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 March 31, 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)
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: 2,439,360 shares of Common Stock, without par value, were outstanding at April 30, 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 March 31, 2005 (unaudited)
and December 31, 2004 3 - 4
Statements of Operations For the Three Months
Ended March 31, 2005 and 2004 (unaudited) 5
Statements of Cash Flows For the Three Months
Ended March 31, 2005 and 2004 (unaudited) 6 - 7
Notes to Financial Statements (unaudited) 8 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13 -18
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities. 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. 19
Signatures. 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 22,711 47,095
Cash, restricted for equipment 20,424 142,968
Accounts and notes receivable
Trade, less allowance for doubtful accounts of $25,000 and 228,566 167,394
$33,176 respectively
Employees - 100
Inventories 557,137 535,171
Prepaid expenses 35,079 12,626
----------- ----------
Total current assets 863,917 905,354
----------- ----------
PROPERTY AND EQUIPMENT,
AT COST
Machinery and equipment 2,163,935 2,143,791
Furniture and fixtures 23,643 22,586
Leasehold improvements 280,791 280,791
Construction in progress 44,314 52,048
----------- ----------
2,512,683 2,499,216
Less accumulated depreciation (1,691,942) (1,641,356)
----------- ----------
820,741 857,860
----------- ----------
OTHER ASSETS
Deposit 8,755 8,755
Intangibles 36,298 37,070
----------- ----------
Total other assets 45,053 45,825
----------- ----------
TOTAL ASSETS $ 1,729,711 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
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
CURRENT LIABILITIES
Capital lease obligation, current portion $ 33,972 $ 33,522
Capital lease obligation, shareholder, current portion 68,428 68,428
Note payable shareholders, current portion 303,653 252,886
Accounts payable 313,666 230,097
Accounts payable, shareholders 7,920 7,920
Accrued contract expenses 217,332 318,939
Accrued personal property taxes 59,671 47,671
Accrued interest, shareholders 35,544 31,891
Deferred contract revenue 93,977 83,739
Accrued expenses 112,282 113,043
----------- ------------
Total current liabilities 1,246,445 1,188,136
----------- ------------
CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION 30,271 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 316,073 309,776
Common stock, no par value, authorized 15,000,000 shares;
2,439,360 shares issued and outstanding 7,541,653 7,541,653
Additional paid-in capital 562,321 558,674
Accumulated deficit (7,967,052) (7,828,135)
----------- ------------
452,995 581,968
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,729,711 $ 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 MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
-------------- -------------
SALES REVENUE $ 486,626 $ 464,856
CONTRACT RESEARCH REVENUE 88,433 44,921
-------------- -------------
575,059 509,777
-------------- -------------
COST OF SALES REVENUE 380,470 410,706
COST OF CONTRACT RESEARCH 87,757 44,921
-------------- -------------
468,227 455,627
-------------- -------------
GROSS MARGIN 106,832 54,150
GENERAL AND ADMINISTRATIVE EXPENSES 178,065 261,256
SALES AND PROMOTIONAL EXPENSES 52,522 65,237
-------------- -------------
LOSS FROM OPERATIONS (123,755) (272,343)
-------------- -------------
OTHER INCOME (EXPENSE)
Interest income 344 217
Interest expense (15,522) (10,730)
Gain (loss) on disposal of equipment 250 (2,481)
Miscellaneous, net (234) (457)
-------------- -------------
(15,162) (13,451)
-------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAX (138,917) (285,794)
INCOME TAX EXPENSE - -
-------------- -------------
NET LOSS (138,917) (285,794)
DIVIDENDS ON PREFERRED STOCK (6,296) (6,296)
-------------- -------------
LOSS APPLICABLE TO COMMON SHARES $ (145,213) $ (292,090)
============== =============
EARNINGS PER SHARE - BASIC AND DILUTED
(Note 2)
NET LOSS PER COMMON SHARE BEFORE
DIVIDENDS ON PREFERRED STOCK
Basic $ (0.06) $ (0.16)
============== =============
Diluted $ (0.06) $ (0.16)
============== =============
NET LOSS PER COMMON SHARE AFTER
DIVIDENDS ON PREFERRED STOCK
Basic $ (0.06) $ (0.16)
============== =============
Diluted $ (0.06) $ (0.16)
============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,439,360 1,824,924
============== =============
Diluted 2,439,360 1,824,924
============== =============
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(138,917) $(285,794)
--------- ---------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and accretion 52,914 51,196
Amortization 772 772
(Gain) loss on disposal of equipment (250) 2,481
Inventory reserve (9,920) (2,760)
Provision for doubtful accounts 8,176 6,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (69,249) (20,457)
Inventories (12,046) (16,150)
Prepaid expenses (22,453) 16,468
Increase (decrease) in liabilities:
Accounts payable 83,569 216,472
Accrued expenses and deferred revenue (66,592) 354,607
--------- ---------
Total adjustments (35,079) 608,629
--------- ---------
Net cash (used) provided by operating activities (173,996) 322,835
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment 250 1,302
Purchases of property and equipment (14,966) (225,342)
--------- ---------
Net cash used in investing activities (14,716) (224,040)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 50,000 150,000
Proceeds from exercise of common stock options - 3,500
Proceeds from sale of common stock - 51,000
Principal payments on capital lease obligations (8,215) (8,938)
--------- ---------
Net cash provided by financing activities 41,785 195,562
--------- ---------
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The accompanying notes are an integral part of these financial statements.
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
--------- --------
NET INCREASE (DECREASE) IN CASH $(146,927) $294,357
CASH - Beginning of period 190,063 266,940
--------- --------
CASH - End of period $ 43,136 $561,297
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest, net $ 1,156 $ 1,310
Income taxes $ - $ -
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES
Property and equipment was purchased by capital lease $ - $ 7,990
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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 March 31, 2005, the Company has disbursed $497,511. Funds received and not disbursed totaling $20,424 are included in accrued contract expenses at March 31, 2005. 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 three months ended March 31, 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.
March 31, March 31,
2005 2004
Net loss applicable to common shares:
As reported $(145,213) $(292,090)
Stock-based compensation, net of tax (3,171) (1,821)
--------- ---------
Pro forma net loss under SFAS #123 $(148,384) $(293,911)
Basic and diluted loss per share:
As reported $ (0.06) $ (0.16)
Pro forma under SFAS #123 $ (0.06) $ (0.16)
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For the periods ended March 31, 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:
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(unaudited)
Raw materials $ 351,034 $ 340,148
Work-in-progress 169,291 142,390
Finished goods 142,422 168,163
Inventory reserve (105,610) (115,530)
----------- ------------
$ 557,137 $ 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 three months ended March 31, 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 March 31, 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 March 31,
2005 2004
----------- -----------
Loss applicable
to common shares $ (145,213) $ (292,090)
=========== ===========
Weighted average
common shares
outstanding - basic 2,439,360 1,824,924
Effect of dilutions - stock options - -
----------- -----------
Weighted average
shares outstanding - diluted 2,439,360 1,824,924
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. CAPITAL REQUIREMENTS; RISK OF CURTAILMENT OF BUSINESS OPERATIONS
The Company's accumulated deficit since inception was $7,967,052 (unaudited) at March 31, 2005. The losses have been financed primarily from additional investments and loans by major shareholders and a private offering of common stock and warrants to purchase common stock in 2004. The Company cannot assure that it will be able to raise additional capital in the future to fund its operations.
As of March 31, 2005, cash on-hand was $43,135 with $20,424 restricted for equipment purchases in accordance with the TFAF grant. Cash available for operations at March 31, 2005 was $22,711. Management believes, based on currently available 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 begin purchasing capital equipment required to commercialize the Company's Lithium Thin Film Battery sputtering target manufacturing process. At March 31, 2005, $20,424 of these funds has not been expended and is included on the balance sheet as accrued contract expenses.
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 loan is repayable on November 1, 2005, and may be repaid earlier without prepayment penalty upon 15 days prior written notice. The interest rate is Huntington National Bank's prime rate plus 2%, and interest will accrue and compound monthly. The loan is secured by the Company's assets and is 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. The director has the option to convert the loan balance (principal and accrued and unpaid interest) to equity at any time before repayment at the same price and terms as any equity financing of the Company equal to or in excess of $200,000. On November 3, 2004, $100,000 was drawn on the loan. $50,000 was drawn on the loan on January 7, 2005 and also on April 1, 2005.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. CAPITAL REQUIREMENTS; RISK OF CURTAILMENT OF BUSINESS OPERATIONS
(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 loan is repayable on June 30, 2006, and may be repaid earlier without prepayment penalty upon 15 days prior written notice. The interest rate is 10%, and interest will accrue and compound monthly. The director has the option to convert the loan balance (principal and accrued and unpaid interest) to equity at any time before repayment at the same price and terms as any equity financing received by the Company after April 14, 2005. If the Company receives at least $500,000 in equity financing, the then outstanding principal sum and accrued and unpaid interest will automatically convert to equity at the same price and terms as the equity financing. On April 14, 2005, $100,000 was drawn on this loan.
The Company has incurred substantial operating losses through March 31, 2005, and numerous factors make it necessary for the Company to seek additional capital. In order to 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. Its 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 early stages of discovery and trial is set for October 2005. Based upon the informal discovery provided by University Area Rentals, an estimate of damages claimed is between $50,000 and $100,000. The Company intends to vigorously defend itself against the claim.
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 High Temperature Superconducting (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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Executive Summary
For the three months ended March 31, 2005, the Company incurred a net loss of $138,917 compared to a net loss of $285,794 for the same period in 2004. 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 are expected to increase in 2005, as the Company is able to provide product with more reasonable lead times. The Company also 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 late 2005.
The Company recently achieved ISO 9001:2000 certification.
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 assessment of the collectibility of specific customer accounts and the aging of the accounts receivable.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) COMPARED TO THREE MONTHS
ENDED MARCH 31, 2004 (UNAUDITED):
REVENUES
Revenues for the three months ended March 31, 2005 were $575,059 compared to $509,777, an increase of $65,282 or 12.8% from the three months ended March 31, 2004.
Product revenues increased to $486,626 in 2005 from $464,856 in 2004 or an increase of 4.7%. The increase in revenues for the first three months is due to the addition of a major new customer.
Contract research revenues were $88,433 in 2005 as compared to $44,921 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 $88,433 and $43,267 from this grant are included in first quarter 2005 and 2004 revenues, respectively.
GROSS MARGIN
Total gross margin in 2005 was $106,832 or 18.6% of total revenue compared to $54,150 or 10.6% in 2004. Gross margin on product revenue was 21.8% in 2005 versus 11.6% in 2004. The increase was due to increased sales as well as the product mix. Gross margin on contract research revenue was 0.8% and 0.0% for the three months ended March 31, 2005 and 2004, respectively.
SELLING EXPENSE
Selling expense in 2005 decreased to $52,522 from $65,237 in 2004, a decrease of 19.5%. The decrease was due to a reduction in commission costs and decreased trade show attendance.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense in 2005 decreased to $178,065 from $261,256 in 2004, or 31.8%. The decrease was due primarily to the relocation of the Company's facility that took place in the first quarter of 2004, of which $70,390 was expensed for this purpose.
RESEARCH AND DEVELOPMENT EXPENSE
Internal research and development costs are expensed as incurred. Internal research and development costs for 2005 were $(7,639) compared to $11,648 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 $15,522 and $10,730 for the three months ended March 31, 2005 and 2004, respectively. Interest expense to related parties was $14,366 and $8,730 for the three months ended March 31, 2005, and March 31, 2004, respectively. The increase was due to the interest incurred as a result of the warrants attached to a note payable to a director.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LOSS APPLICABLE TO COMMON SHARES
BASIC
Loss applicable to common shares was $145,213 and $292,090 for the three months ended March 31, 2005 and 2004, respectively. Net loss per common share based on the loss applicable to common shares for the three months ended March 31, 2005 and 2004 was $0.06 and $0.16, 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 $0.06 and $0.16 for the three months ended March 31, 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 $6,296 for the three months ended March 31, 2005 and 2004, respectively.
Basic loss per common share for the three months ended March 31, 2005, was $0.06 per share with 2,439,360 weighted average common shares outstanding as compared to $0.16 per share and 1,824,924 weighted average common shares outstanding for the three months ended March 31, 2004.
DILUTED
Diluted loss per common share for the three months ended March 31, 2005 was $0.06 per share with 2,439,360 average common shares outstanding as compared to $0.16 per share and 1,824,924 weighted average common shares outstanding for the three months ended March 31, 2004. For the three months ended March 31, 2005 and 2004, all outstanding common stock equivalents are anti-dilutive due to the net loss.
LIQUIDITY AND WORKING CAPITAL
At March 31, 2005, working capital was $(382,528) compared to $(250,083) at March 31, 2004. The decrease was due to a reduction in cash for operations, as well as a reduction in cash restricted for equipment purchases for the TFAF grant in the amount of $279,303. Also, an increase in deferred contract revenue and accrued expenses reduced working capital. The Company used cash from operations of approximately $174,000 for the three months ended March 31, 2005. The Company provided cash from operations of approximately $323,000 for the three months ended March 31, 2004. Significant non-cash items including depreciation, accretion and amortization, inventory reserve on excess and obsolete inventory, and allowance for doubtful accounts were approximately $52,000 and $55,000, respectively, for the three months ended March 31, 2005 and 2004. Accounts receivable, inventory and prepaids increased in excess of increases in accounts payable and accrued expenses by approximately $87,000 for the three months ended March 31, 2005. Accounts payable and accrued expenses increased in excess of increases in accounts receivable, inventory and prepaids by approximately $551,000 for the three months ended March 31, 2004.
For investing activities, the Company used cash of approximately $15,000 and $224,000, for the three months ended March 31, 2005 and March 31, 2004, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity, new product
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
lines and for leasehold improvements for the new facility. Proceeds on sale of equipment totaled $250 and $1,302 for the three months ended March 31, 2005 and March 31, 2004, respectively.
For financing activity for the three months ended March 31, 2005, the Company provided cash of approximately $42,000. Cash payments to third parties for capital lease obligations approximated $8,000. Proceeds from note payable totaled $50,000.
For financing activity for the three months ended March 31, 2004, the Company provided cash of approximately $196,000. Cash payments to third parties for capital lease obligations approximated $9,000; proceeds from notes payable totaled $150,000. Proceeds from sale of common stock was $51,000 and proceeds from the exercise of stock options totaled $3,500. The Company incurred a new lease of $7,990 for a telephone system for the new facility.
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. However, the Company cannot be certain that it will be successful in efforts to raise additional new 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 loan is repayable on November 1, 2005, and may be repaid earlier without prepayment penalty upon 15 days prior written notice. The interest rate is Huntington National Bank's prime rate plus 2%, and interest will accrue and compound monthly. The loan is secured by the Company's assets and is 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. The director has the option to convert the loan balance (principal and accrued and unpaid interest) to equity at any time before repayment at the same price and terms as any equity financing of the Company equal to or in excess of $200,000. On November 3, 2004, $100,000 was drawn on the loan. $50,000 was drawn on the loan on January 7, 2005 and also on April 1, 2005. In April of 2005 the same director agreed to loan the Company up to $200,000 for working capital. The loan is repayable on June 30, 2006, and may be repaid earlier without prepayment penalty upon 15 days prior written notice. The interest rate is 10%, and interest will accrue and compound monthly. The director has the option to convert the loan balance (principal and accrued and unpaid interest) to equity at any time before repayment at the same price and terms as any equity financing received by the Company after April 14, 2005. If the Company receives at least $500,000 in equity financing, the then outstanding principal sum and accrued and unpaid interest will automatically convert to equity at the same price and term as the equity financing. On April 14, 2005, $100,000 was drawn on this loan.
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 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 $7,967,052 (unaudited) at March 31, 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. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations.
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, 2005, our cash on-hand was $43,135, with $20,424 restricted for equipment purchased by the TFAF grant. During the first quarter of 2005, the Company used approximately $174,000 in cash for operations, with the TFAF grant accounting for $123,000 of the March 31, 2005 cash from operations. We believe, based on currently available financing and forecasted sales and expenses, that our funding will be adequate to sustain operations through December 2005.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Revolving Promissory Note dated November 3, 2004 by and between the Company and Robert H. Peitz
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.
(b) REPORTS ON FORM 8-K.
None.
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: May 10, 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 10.1
NON-NEGOTIABLE
REVOLVING PROMISSORY NOTE
$200,000
Columbus, Ohio
November 3, 2004
FOR VALUE RECEIVED, Superconductive Components, Inc., an Ohio corporation ("Maker"), promises to pay Robert H. Peitz, (hereinafter "Lender"), the sum of TWO HUNDRED THOUSAND AND 00/100 Dollars ($200,000.00) or so much thereof as shall have been advanced by Lender at any time and not hereafter repaid (hereinafter referred to as "Principal Sum") together with interest as hereinafter provided and payable at the time and in the manner hereinafter provided. Subject to the terms and conditions set forth below, the proceeds of the loan evidenced hereby may be advanced in partial amounts during the term of this revolving note (this "Note"). Each such advance will be made to the Maker upon receipt by Lender of the Maker's written request therefor.
SECTION 1. PAYMENT OF INTEREST. Interest will accrue and compound monthly on the unpaid balance of the Principal Sum until paid at a variable rate of interest per annum, which shall change in the manner set forth below, equal to two percentage points (2%) in excess of the Prime Commercial Rate in effect at Huntington National Bank, Columbus, Ohio ("Prime Rate"). The interest rate shall adjust automatically without notice to the undersigned immediately with each change in the Prime Rate.
SECTION 2. DUE DATE; PAYMENT OF PRINCIPAL SUM. The Principal Sum and accrued and unpaid interest shall be payable in full on November 1, 2005 (the "Due Date").
SECTION 3. ADVANCES. Proceeds of the loan evidenced by this Note, may from time to time be advanced in whole or in $50,000 increments until the Due Date. Each advance will be made to Maker upon receipt by Lender of Maker's written request therefor.
SECTION 4. WARRANTS. As additional consideration for entering into this Agreement, the Lender shall receive up to 20,000 warrants to purchase shares of the Company's common stock at an exercise price of TWO DOLLARS and FIFTY CENTS ($2.50) per share (the "Warrants") which shall vest according to the following schedule and be exercisable until November 1, 2009.
NUMBER OF WARRANTS VESTING SCHEDULE EXERCISE PERIOD
------------------ ---------------------------- -----------------
10,000 Vested November 3, 2004 November 1, 2009
10,000 Vesting 5,000 per each November 1, 2009
additional $50,000 loaned
to the Company after
November 3, 2004 by
Mr. Robert H. Peitz pursuant
to the Note dated
November 3, 2004
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SECTION 5. OPTION TO CONVERT LOAN BALANCE. The Lender shall have the option to convert the loan balance to equity at any time before repayment of the loan at the same price and terms as any equity financing of the Company equal to or in excess of $200,000.
SECTION 6. PREPAYMENT. All or any part of the Principal Sum and accrued and unpaid interest may be prepaid at any time without prepayment penalty after providing 15 days written notice to the Lender.
SECTION 7. DEFAULT. Section 7 of the Security Agreement by and between the Lender and the Maker is incorporated by reference as if fully restated herein.
SECTION 8. NON-NEGOTIABLE. This Note is non-negotiable.
SECTION 9. WAIVER. All of the parties hereto, including the undersigned, and any indorser, surety, or guarantor, hereby severally waive presentment, notice of dishonor, protest, notice of protest, and diligence in bringing suit against any party hereto, and consent that, without discharging any of them, the time of payment may be extended an unlimited number of times before or after maturity without notice. Lender shall not be required to pursue any party hereto, including any guarantor, or to exercise any rights against any collateral before exercising any other such rights.
SECTION 10. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of Ohio without reference to choice of law rules.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed on the day and year first above written.
SUPERCONDUCTIVE COMPONENTS, INC.
By: /s/ Daniel Rooney
--------------------------------
Daniel Rooney
President and Chief
Executive Officer
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NON-NEGOTIABLE
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 annual 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) [reserved];
(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: May 10, 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) [reserved];
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: May 10, 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 March 31, 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.
/s/ Daniel Rooney ---------------------------------------- Daniel Rooney President and Chief Executive Officer of Superconductive Components, Inc. May 10, 2005 |
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 March 31, 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.
/s/ Gerald S. Blaskie ------------------------------- Gerald S. Blaskie Chief Financial Officer of Superconductive Components, Inc. May 10, 2005 |