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, 2006
[ ] 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)
State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 3,425,915 shares of Common Stock, without par value, were outstanding at April 30, 2006.
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, 2006 (unaudited) and
December 31, 2005 3
Statements of Operations For the Three Months Ended
March 31, 2006 and 2005 (unaudited) 5
Statements of Cash Flows For the Three Months Ended
March 31, 2006 and 2005 (unaudited) 6
Notes to Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
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,
2006 2005
----------- ------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 1,069,912 $ 1,161,369
Accounts receivable
Trade, less allowance for doubtful accounts of $25,000 353,298 243,130
Contract 38,923 50,710
Employees 74 290
Other 14,801 13,459
Inventories 543,560 584,140
Prepaid expenses 27,239 11,748
----------- -----------
Total current assets 2,047,807 2,064,846
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 2,368,257 2,221,298
Furniture and fixtures 23,643 23,643
Leasehold improvements 289,315 284,072
Construction in progress 9,175 101,075
----------- -----------
2,690,390 2,630,088
Less accumulated depreciation (1,850,374) (1,814,959)
----------- -----------
840,016 815,129
----------- -----------
OTHER ASSETS
Deposit 18,677 10,765
Intangibles 33,210 33,982
----------- -----------
Total other assets 51,887 44,747
----------- -----------
TOTAL ASSETS $ 2,939,710 $ 2,924,722
=========== ===========
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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,
2006 2005
----------- ------------
(UNAUDITED)
CURRENT LIABILITIES
Capital lease obligation, current portion $ 38,099 $ 39,949
Accounts payable 353,599 295,640
Accrued contract expenses 167,505 145,104
Accrued personal property taxes 36,431 35,000
Accrued expenses and other 128,658 105,773
----------- -----------
Total current liabilities 724,292 621,466
----------- -----------
CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 67,854 71,381
----------- -----------
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 341,258 334,961
Common stock, no par value, authorized 15,000,000 shares;
3,425,915 shares issued and outstanding 9,010,217 9,047,550
Additional paid-in capital 1,004,421 1,010,719
Accumulated deficit (8,208,332) (8,161,355)
----------- -----------
2,147,564 2,231,875
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,939,710 $ 2,924,722
=========== ===========
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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, 2006 AND 2005
(UNAUDITED)
2006 2005
---------- ----------
SALES REVENUE $1,158,531 $ 486,626
CONTRACT RESEARCH REVENUE 42,092 88,433
---------- ----------
1,200,623 575,059
---------- ----------
COST OF SALES REVENUE 910,243 380,470
COST OF CONTRACT RESEARCH 17,407 37,735
---------- ----------
927,650 418,205
---------- ----------
GROSS MARGIN 272,973 156,854
GENERAL AND ADMINISTRATIVE EXPENSES 212,730 186,019
RESEARCH AND DEVELOPMENT EXPENSES 47,176 42,068
SALES AND PROMOTIONAL EXPENSES 68,103 52,522
---------- ----------
LOSS FROM OPERATIONS (55,036) (123,755)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 10,795 344
Interest expense (2,024) (15,522)
Gain on disposal of equipment -- 250
Miscellaneous, net (712) (234)
---------- ----------
8,059 (15,162)
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAX (46,977) (138,917)
INCOME TAX EXPENSE -- --
---------- ----------
NET LOSS (46,977) (138,917)
DIVIDENDS ON PREFERRED STOCK (6,296) (6,296)
---------- ----------
LOSS APPLICABLE TO COMMON SHARES $ (53,273) $ (145,213)
========== ==========
EARNINGS PER SHARE - BASIC AND DILUTED
(Note 2)
NET LOSS PER COMMON SHARE BEFORE
DIVIDENDS ON PREFERRED STOCK
Basic $ (0.01) $ (0.06)
========== ==========
Diluted $ (0.01) $ (0.06)
========== ==========
NET LOSS PER COMMON SHARE AFTER
DIVIDENDS ON PREFERRED STOCK
Basic $ (0.02) $ (0.06)
========== ==========
Diluted $ (0.02) $ (0.06)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,425,915 2,439,360
========== ==========
Diluted 3,425,915 2,439,360
========== ==========
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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, 2006 AND 2005
(UNAUDITED)
2006 2005
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(46,977) $(138,917)
-------- ---------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and accretion 50,242 52,914
Amortization 772 772
Gain on disposal of equipment -- (250)
Inventory reserve -- (9,920)
Provision for doubtful accounts -- 8,176
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (99,507) (69,249)
Inventories 40,580 (12,046)
Prepaid expenses (15,491) (22,453)
Other assets (7,912) --
Increase (decrease) in liabilities:
Accounts payable 57,960 83,569
Accrued expenses and deferred revenue 45,888 (66,592)
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Total adjustments 72,532 (35,079)
-------- ---------
Net cash provided by (used in) operating activities 25,555 (173,996)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment -- 250
Purchases of property and equipment (65,922) (14,966)
-------- ---------
Net cash used in investing activities (65,922) (14,716)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable -- 50,000
Payments related to registration of common stock (37,333) --
Principal payments on capital lease obligations (13,757) (8,215)
-------- ---------
Net cash (used in) provided by financing activities (51,090) 41,785
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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, 2006 AND 2005
2006 2005
---------- ---------
NET DECREASE IN CASH $ (91,457) $(146,927)
CASH - Beginning of period 1,161,369 190,063
---------- ---------
CASH - End of period $1,069,912 $ 43,136
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest, net $ 2,024 $ 1,156
Income taxes $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES
Property and equipment purchased by capital lease $ 8,380 $ --
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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 year ended December 31, 2005. 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 FUNDING
In 2004, the Company received funds of $517,935 from the Ohio Department of Development's Third Frontier Action Fund (TFAF) for the purpose of equipment related to the grant's purpose. The Company elected to record the funds received as a liability; therefore, the equipment is not reflected in the Company's financial statements. As equipment was purchased, the liability initially created when the cash was received was reduced with no revenue recognized or equipment recorded on the balance sheet. In 2005 the Company purchased equipment in the amount of $25,945 that was reimbursed by TFAF in the first quarter of 2006. As of March 31, 2006, the Company had disbursed the entire amount received. The grant provides that as long as the Company performs in compliance with the grant, the Company retains the rights to the equipment. Management anticipates that the Company will be in compliance with the requirements and, therefore, expects to retain the equipment at the end of the grant.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain amounts in the prior year financial statements pertaining to research and development have been reclassified to conform to the current year presentation.
STOCK BASED COMPENSATION
During 2005 the Company accounted for stock based compensation using the intrinsic value method prescribed in APB Opinion #25, "Accounting for Stock Issued to Employees." The Financial Accounting Standards Board issued Statement of Financial Accounting Standard #123, "Accounting for Stock Based Compensation" (SFAS #123), which established accounting and disclosure requirements using a fair value based methodology. SFAS #123 allowed the intrinsic value method to be used, and required disclosure of the impact to the financial statements of utilizing the intrinsic value versus the fair value based method on a pro forma basis, as set forth in the table below. For stock based compensation to non-employees, the Company utilizes the fair value method as provided for in SFAS #123.
The Company's pro forma information for the three months ended March 31, 2005, in accordance with the provisions of SFAS #123 is provided below. For purposes of pro forma disclosures, stock based compensation was amortized to expense on a straight-line basis over the vesting period.
2005
---------
Net loss applicable to
common shares:
As reported $(145,213)
Stock-based compensation, net of
tax for pro forma (3,171)
---------
Pro forma net loss under SFAS #123 $(148,384)
Basic and diluted loss per share:
As reported $ (0.06)
Pro forma under SFAS #123 $ (0.06)
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For the three months ended March 31, 2005, there was no stock based employee compensation cost included in the determination of net loss as reported.
Recently Issued Accounting Standards - In December 2004, the FASB issued SFAS #123 (Revised), "Shared Based Payment" (SFAS #123R). SFAS #123R replaced SFAS #123, and superseded APB Opinion #25. The Company adopted SFAS #123R effective January 1, 2006. SFAS #123R requires compensation costs related to share based payment transactions to be recognized in the financial statements. Compensation costs will be recognized over the vesting period of the award. In December 2005, all stock options were fully vested and therefore, there was no stock based compensation expense in the first quarter of 2006.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVENTORY
Inventory is comprised of the following:
MARCH 31, DECEMBER 31,
2006 2005
----------- ------------
(unaudited)
Raw materials $288,137 $286,089
Work-in-progress 192,943 201,441
Finished goods 151,741 185,871
Inventory reserve (89,261) (89,261)
-------- --------
$543,560 $584,140
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NOTE 4. 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, 2006 and 2005, 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,
----------------------------
2006 2005
---------- ----------
Loss applicable
to common shares $ (53,273) $ (145,213)
========== ==========
Weighted average
common shares
outstanding - basic 3,425,915 2,439,360
Effect of dilutions -
stock options -- --
---------- ----------
Weighted average
shares outstanding -
diluted 3,425,915 2,439,360
========== ==========
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NOTE 5. CAPITAL REQUIREMENTS
The Company's accumulated deficit since inception was $8,208,332 (unaudited) at March 31, 2006. The losses have been financed primarily from additional investments and loans by major shareholders and private offerings of common stock and warrants to purchase common stock in 2004 and 2005. The Company cannot assure that it will be able to raise additional capital in the future to fund its operations.
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. CAPITAL REQUIREMENTS (CONTINUED)
As of March 31, 2006, cash on-hand was $1,069,912. Management believes, based on forecasted sales and expenses, that funding will be adequate to sustain operations at least through March 31, 2007. During 2005 the Company raised additional funds through offerings of debt and equity. The Company received debt financing of $300,000 in 2005. Of this $300,000 received, $100,000 was repaid to the lender and $200,000 was converted to the Company's common stock.
In November of 2004 a director agreed to loan the Company up to $200,000 for working capital, to be drawn by the Company in increments of $50,000. The interest rate was Huntington National Bank's prime rate plus 2%, which accrued and compounded monthly. The loan was secured by the Company's assets and perfected by the filing of a UCC-1 financing statement. For each $50,000 increment drawn on the loan the director received 5,000 warrants to purchase the Company's common stock, without par value, at a purchase price of $2.50 per share and exercisable until November 1, 2009. The loan was drawn on the following schedule: November 3, 2004, $100,000; January 7, 2005, $50,000; and April 1, 2005, $50,000. The loan balance (principal and accrued interest) was repaid in October 2005 and the UCC-1 financing statement was terminated.
In April of 2005, the same director who agreed to provide a loan to the Company in November 2004, agreed to provide an additional $200,000 convertible secured loan to the Company for working capital. The interest rate of 10% accrued and compounded monthly. The loan was drawn on the following schedule: April 14, 2005, $100,000; and May 20, 2005, $100,000. Because the Company completed equity financing of at least $500,000 during the fourth quarter of 2005, the principal and accrued interest totaling $209,110 automatically converted on the same basis as the new financing to 104,555 shares of common stock ($2.00 per share) and warrants to purchase an aggregate of 26,139 shares of the Company's common stock at a purchase price of $3.00 per share exercisable until October 2010.
In the fourth quarter of 2005, the Company completed a private placement to accredited investors. The investors purchased 986,555 shares of common stock at a price of $2.00 per share and warrants to purchase an additional 246,639 shares of common stock at $3.00 per share until October 14, 2010. The Company received $1,386,000 in cash from certain investors for 693,000 shares of common stock and warrants to purchase 173,250 shares of Common Stock. Four other investors cancelled indebtedness owed by the Company in the aggregate amount of $587,110 in exchange for 293,555 shares of common stock and warrants to purchase 73,389 shares of common stock. The indebtedness cancelled was as follows: (i) the Estate of Edward R. Funk cancelled indebtedness of $188,411.71 in exchange for 94,000 shares of common stock, warrants to purchase 23,500 shares of common stock at $3.00 per share exercisable until October 2010, and payment of $411.71; (ii) the Estate of Ingeborg V. Funk cancelled $100,980.21 of indebtedness in exchange for 50,000 shares of common stock, warrants to purchase 12,500 shares of common stock at $3.00 per share exercisable until October 2010, and payment of $980.21; (iii) Porter, Wright, Morris & Arthur LLP (PWMA) cancelled $90,000 of indebtedness for legal fees in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010; and (iv) a director cancelled $209,110 of a secured loan in exchange for 104,555 shares of common stock and warrants to purchase an additional 26,139 shares of common stock at $3.00 per share exercisable until October 2010 (as described in preceding paragraph).
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. CAPITAL REQUIREMENTS (CONTINUED)
The Company has incurred substantial operating losses through March 31, 2006, and numerous factors may make it necessary for the Company to seek additional capital. In order to support the initiatives envisioned in its business plan, it may need to raise additional funds through 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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Overview
Superconductive Components, Inc. ("SCI" or the "Company"), an Ohio corporation, was incorporated in 1987, to develop, manufacture and market products based on or incorporating high temperature superconductive ("HTS") materials. The Company presents itself to the market as SCI Engineered Materials, an operating unit of Superconductive Components, Inc. The Company views its business as supplying ceramic and metal materials to a variety of industrial applications including: HTS, Photonics/Optical, and Thin Film Batteries. The production and sale of HTS materials was the initial focus of the Company's operations and these materials continue to be a part of the Company's development efforts. Photonics/Optical currently represents the Company's largest market for its materials. Thin Film Battery materials is a developing market where manufacturers of batteries use these materials to produce very small power supplies, with small quantities of stored energy.
Executive Summary
For the three months ended March 31, 2006, the Company had revenues of $1,200,623. This represented the highest quarterly revenue for the Company and was the third consecutive quarter of revenues in excess of $1,000,000. This was an increase of $625,564, or 108.8%, over the three months ended March 31, 2005 and was the sixth consecutive quarter showing a revenue increase. Revenues for the twelve-month period ending March 31, 2006 were $4,082,746. The first quarter of 2006 included $1,158,531 in product revenue, which was the second consecutive quarter that product revenue exceeded $1,000,000. For the three months ended March 31, 2006, the Company incurred a net loss applicable to common shares of $53,273 compared to a net loss of $145,213 for the same period in 2005. EBITDA (Earnings Before Interest, Taxes, Deprecation and Amortization) was ($4,021) during the three months ending March 31, 2006 versus ($70,069) during the same period last year.
The Company achieved ISO 9001:2000 certification during the second quarter of 2005. This immediately resulted in the return of a major customer and helped to increase the Company's customer base in 2005. Orders received in the first quarter of 2006 were $1,274,000, which was $544,000, or 74.5% more than the first quarter of 2005. Orders received for the twelve-month period ending March 31, 2006 were $4,004,000.
The Company received notification in 2005 from the Department of Energy of a Notice of Financial Assistance Award that will provide support for Phase I of an SBIR entitled "Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires, for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin." The award, in an amount of $99,793, has been completed. The Company has submitted the final report and has applied for a Phase II SBIR for this project. Revenues of $42,092 were recognized during the first quarter of 2006 for this award. $57,701 in revenues was recognized in the second half of 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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, 2005 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.
THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED) COMPARED TO THREE MONTHS
ENDED MARCH 31, 2005 (UNAUDITED):
REVENUES
Revenues for the three months ended March 31, 2006 were $1,200,623 compared to $575,059, for the same period last year, an increase of $625,564 or 108.8%.
Product revenues increased to $1,158,531 in 2006 from $486,626 in 2005, or an increase of 138.1%. The increase in revenues for the first three months of 2006 was due to the return of a major customer and the addition of another major customer following the second quarter 2005 ISO 9001:2000 certification. Also, the addition of other new customers throughout the past twelve months helped to increase revenues.
Contract research revenues were $42,092 in 2006 as compared to $88,433 in 2005. The decrease was due to the completion of 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. The work on this contract was completed in 2005. Revenues of $0 and $88,433 from this grant were included in first quarter 2006 and 2005 revenues, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company received notification in 2005 from the Department of Energy of a Notice of Financial Assistance Award in the amount of $99,793. This award provided support for Phase I of an SBIR entitled "Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires, for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin." The work on the contract has been completed and the Company has submitted the final report and has applied for a Phase II SBIR for this project. Revenues of $42,092 were recognized during 2006 for this award. $57,701 in revenues was recognized in the second half of 2005.
GROSS MARGIN
Total gross margin in 2006 was $272,973 or 22.7% of total revenue compared to $156,854 or 27.3% in 2005. Gross margin on product revenue was 21.4% in 2006 versus 21.8% in 2005. The slight decrease was due to product mix of higher value product with lower gross margins. Gross margin on contract research revenue was 58.6% and 57.3% for the three months ended March 31, 2006 and 2005, respectively.
SELLING EXPENSE
Selling expense in 2006 increased to $68,103 from $52,522 in 2005, an increase of 29.7%. The increase was due to the implementation of an incentive compensation program.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense in 2006 increased to $212,730 from $186,019 in 2005, or 14.4%. The increase was due to higher public relations and legal expenses and the implementation of an incentive compensation program.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are expensed as incurred. Research and development costs for 2006 were $47,176 compared to $42,068 in 2005, an increase of 12.1%. The increase was due to higher wages and implementation of an incentive compensation program.
INTEREST EXPENSE
Interest expense was $2,024 and $15,522 for the three months ended March 31, 2006 and 2005, respectively. Interest expense to related parties was $0 and $14,366 for the three months ended March 31, 2006, and March 31, 2005, respectively. The decrease was due to the elimination of interest expense to related parties on a note that was repaid and another note that converted to equity in October of 2005.
LOSS APPLICABLE TO COMMON SHARES
Loss applicable to common shares was $53,273 and $145,213 for the three months ended March 31, 2006 and 2005, respectively. Net loss per common share based on the loss applicable to common shares for the three months ended March 31, 2006 and 2005 was $0.02 and $0.06, respectively. The loss applicable to common shares includes the net loss from operations and the accretion of Series B preferred stock dividends. The net loss per common share before dividends
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
on preferred stock was $0.01 and $0.06 for the three months ended March 31, 2006 and 2005, respectively. For the three months ended March 31, 2006 and 2005, all outstanding common stock equivalents are anti-dilutive due to the net loss.
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, 2006 and 2005.
LIQUIDITY AND WORKING CAPITAL
At March 31, 2006, working capital was $1,323,515 compared to $(382,528) at March 31, 2005. The increase was due to an increase in cash from the private placement in the fourth quarter of 2005 as well as a reduction in capital lease obligations and obligations due to a note payable-shareholder. The Company provided cash from operations of approximately $26,000 for the three months ended March 31, 2006. The Company used cash from operations of approximately $174,000 for the three months ended March 31, 2005. Significant non-cash items including depreciation, accretion and amortization, inventory reserve on excess and obsolete inventory, and allowance for doubtful accounts were approximately $51,000 and $52,000, respectively, for the three months ended March 31, 2006 and 2005. Accounts receivable, inventory, prepaid expenses and other assets increased approximately $82,000 for the three months ended March 31, 2006 as compared to approximately $104,000 for the same period in 2005. Accounts payable and accrued expenses and other increased approximately $104,000 for the three months ended March 31, 2006 versus approximately $17,000 for the first three months of 2005.
The Company used cash of approximately $66,000 and $15,000 for investing activities for the three months ended March 31, 2006 and March 31, 2005, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity, new product lines and for leasehold improvements for the new facility. Proceeds on sale of equipment totaled $0 and $250 for the three months ended March 31, 2006 and March 31, 2005, respectively.
The Company used cash of approximately $51,000 for financing activities during the three months ended March 31, 2006. Cash payments to third parties for capital lease obligations approximated $14,000. Cash payments for services provided for the registration of common stock were $37,333. The Company incurred a new lease of $8,380 for a forklift.
The Company provided cash of approximately $42,000 for financing activities for the three months ended March 31, 2005. Cash payments to third parties for capital lease obligations approximated $8,000. Proceeds from note payable totaled $50,000.
While certain major shareholders of the Company have advanced funds in the form of secured debt, subordinated debt, accounts payable and guaranteeing bank debt in the past, there is no commitment by these individuals to continue funding the Company or guaranteeing bank debt in the future. The Company will continue to seek new financing or equity financing arrangements. However, the Company cannot be certain that it will be successful in efforts to raise additional funds.
In November 2004, a director agreed to loan the Company up to $200,000 for working capital, to be drawn by the Company in increments of $50,000. The interest rate was Huntington National Bank's prime rate plus 2%, accruing and compounding monthly. The loan was secured by a first
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
lien on substantially all of the Company's assets. For each $50,000 increment drawn on the loan, the director received 5,000 warrants to purchase the Company's common stock at a purchase price of $2.50 per share exercisable until November 1, 2009. The loan was drawn based on the following schedule: November 3, 2004, $100,000, January 7, 2005, $50,000; and April 1, 2005, $50,000. The entire loan balance (principal and accrued interest) was repaid in October 2005.
In April 2005, the same director who agreed to provide a secured loan for $200,000 to the Company in November 2004, agreed to provide an additional $200,000 secured loan to the Company for working capital. The interest rate was 10%, accruing and compounding monthly. On April 14, 2005, $100,000 was drawn on this loan. $100,000 was also drawn on the loan on May 20, 2005. By the terms of the loan, because the Company completed an equity financing of at least $500,000 during 2005, the principal and accrued interest on this loan totaling $209,110 automatically converted on the same basis as the new financing to 104,555 shares of common stock ($2.00 per share) and warrants to purchase an aggregate of 26,139 shares of the Company's common stock at a purchase price of $3.00 per share exercisable until October 2010.
In the fourth quarter of 2005, the Company completed a private placement to accredited investors. The investors purchased 986,555 shares of common stock at a price of $2.00 per share and warrants to purchase an additional 246,639 shares of common stock at $3.00 per share until October 14, 2010. The Company received $1,386,000 in cash from certain investors for 693,000 shares of common stock and warrants to purchase 173,250 shares of Common Stock. Four other investors cancelled indebtedness owed by the Company in the aggregate amount of $587,110 in exchange for 293,555 shares of common stock and warrants to purchase 73,389 shares of common stock. The indebtedness cancelled was as follows: (i) the Estate of Edward R. Funk cancelled indebtedness of $188,411.71 in exchange for 94,000 shares of common stock, warrants to purchase 23,500 shares of common stock at $3.00 per share exercisable until October 2010, and payment of $411.71; (ii) the Estate of Ingeborg V. Funk cancelled $100,980.21 of indebtedness in exchange for 50,000 shares of common stock, warrants to purchase 12,500 shares of common stock at $3.00 per share exercisable until October 2010, and payment of $980.21; (iii) Porter, Wright, Morris & Arthur LLP (PWMA) cancelled $90,000 of indebtedness for legal fees in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010; and (iv) a director cancelled $209,110 of a secured loan in exchange for 104,555 shares of common stock and warrants to purchase an additional 26,139 shares of common stock at $3.00 per share exercisable until October 2010 (as described in preceding paragraph).
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 27, 2006, have affected or could affect the Company's actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by the Company. Investors should consider carefully these risks and speculative factors inherent in and affecting the business of the Company and an investment in the Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We have experienced significant operating losses in the past and may continue to do so in the future.
We commenced business in May of 1987. Our accumulated deficit since inception was $8,208,332 (unaudited) at March 31, 2006.
We have financed the losses primarily from additional investments and loans by our major shareholders and a private offering of common stock and warrants to purchase common stock in 2004 and 2005. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements including special purpose entities.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the period covered by this report in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms.
Additionally, there were no changes in the Company's internal controls that could materially affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any material deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.
31.1 Rule 13a-14(a) Certification of Principal Executive Officer.
31.2 Rule 13a-14(a) Certification of Principal Financial Officer.
32.1 Section 1350 Certification of Principal Executive Officer.
32.2 Section 1350 Certification of Principal Financial Officer.
99.1 Press Release dated May 8, 2006, entitled "Superconductive Components,
Inc. Reports Record First Quarter Revenues."
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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 8, 2006 /s/ Daniel Rooney
----------------------------------------
Daniel Rooney, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Gerald S. Blaskie
----------------------------------------
Gerald S. Blaskie, Vice President and
Chief Financial Officer
(Principal Financial Officer)
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel Rooney, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Superconductive Components, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [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 8, 2006 /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 8, 2006
/s/ Gerald S. Blaskie
----------------------------------------
Gerald S. Blaskie
Vice President and
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, 2006 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 8, 2006 |
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, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald S. Blaskie, Vice President and 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 Vice President and Chief Financial Officer of Superconductive Components, Inc. May 8, 2006 |