,000 to the Company in November 2004, agreed to provide an additional $200,000 secured loan to the Company for working capital. The interest rate of 10% accrued and compounded monthly. On April 14, 2005, $100,000 was drawn on this loan. $100,000 was also drawn on the loan on May 20, 2005. Because the Company completed equity financing of at least $500,000 during the fourth quarter of 2005, the principal and accrued interest totaling $209,110 automatically converted to 104,555 shares of common stock, without par value, at a conversion rate of $2.00 per share. As part of the conversion, the director also received warrants to purchase an aggregate of 26,139 shares of the Company's common stock, without par value, at a purchase price of $3.00 per share.
During October 2005, the Company entered into an agreement with the Estate of Edward R. Funk. The Company was indebted to the Estate in the amount of $188,411.71. The Estate agreed to cancel $188,000 of the indebtedness in exchange for 94,000 shares of common stock and warrants to purchase an additional 23,500 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estate $411.71 in full satisfaction of the remaining amount of the indebtedness.
Also, during October 2005, the Company entered into an agreement with the Estate of Ingeborg V. Funk. The Company was indebted to the Estate in the amount of $100,980.21. The Estate agreed to cancel $100,000 of the indebtedness in exchange for 50,000 shares of common stock and warrants to purchase an additional 12,500 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estate $980.21 in full satisfaction of the remaining amount of the indebtedness.
In addition, during October 2005, the Company entered into an agreement with Porter, Wright, Morris & Arthur LLP (PWMA). The Company is indebted to PWMA for legal services rendered by PWMA to the Company. PWMA agreed to cancel $90,000 of the indebtedness in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010.
RISK FACTORS
The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The following factors, as well as the factors listed under the
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
caption "Risk Factors" in the Company's Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005, have affected or could affect the Company's actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by the Company. Investors should consider carefully these risks and speculative factors inherent in and affecting the business of the Company and an investment in the Company's common stock.
We have experienced significant operating losses in the past and may continue to do so in the future.
We commenced business in May of 1987. Our accumulated deficit since inception was $8,128,841 (unaudited) at September 30, 2005.
We have financed the losses primarily from additional investments and loans by our major shareholders and a private offering of common stock and warrants to purchase common stock in 2004 and 2005. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements including special purpose entities.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the period covered by this report in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms.
Additionally, there were no changes in the Company's internal controls that could materially affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any material deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
To obtain funding for the payment of debt and other payables, and for capital equipment and general working capital, the Company entered into Subscription Agreements with various accredited investors (the "Investors") from August 2, 2005 to October 14, 2005, for the sale of investment units (the "Units"), with each Unit consisting of (i) 1,000 shares of the Company's common stock without par value (the "Common Stock"), and (ii) a warrant to purchase 250 shares of Common Stock at $3.00 per share until October 14, 2010 (the "Warrants"). The Company offered the Units to accredited investors as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Act"), at a price of $2,000 per Unit.
The Investors purchased an aggregate of $1,973,110 in Units representing 986,555 shares of Common Stock at a price of $2.00 per share, and warrants to purchase an additional 246,639 shares of Common Stock at $3.00 per share until October 14, 2010. The Company received $1,386,000 in cash from the Investors in exchange for the purchase of 693 Units representing (i) 693,000 shares of Common Stock, and (ii) warrants to purchase an additional 173,250 shares of Common Stock. The Company sold an additional 293.6 Units representing (i) 293,555 shares of Common Stock, and (ii) warrants to purchase an additional 73,389 shares of Common Stock, in exchange for the cancellation of an aggregate $587,110 of indebtedness of the Company held by four Investors.
The Company granted the Investors registration rights with respect to the Common Stock and the shares of Common Stock underlying the Warrants. Pursuant to the terms of the Subscription Agreements, the Company must prepare and file with the Securities and Exchange Commission a registration statement covering the shares of Common Stock and the shares of Common Stock underlying the Warrants. The Company also granted the Investors piggyback registration rights with respect to the Common Stock and shares of Common Stock underlying the Warrants.
The Company offered and sold the securities to the Investors in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Act and Rule 506 promulgated thereunder. Each of the Investors is an accredited investor as defined in Rule 501 of Regulation D promulgated under the Act.
ITEM 6. EXHIBITS.
31.1 Rule 13a-14(a) Certification of Principal Executive Officer.
31.2 Rule 13a-14(a) Certification of Principal Financial Officer.
32.1 Section 1350 Certification of Principal Executive Officer.
32.2 Section 1350 Certification of Principal Financial Officer.
99.1 Press Release dated October 28, 2005, entitled "Superconductive
Components, Inc. Reports Improved Third Quarter Results"
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SUPERCONDUCTIVE COMPONENTS, INC.
Date: October 28, 2005 /s/ Daniel Rooney
----------------------------------------
Daniel Rooney, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Gerald S. Blaskie
----------------------------------------
Gerald S. Blaskie, Chief Financial
Officer
(Principal Financial Officer)
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel Rooney, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Superconductive Components, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: October 28, 2005 /s/ Daniel Rooney
---------------------------------------
Daniel Rooney
President and Chief Executive Officer
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald S. Blaskie, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Superconductive Components, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: October 28, 2005
/s/ Gerald S. Blaskie
---------------------------------------
Gerald S. Blaskie
Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Superconductive Components, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Rooney, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: October 28, 2005
/s/ Daniel Rooney
----------------------------------------
Daniel Rooney
President and Chief Executive Officer of
Superconductive Components, Inc.
|
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Superconductive Components, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald S. Blaskie, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: October 28, 2005
/s/ Gerald S. Blaskie
---------------------------------------
Gerald S. Blaskie
Chief Financial Officer of
Superconductive Components, Inc.
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EXHIBIT 99.1
FOR IMMEDIATE RELEASE For Additional Information Contact: Robert Lentz (614) 876-2000
SUPERCONDUCTIVE COMPONENTS, INC.
REPORTS IMPROVED THIRD QUARTER RESULTS
COLUMBUS, Ohio (October 28, 2005) Superconductive Components, Inc. (OTCBB:
SCCI), a manufacturer of ceramics and metals for advanced applications in
batteries, photonic/optical, and high temperature superconductive products,
today announced results for the three months ended September 30, 2005.
Total revenues increased 126.5% to $1,021,211 for the three months ended September 30, 2005 from $450,838 for the same period in 2004. The loss applicable to common shares was $44,320, or $0.02 per share, for the third quarter of 2005 compared to a loss applicable to common shares of $262,505, or $0.11 per share, for the same period last year.
Dan Rooney, Chairman, President and Chief Executive Officer, commented, "Our results for the third quarter 2005 included the highest quarter of revenue since the first quarter 2001, improved margins and a substantial reduction in the net loss compared to the prior year. The significant growth in revenues was primarily attributable to increased sales to customers added earlier in 2005 and as well as to existing customers. We benefited from our expanded sales efforts to the photonic/optical market and also qualified for new business due to the ISO 9001:2000 registration we received during the second quarter 2005. Additionally, sales to thin-film battery customers increased substantially during the third quarter and exceeded sales to those customers for the entire first half of 2005. Total revenues for the first nine months of 2005 exceeded revenues for the full-year 2004. During the third quarter 2005, the company received $1,004,000 of new orders, which was the highest quarterly amount in the past three years."
Mr. Rooney added, "Earlier this month we successfully completed a private equity placement. As previously reported, this was the largest single financing in the company's history and significantly improved our capital structure and balance sheet. We plan to increase our presence in the photonic/optical market and further strengthen our leading position in the manufacture of materials for the emerging thin-film battery market."
Other Operating Results
Product revenues increased 160.5% to $953,494 for the third quarter 2005 from $366,072 the prior year as a result of higher sales to existing customers and new Tier 1 automotive customers. Contract research revenues declined to $67,717 for the third quarter 2005 from $84,766 the prior year due to lower revenues related to a Phase II Small Business Innovation Research award from the Department of Energy.
Gross profit increased to $217,158, or 21.3% of total revenues, for the third quarter 2005 from a negative $27,966 for the third quarter 2004. This resulted from increased production and improved operating efficiencies compared to the same period last year. Gross margin on product revenues rose to 22.8% for the third quarter 2005 from a negative gross margin for the third quarter a year ago.
General and administrative expense was $171,973 for the third quarter 2005 compared to $174,601 for the same period last year. For the third quarter 2004, general and administrative expenses included $35,586 of non-cash expenses.
Sales and promotional expenses were $56,584 for the third quarter 2005 versus $51,942 for the third quarter 2004.
Nine Month Results
Total revenues for the nine months ended September 30, 2005 increased 42.4% to $2,309,805 compared to $1,621,777 for the same period last year. This was primarily attributable to increased business from existing customers and the addition of new customers. Product revenue increased 45.1% to $2,064,122 for the nine months ended September 30, 2005 compared to $1,422,716 a year ago. Contract research revenue was $245,683 for the 2005 year-to-date period compared to $199,061 for the same period in 2004.
Gross profit was $477,370, or 20.7% of total revenues, for the first nine months of 2005 versus $156,811, or 9.7% of total revenues, a year ago. This increase was due to higher sales and revenue mix for the 2005 year-to-date period compared to last year. Gross margin on product revenue improved to 23.1% in 2005 from 12.1% for the same period in 2004.
General and administrative expenses declined 18.5% to $544,177 for the first nine months of 2005 from $667,601 for the same period last year. The 2004 year-to-date period included $109,094 of one-time expenses related to the company's move to a new facility and non-employee stock warrants.
Sales and promotional expenses for the first nine months of 2005 decreased to $167,518 from $185,112 for the same period last year primarily due to a decline in expenses related to trade shows.
The loss applicable to common shares was $319,595 for the first nine months of 2005 compared to a loss of $911,844 for the same period last year. On a per share basis, the year-to-date loss applicable to common shares was $0.13 versus $0.43 for 2005 and 2004, respectively.
Phase I SBIR Award
In June 2005 the company received a Phase I Small Business Innovation Research award for approximately $100,000. These activities are intended to develop superconductor round wire capable of operating above Tesla 12. The award helps to maintain the company's active involvement in superconductor programs through this type of research. This Phase I activity is expected to continue through the first quarter 2006.
Private Equity Placement
On October 14, 2005, the company completed a private equity financing. This included $1,386,000 in cash for 693,000 shares of the Company's common stock at a price of $2 per share and five-year warrants to purchase an additional 173,250 shares of common stock at $3 per share. The company also converted $587,110 of liabilities into 293,555 shares of common stock and five-year warrants to purchase an additional 73,389 shares of common stock at $3 per share.
About Superconductive Components, Inc.
Superconductive Components, Inc. operates through SCI Engineered Materials and manufactures ceramics and metals for advanced applications such as thin film batteries, superconductors, and advanced optical systems. The Company also provides materials for thin film applications used in photovoltaics, electronic switches, hardness and decorative coatings. The Company is a global materials supplier with clients in more than 40 countries. Additional information is available at http://www.sciengineeredmaterials.com.
This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts, and plans of the company and its management, and specifically include statements regarding activities related to a Phase 1 SBIR which are expected to continue through the first quarter 2006 (paragraph 14). These forward-looking statements involve numerous risks and uncertainties, including, without limitation: the development of the thin film battery market, the impact of competitive products and services, the ability to adapt to technological changes, the availability of capital, and other risks and uncertainties detailed from time to time in the company's Securities and Exchange Commission filings, including the company's Annual Report on Form 10-KSB for the year ended December 31, 2004. One or more of these factors have affected, and could in the future affect, the company's projections. Therefore, there can be no assurances that the forward-looking statements included in this press release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the company, or any other persons, that the objectives and plans of the company will be achieved. All forward-looking statements made in this press release are based on information presently available to the management of the company. The company assumes no obligation to update any forward-looking statements.