OHIO 31-0121318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to 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: 1,823,256 shares of Common Stock, without par value, were outstanding at April 30, 2003.
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 3 - 4
Statements of Operations For the Three Months
Ended March 31, 2003 and 2002 (unaudited) 5
Statements of Cash Flows For the Three Months
Ended March 31, 2003 and 2002 (unaudited) 6 - 7
Notes to Financial Statements (unaudited) 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12 - 21
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities and Use of Proceeds. N/A
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 and Reports on Form 8-K. 22
Signatures 22
Certifications of CEO and CFO. 23 - 24
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MARCH 31, DECEMBER 31,
2003 2002
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(UNAUDITED)
CURRENT ASSETS
Cash $ 111,414 $ 48,908
Accounts and notes receivable
Trade, less allowance for doubtful accounts of $15,000 and
$18,000 respectively 219,865 170,038
Contract receivable 2,471 71,087
Related party receivables 4,589 4,368
Employees 11,078 11,985
Other 725 733
Inventories 627,270 655,432
Prepaid expenses 21,314 33,934
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Total current assets 998,726 996,485
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PROPERTY AND EQUIPMENT,
AT COST
Machinery and equipment 2,331,717 2,312,869
Furniture and fixtures 22,124 22,124
Leasehold improvements 347,349 347,349
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2,701,190 2,682,342
Less accumulated depreciation (2,095,342) (2,068,246)
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605,848 614,096
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OTHER ASSETS
Intangibles 42,475 43,247
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TOTAL ASSETS $ 1,647,049 $ 1,653,828
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The accompanying notes are an integral part of these financial statements.
MARCH 31, DECEMBER 31,
2003 2002
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(UNAUDITED)
CURRENT LIABILITIES
Capital lease obligation, current portion $ 37,869 $ 40,144
Capital lease obligation, shareholder, current portion 54,142 48,171
Note payable shareholders, current portion 94,000 82,000
Accounts payable 309,130 329,693
Accounts payable, shareholders 7,920 7,920
Accrued contract expenses 78,358 21,143
Accrued personal property taxes 67,501 54,002
Accrued interest, shareholder 24,932 20,638
Accrued expenses 89,701 42,836
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Total current liabilities 763,553 646,547
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CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION 55,005 63,721
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CAPITAL LEASE OBLIGATION, SHAREHOLDER, NET OF
CURRENT PORTION 14,286 20,257
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NOTE PAYABLE SHAREHOLDERS, NET OF CURRENT
PORTION 74,270 86,270
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REDEEMABLE CONVERTIBLE PREFERRED
STOCK (Series A)
10% cumulative, nonvoting, no par value, $1,000 stated value, liquidation and
mandatory redemption at stated value per share plus unpaid and accumulated
dividends of $278.20 per share 121,770 121,770
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COMMITMENTS AND CONTINGENCIES -- --
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SHAREHOLDERS' EQUITY
Convertible preferred stock, Series B, 10% cumulative, nonvoting, no par
value, $10 stated value, optional redemption at 103% 342,378 335,492
Common stock, no par value, authorized 15,000,000
shares; 1,823,256 shares issued and outstanding 6,378,216 6,378,216
Additional paid-in capital 2,106 8,992
Accumulated deficit (6,104,535) (6,007,437)
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618,165 715,263
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,647,049 $ 1,653,828
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The accompanying notes are an integral part of these financial statements.
2003 2002
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SALES REVENUE $ 624,546 $ 714,148
CONTRACT RESEARCH REVENUE 33,333 69,231
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657,879 783,379
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COST OF SALES REVENUE 475,328 527,778
COST OF CONTRACT RESEARCH 33,333 69,231
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508,661 597,009
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GROSS MARGIN 149,218 186,370
GENERAL AND ADMINISTRATIVE EXPENSES 179,070 212,607
SALES AND PROMOTIONAL EXPENSES 48,256 41,513
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LOSS FROM OPERATIONS (78,108) (67,750)
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OTHER INCOME (EXPENSE)
Interest, net (5,846) (4,156)
Miscellaneous, net 2,742 (428)
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(3,104) (4,584)
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LOSS BEFORE INCOME TAX (81,212) (72,334)
INCOME TAX EXPENSE -- --
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NET LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING (81,212) (72,334)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING (15,886) --
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NET LOSS (97,098) (72,334)
DIVIDENDS ON PREFERRED STOCK (6,885) (9,360)
ACCRETION OF REDEEMABLE CONVERTIBLE
PREFERRED (SERIES A) -- (3,881)
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LOSS APPLICABLE TO COMMON SHARES $ (103,983) $ (85,575)
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EARNINGS PER SHARE - BASIC AND DILUTIVE
NET LOSS PER COMMON SHARE BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING
Basic $ (0.04) $ (0.04)
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Dilutive $ (0.04) $ (0.04)
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NET LOSS PER COMMON SHARE AFTER CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
Basic $ (0.06) $ (0.05)
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Dilutive $ (0.06) $ (0.05)
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WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,823,256 1,823,256
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Dilutive 1,823,256 1,823,256
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The accompanying notes are an integral part of these financial statements.
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (97,098) $ (72,334)
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Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 58,709 60,922
Amortization and accretion 1,600 743
Cumulative effect of a change in accounting 15,886 --
Gain on sale of equipment (3,200) --
Inventory reserve (19,837) --
Provision for doubtful accounts 3,000 (3,000)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 16,483 12,876
Inventories 47,999 (19,067)
Prepaid expenses 12,620 (33,694)
Other assets -- (537)
Increase (decrease) in liabilities:
Accounts payable (20,562) 2,138
Accrued expenses 93,487 1,464
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Total adjustments 206,185 21,845
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Net cash provided by (used in) operating activities 109,087 (50,489)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment 3,200 --
Purchases of property and equipment (38,790) (21,504)
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Net cash used in investing activities (35,590) (21,504)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable, shareholders -- 50,000
Principal payments on capital lease obligations (10,991) (10,061)
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Net cash provided by (used in) financing activities (10,991) 39,939
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The accompanying notes are an integral part of these financial statements.
2003 2002
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NET INCREASE (DECREASE) IN CASH 62,506 (117,421)
CASH - Beginning of period 48,908 202,406
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CASH - End of period $ 111,414 $ 84,985
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SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest, net $ 1,552 5,671
Income taxes $ -- --
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The accompanying notes are an integral part of these 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, lens and optical coatings, research, electronics and functional 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, 2002. 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.
Effective January 1, 2003, the Company implemented SFAS 143 - "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.
NOTE 3. INVENTORY
Inventory is comprised of the following:
MARCH 31, DECEMBER 31,
2003 2002
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(unaudited)
Raw materials $ 429,154 $ 459,784
Work-in-progress 139,995 145,838
Finished goods 164,407 175,933
Inventory reserve (106,286) (126,123)
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$ 627,270 $ 655,432
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NOTE 4. COMMON STOCK AND STOCK OPTIONS
The following options were granted under the 1995 Stock Option Plan during the three months ended March 31, 2003:
GRANT DATE # OPTIONS GRANTED OPTION PRICE
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January 16, 2003 35,000 $1.00
NOTE 5. EARNINGS PER SHARE
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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 March 31, 2003 all Common Stock options and warrants had an exercise price above the fair market value of the Company's Common Stock, and accordingly, no effect of dilution is recorded for such Common Stock equivalents. The following is provided to reconcile the earnings per share calculations:
Three months ended March 31,
2003 2002
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Income (loss) applicable
to common shares $ (103,983) $ (85,575)
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Weighted average
common shares
outstanding - basic 1,823,256 1,823,256
Effect of dilutions -
stock options -- --
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Weighted average
shares outstanding -
diluted 1,823,256 1,823,256
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NOTE 6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (SERIES A)
Effective May 31, 2002, the 99 shares of Series A redeemable convertible preferred stock ($99,000) and accrued dividends ($22,770) became fully redeemable by the Company. At March 31, 2003, the Company still owes the total outstanding balance of $121,770. Management is working with the shareholder to negotiate repayment terms. Management expects to have a resolution prior to the end of the second quarter of 2003. However, due to the Company's current capital position and its prospects for obtaining additional financing in the near future, there can be no assurance that a resolution to this issue will be reached by that time.
NOTE 7. ASSET RETIREMENT OBLIGATION
Property and equipment are stated at cost including the expected present value of future obligations to provide for their retirement. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets.
Included in machinery and equipment is various production equipment which, per the Company's building lease, is required to be removed upon termination of the lease. Included in current liabilities in the accompanying balance sheet is the asset retirement obligation that represents the expected present value of the liability to remove this equipment. There are no assets that are legally restricted for purposes of settling this asset retirement obligation.
Changes in asset retirement for the quarter ended March 31, 2003:
Liability, beginning of year $ 0
Liabilities incurred prior to 2003
recorded in first quarter 27,158
Liabilities incurred in first quarter 400
Liabilities settled 0
Accretion expense 828
Revisions in cash flow estimates 0
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Liability, end of quarter $ 28,386
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Pro forma income statement effect for the quarter ended March 31, 2002:
Net loss as reported $(85,575)
Additional depreciation expense 45
Additional accretion expense 211
Net loss restated retroactive for
change in accounting $(85,831)
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Net loss per common share
as reported $ (0.05)
Net loss per common share
restated retroactive for
change in accounting $ (0.05)
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NOTE 8. CAPITAL REQUIREMENTS; RISK OF CURTAILMENT OF BUSINESS OPERATIONS
Our accumulated deficit since inception was $6,104,535 (unaudited) at March 31, 2003. We have financed the losses primarily from: (i) several private offerings of debt and equity securities; (ii) additional investments and loans by our major shareholders; and (iii) a private offering of common stock and warrants to purchase common stock in October 2000. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations. We expect to continue to incur significant operating and net losses in 2003, and it is possible that we will never be able to sustain or develop the revenue levels necessary to attain profitability.
As of March 31, 2003, our cash on-hand was $111,414 with an additional $100,000 available to the Company through a line of credit. During the first quarter of 2003, the Company provided $109,000 in cash to fund our operations. We believe, based on currently available financing and forecasted sales and expenses, that our funding will be adequate to sustain operations through December 2003. During the first quarter of 2003 we have attempted to raise additional funds through further offerings of debt or equity; however, to date, we have not been successful in our efforts. While certain major shareholders of the Company have advanced funds in the form of 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. We believe that unless additional financing is arranged, we would likely have to significantly curtail our current business operations and may be forced to liquidate the Company. We must ultimately achieve profitability from our current product line for our business model to succeed. We do not believe that we will be able to achieve profitability from our current product line until the fourth quarter of 2003, based on our current projections. In the absence of significant revenue from our product line, we believe that we will need to arrange financing of at least $180,000 by December 2003 in order to sustain our operations at current levels into 2004. However, we cannot assure you that subsequent additional financings will be available to us on a timely basis or that the additional capital that we require will be available on acceptable terms, if at all. The terms of a subsequent financing may involve the authorization of additional shares of our common stock that may result in a significant dilution, a change of control and/or require stockholder approval. We have been, and continue to be, actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. If additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange some other suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.
The Company has incurred substantial operating losses through March 31, 2003, and numerous factors, including a need to secure new facilities for the Company's operations in the near future, makes it necessary for the Company to seek additional capital. In order to support the initiatives envisioned in our business plan, we will need to raise additional funds through the sale of assets, public or private financing, collaborative relationships or other arrangements. Our ability to raise additional financing depends on many factors beyond our control, including the state of capital markets, the market price of our common stock and the development or prospects for development of competitive products by others. Because our 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 to us or may be available only on terms that would result in further dilution to the current owners of our common stock.
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.
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, 2002 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 doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, asset retirement obligations 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 assessment of the collectibility of specific customer accounts and the aging of the accounts receivable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. Cost estimates for removal and repair of the current leased building or a change in timing of the relocation could impact the estimate. 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.
To date, the Company has received revenue predominantly from commercial sales, government research contracts and non-government research contracts. The Company has incurred cumulative losses of $6,104,535 from inception to March 31, 2003.
Revenues for the three months ended March 31, 2003 were $657,879 compared to $783,379, a decrease of $125,500 or 16.0% from the three months ended March 31, 2002.
Product revenues decreased to $624,546 in 2003 from $714,148 in 2002 or a decrease of 12.5%. The decline in revenues for the first three months is due to lower product shipments as a result of the weak U.S. economy. The Company intends to intensify its marketing efforts by increasing the number of manufacturers representatives representing the Company. Also, a sales manager is expected to be added to the organization in 2003.
Contract research revenues were $33,333 in 2003 as compared to $69,231 in 2002. The decrease is due to a Phase II SBIR grant from the National Science Foundation that expired in 2002. Revenues of $69,231 from this grant are included in 2002 revenues.
The Company was awarded a $100,000 Phase I SBIR from the Department of Energy in May 2002. This grant began in August 2002 and $33,333 of revenue was recognized in the first quarter of 2003.
The Company became a member of a team led by Oxford Instruments Superconducting Technology, which was awarded a grant from the Department of Energy Superconductivity Partnership Initiative Program. This program began in the fourth quarter of 2002. Expenses of $4,900 were incurred in the first quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total gross margin in 2003 was $149,218 or 22.7% of total revenue compared to $186,370 or 23.8% in 2002. Gross margin on product revenue was 23.9% in 2003 versus 26.1% in 2002. The decrease was due to lower sales as well as the product mix. Gross margin on contract research revenue was 0.0% for 2003 and 2002.
Selling expense in 2003 increased to $48,256 from $41,513 in 2002, an increase of 16.2%. The increase was due to increased commission costs and increased trade show attendance.
General and administrative expense in 2003 decreased to $179,070 from $212,607 or a 15.8% decrease. The decrease in these costs was due to a reduction in administrative staff. In addition, 2002 expenses include consulting services for management assistance, which totaled $12,491.
Internal research and development costs are expensed as incurred. Research and development costs for 2003 were $17,028 compared to $(351) in 2002. Internal research and development costs increased due to a decrease in contract research revenues, which are used to offset these expenses.
Interest expense was $6,439 for the three months ended March 31, 2003 compared to $5,671 for the three months ended March 31, 2002. Interest expense to related parties was $4,294 and $2,763 for the three months ended March 31, 2003, and March 31, 2002, respectively. The increase is due to the accrued interest incurred as a result of the Series A preferred stock.
Net loss per common share based on the loss applicable to common shares for the three months ended March 31, 2003 and 2002 was $0.06 and $0.05, respectively. The loss applicable to common shares includes the net loss from operations, Series A and B preferred stock dividends, the accretion of Series A preferred stock and the cumulative effect of the change in accounting. The net loss per common share from operations was $0.04 and $0.04 for the three months ended March 31, 2003 and 2002, respectively. The difference between the net loss from operations and the loss applicable to common shares of $0.02 and $0.01 for the three months ended March 31, 2003 and 2002, respectively, is a result of the preferred position that the preferred shareholders have in comparison to the common shareholders and the cumulative effect of the change in accounting.
Dividends on the Series A and B preferred stock accrue at 10% annually on the outstanding shares. Dividends on the Series A preferred stock totaled $0 for the three months ended March 31, 2003 and $2,475 for the three months ended March 31, 2002. Dividends on the Series B preferred stock totaled $6,885 for each period.
The accretion of Series A preferred stock represents issue costs of $70,277 that were netted against the proceeds of Series A preferred stock. The issue costs were amortized over the payout period of seven years of income (loss) applicable to common shares and additional paid-in capital. The accretion totaled $0 for the first three months of 2003 and $3,881 for the first three months of 2002.
Basic loss per common share for the three months ended March 31, 2003, was $0.04 per share with 1,823,256 average common shares outstanding as compared to $0.05 per share and 1,823,256 weighted average common shares outstanding for the three months ended March 31, 2002.
Diluted loss per common share for the three months ended March 31, 2003 was $0.06 per share with 1,823,256 average common shares outstanding as compared to $0.05 per share and 1,823,256 weighted average common shares outstanding for the three months ended March 31, 2002. For the three months ended March 31, 2003 and 2002, all outstanding common stock equivalents are anti-dilutive due to the net loss.
At March 31, 2003, working capital was $235,173 compared to $681,663 at March 31, 2002. The Company provided cash from operations for the three months ended March 31, 2003, of approximately $109,000. The Company utilized cash from operations for the three months ended March 31, 2002, of approximately $50,000. Significant non-cash items including depreciation, inventory reserve on excess and obsolete inventory, allowance for doubtful accounts and the cumulative effect of the change in accounting were approximately $56,000 and $62,000, respectively, for the three months ended March 31, 2003 and 2002. Overall, accounts payable and accrued expenses increased in excess of decreases in accounts receivable, inventory and prepaids by approximately $150,000 for the three months ended March 31, 2003. Accounts receivable, inventory, and prepaids increased in excess of increases in accounts payable and accrued expenses by approximately $37,000 for the three months ended March 31, 2002, as a result of timing of receipt of inventory versus required scheduled payments on this inventory and increased prepaid expenses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For investing activities, the Company used cash of approximately $36,000 and $22,000, for the three months ended March 31, 2003 and March 31, 2002, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity. Proceeds on sale of equipment totaled $3,200 and $0 for the three months ended March 31, 2003 and March 31, 2002, respectively.
For financing activity for the three months ended March 31, 2003, the Company utilized cash of approximately $11,000. Cash payments to third parties for capital lease obligations approximated $11,000.
For financing activity for the three months ended March 31, 2002, the Company provided cash of approximately $40,000. Cash payments to third parties for capital lease obligations approximated $10,000; proceeds from notes payable from shareholders totaled $50,000.
Series A redeemable convertible preferred stock and accrued dividends in the amount of $121,770 is outstanding at March 31, 2003 and was due May 31, 2002. Management is working with the shareholder to negotiate repayment terms. Management expects to have a resolution prior to the end of the second quarter of 2003. However, due to the Company's current capital position and its prospects for obtaining additional financing in the near future, there can be no assurance that a resolution to this issue will be reached by that time.
While certain major shareholders of the Company have advanced funds in the form of 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. However, the Company cannot be certain that it will be successful in efforts to raise additional new funds.
The Company anticipates, based on currently available financing and forecasted sales and expenses, that funding for the Company's operations will be adequate to sustain operations through December 2003. During the first quarter of 2003, the Company has attempted to raise additional funds through further offerings of debt or equity; however, to date, these efforts have been unsuccessful. Unless additional financing is arranged, the Company will have to significantly curtail its current business operations and may be forced to liquidate.
In the absence of significant revenue from our product line, the Company must arrange financing of at least $180,000 by December 2003 in order to sustain its operations at current levels into 2004. In order to succeed, the Company must ultimately achieve profitability from our current product line. It is unlikely that the Company will be able to achieve profitability from its current product line until the fourth quarter of 2003.
The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The following factors 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 the following 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 $6,104,535 (unaudited) at March 31, 2003.
We have financed the losses primarily from: (i) several private offerings of debt and equity securities; (ii) additional investments and loans by our major shareholders; and (iii) a private offering of common stock and warrants to purchase common stock in October 2000. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations. We expect to continue to incur significant operating and net losses in 2003, and it is possible that we will never be able to sustain or develop the revenue levels necessary to attain profitability.
If we are unable to obtain additional funds we may have to significantly curtail the scope of our operations or liquidate the Company.
As of March 31, 2003, our cash on-hand was $111,414 with an additional $100,000 available to the Company through a line of credit. During the first quarter of 2003, the Company provided $109,000 in cash to fund our operations. We believe, based on currently available financing and forecasted sales and expenses, that our funding will be adequate to sustain operations through December 2003. During the first quarter of 2003 we have attempted to raise additional funds through further offerings of debt or equity; however, to date, we have not been successful in our efforts. While certain major shareholders of the Company have advanced funds in the form of 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. We believe that unless additional financing is arranged, we would likely have to significantly curtail our current business operations and may be forced to liquidate the Company. We must ultimately achieve profitability from our current product line for our business model to succeed. We do not believe that we will be able to achieve profitability from our current product line until the fourth quarter of 2003, based on our current projections. In the absence of significant revenue from our product line, we believe that we will need to arrange financing of at least $180,000 by December 2003 in order to sustain our operations at current levels into 2004. However, we cannot assure you that subsequent additional financings will be available to us on a timely basis or that the additional capital that we require will be available on acceptable terms, if at all. The terms of a subsequent financing may involve the authorization of additional shares of our common stock that may result in a significant dilution, a change of control and/or require stockholder approval. We have been, and continue to be, actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. If additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange some other suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.
We have limited marketing and sales capabilities.
To successfully market our products, we must continue to develop appropriate marketing, sales, technical, customer service and distribution capabilities, or enter into agreements with third parties to provide these services. Our failure to develop these capabilities or obtain third-party agreements could adversely affect us.
Our success depends on our ability to retain key management personnel.
Our success depends in large part on our ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel. The loss of services of one of our executive officers or other key personnel, or our failure to attract and retain other executive officers or key personnel, could have a material adverse effect on our business, operating results and financial condition. Although the Company has been successful in planning for and retaining highly capable and qualified successor management in the past, there can be no assurance that it will be able to do so in the future.
We need additional capital, which may reduce the value of our common stock.
The Company has incurred substantial operating losses through March 31, 2003, and numerous factors, including a need to secure new facilities for the Company's operations in the near future, makes it necessary for the Company to seek additional capital. In order to support the initiatives envisioned in our business plan, we will need to raise additional funds through the sale of assets, public or private financing, collaborative relationships or other arrangements. Our ability to raise additional financing depends on many factors beyond our control, including the state of capital markets, the market price of our common stock and the development or prospects for development of competitive products by others. Because our 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 to us or may be available only on terms that would result in further dilution to the current owners of our common stock.
Our competitors have far greater financial and other resources than we have.
The market for Thin Film Materials is a substantial market with significant competition in both ceramic and metal materials. While we believe that our products enjoy certain competitive advantages in design, function, quality, and availability, considerable competition exists from well-established firms such as a division of Praxair's Surface Science Technology group as well as MCR, Johnson Matthey, Pure Tech and CERAC, all of which have more resources than we have.
In addition, a significant portion of our business is in the very competitive market for sputtering targets made of ceramics, metals and alloys. We face substantial competition in this area from companies with far greater financial and other resources than we have. We cannot assure you that developments by others will not render our products or technologies obsolete or less competitive.
Government contracts may be terminated or suspended for noncompliance or other events beyond our control.
The government may cancel virtually all of our government contracts which are terminable at the option of the government. While we have complied with applicable government rules and regulations and contract provisions in the past, we could fail to comply in the future. Noncompliance with government procurement regulations or contract provisions could result in the termination of government contracts. The termination of our significant government contracts or the adoption of new or modified procurement regulations or practices could adversely affect us.
Inventions conceived or actually reduced to practice under a government contract generally result in the government obtaining a royalty-free, non-exclusive license to practice the invention. Similarly, technologies developed in whole or in part at government expense generally result in the government obtaining unlimited rights to use, duplicate or disclose technical data produced under the contract. These licenses and rights may result in a loss of potential revenues or the disclosure of our proprietary information, either of which could adversely affect us.
Our revenues depend on patents and proprietary rights that may not be enforceable.
We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property. These may be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information could adversely affect us.
Rights we have to patents and pending patent applications may be challenged.
We have received from the United States Patent and Trademark Office a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method, and have also received a patent for a new process to join two individual strongly linked super-conductors utilizing a melt processing technique. In addition, in the future we may submit additional patent applications covering various applications. The patent application we filed and patent applications that we may file in the future may not result in patents being issued, and any patents issued may not afford meaningful protection against competitors with similar technology, and may be challenged by third parties. Because U.S. patent applications are maintained in secret until patents are issued, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Moreover, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed. We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial costs. Litigation may also be necessary to enforce any patents held by or issued to us or to determine the scope and validity of others' proprietary rights, which could result in substantial costs.
The rapid rate of inventions and discoveries in the superconductivity field has raised many unresolved patent issues that may negatively affect our business.
The claims in granted patents often overlap and there are disputes involving rights to inventions claimed in pending patent applications. As a result, the patent situation in the high temperature superconductor field is unusually complex. It is possible that there will be patents held by third parties relating to our products or technology. We may need to acquire licenses to design around or successfully contest the validity or enforceability of those patents. It is also possible that because of the number and scope of patents pending or issued, we may be required to obtain multiple licenses in order to use a single material. If we are required to obtain multiple licenses, our costs will increase. Furthermore, licenses may not be available on commercially reasonable terms or at all. The likelihood of successfully contesting the validity or enforceability of those patents is also uncertain; and, in any event, we could incur substantial costs in defending the validity or scope of our patents or challenging the patents of others.
The rapid technological changes of our industry may adversely affect us if we do not keep pace with advancing technology.
The Thin Film Market is characterized by rapidly advancing technology. Our success depends on our ability to keep pace with advancing technology, processes and industry standards. To date, we have focused our development efforts on powders and targets. We intend to continue to develop and integrate advances in the thin film coatings industry. However, our development efforts may be rendered obsolete by research efforts and technological advances made by others, and materials other than those we currently use may prove more advantageous.
Development Stage of the Company's Products and Uncertainty Regarding Development of Markets
Some of the Company's products are in the early stages of commercialization and the Company believes that it will be several years before products will have significant commercial end-use applications, and that significant additional development work may be necessary to improve the commercial feasibility and acceptance of its products. There can be no assurance that the Company will be able to commercialize any of the products currently under development.
To date, there has been no widespread commercial use of High Temperature Superconductive (HTS) products. Additionally, the market for the Thin Film Battery materials is still in its nascent stages.
Our stock price and our listing may make it more difficult for our shareholders to resell shares when desired or at attractive prices. From April 2000 until September 2001, our common stock traded on the National Quotation Bureau (the "pink sheets"). In September 2001, our stock once again began trading on The Over the Counter Bulletin Board ("OTC Bulletin Board"). Nevertheless, our common stock has continued to trade in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks. This has the effect of limiting the pool of potential purchasers of our common stock at present price levels. Shareholders may find greater percentage spreads between bid and asked prices, and more difficulty in completing transactions and higher transaction costs when buying or selling our common stock than they would if our stock were listed on a major stock exchange, such as The New York Stock Exchange or The NASDAQ National Market.
Additionally, the market prices for securities of superconductive material companies have been volatile throughout the Company's existence. Most of the companies are traded over the counter through the National Quotation Bureau or National Association of Securities Dealers Automated Quotation System. Historical trading characteristics for public companies in this industry include limited market support, low trading volume, and wide spreads (on a percentage basis) between the bid and ask prices. Announcements regarding product developments, technological advances, significant customer orders, and financial results significantly influence per share prices.
Our common stock is subject to the Securities and Exchange Commission's "penny stock" regulations, which limits the liquidity of common stock held by our shareholders.
Based on its trading price, our common stock is considered a "penny stock" for purposes of federal securities laws, and therefore is subject to regulations, which affect the ability of broker-dealers to sell the Company's securities. Broker-dealers who recommend a "penny stock" to persons (other than established customers and accredited investors) must make a special written suitability determination and receive the purchaser's written agreement to a transaction prior to sale.
As long as the penny stock regulations apply to our common stock, it may be difficult to trade such stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers may be discouraged from effecting transactions in our common stock because of the sales practice and disclosure requirements for penny stock. This could adversely effect the liquidity and/or price of our common stock, and impede the sale of our common stock in the secondary market.
Our Articles of Incorporation authorize us to issue additional shares of stock.
We are authorized to issue up to 15,000,000 shares of common stock, which may be issued by our board of directors for such consideration, as they may consider sufficient without seeking shareholders approval. The issuance of additional shares of common stock in the future will reduce the proportionate ownership and voting power of current shareholders.
Our Articles of Incorporation also authorize us to issue up to 260,000 shares of preferred stock. The issuance of preferred stock in the future could create additional securities which would have dividend and liquidation preferences prior in right to the outstanding shares of common stock. These provisions could also impede a non-negotiated change in control.
We have not paid dividends on our common stock in the past and do not expect to do so in the future.
We cannot assure you that our operations will result in sufficient revenues to enable us to operate at profitable levels or to generate positive cash flow sufficient to pay dividends. We have never paid dividends on our common shares in the past and do not expect to do so in the foreseeable future.
We may have difficulty raising additional capital, which could deprive us of necessary resources.
We require substantial capital resources to maintain existing operations and to secure new manufacturing facilities.
The Company has no off balance sheet arrangements including special purpose entities.
ITEM 3. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer along with the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings.
(b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and the Chief Financial Officer carried out this evaluation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
99(a) Certification of CEO under Section 906 of Sarbanes-Oxley Act of 2002.
99(b) Certification of CFO under Section 906 of Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K.
None.
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.
Date: May 15, 2003 /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)
|
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 quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Daniel Rooney ----------------------------------- Daniel Rooney President and Chief Executive Officer |
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 quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Gerald S. Blaskie ---------------------------- Gerald S. Blaskie Chief Financial Officer |
EXHIBIT 99(a)
In connection with the Quarterly Report of Superconductive Components, Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Rooney, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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.
/s/ Daniel Rooney ------------------------------ Daniel Rooney Chief Executive Officer May 15, 2003 |
A signed original of this written statement required by Section 906 has been provided to Superconductive Components, Inc., and will be retained by Superconductive Components, Inc., and furnished to the Security and Exchange Commission or its staff upon request.
EXHIBIT 99(b)
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 March 31, 2003, 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. ss. 1350, as adopted pursuant to ss. 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.
/s/ Gerald S. Blaskie ----------------------------- Gerald S. Blaskie Chief Financial Officer May 15, 2003 |
A signed original of this written statement required by Section 906 has been provided to Superconductive Components, Inc., and will be retained by Superconductive Components, Inc., and furnished to the Security and Exchange Commission or its staff upon request.