SCI Engineered Materials, Inc. - Quarter Report: 2010 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended June 30,
2010
or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period
from ____________ to _________________
Commission
file number: 0-31641
SCI
ENGINEERED MATERIALS, INC.
(Exact
name of small business issuer as specified in its charter)
|
Ohio
|
31-1210318
|
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
|
2839
Charter Street, Columbus, Ohio 43228
(Address
of principal executive offices) (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 such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer ¨
Accelerated filer ¨ Non-accelerated filer
¨ Smaller reporting
company x
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No
x
3,773,008
shares of Common Stock, without par value, were outstanding at July 20,
2010.
FORM
10-Q
SCI
ENGINEERED MATERIALS, INC.
Table of
Contents
|
Page No.
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||
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PART
I. FINANCIAL
INFORMATION
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||
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Item
1.
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Financial
Statements.
|
|
|
Balance
Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
3
|
|
|
Statements
of Operations for the Three and Six Months Ended June 30, 2010 and 2009
(unaudited)
|
5
|
|
|
Statements
of Cash Flows for the Six Months Ended June 30, 2010 and 2009
(unaudited)
|
6
|
|
|
Notes
to Financial Statements (unaudited)
|
7
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
12
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
N/A
|
|
Item
4.
|
Controls
and Procedures.
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19
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|
PART
II. OTHER INFORMATION
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||
|
Item
1.
|
Legal
Proceedings.
|
N/A
|
|
Item 1A.
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Risk
Factors
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N/A
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
N/A
|
|
Item
3.
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Defaults
Upon Senior Securities.
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N/A
|
|
Item
4.
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(Removed
and Reserved).
|
N/A
|
|
Item
5.
|
Other
Information.
|
N/A
|
|
Item
6.
|
Exhibits.
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21
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|
Signatures.
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21
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|
2
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
SCI
ENGINEERED MATERIALS, INC.
BALANCE
SHEETS
ASSETS
|
June 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(UNAUDITED)
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
|
$ | 1,594,168 | $ | 1,107,216 | ||||
|
Accounts
receivable
|
||||||||
|
Trade,
less allowance for doubtful accounts of $15,753
|
618,539 | 539,398 | ||||||
|
Contract
|
127,550 | 19,714 | ||||||
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Other
|
8,385 | 11,000 | ||||||
|
Inventories
|
1,410,619 | 1,031,777 | ||||||
|
Deferred
taxes
|
84,000 | 156,000 | ||||||
|
Prepaid
expenses
|
322,460 | 977,536 | ||||||
|
Total
current assets
|
4,165,721 | 3,842,641 | ||||||
|
PROPERTY
AND EQUIPMENT, AT COST
|
||||||||
|
Machinery
and equipment
|
5,165,395 | 4,933,855 | ||||||
|
Furniture
and fixtures
|
130,798 | 127,451 | ||||||
|
Leasehold
improvements
|
315,054 | 315,054 | ||||||
|
Construction
in progress
|
93,419 | 22,966 | ||||||
| 5,704,666 | 5,399,326 | |||||||
|
Less
accumulated depreciation
|
(3,064,061 | ) | (2,868,198 | ) | ||||
| 2,640,605 | 2,531,128 | |||||||
|
OTHER
ASSETS
|
||||||||
|
Deposits
|
15,655 | 21,909 | ||||||
|
Intangibles
|
39,813 | 41,358 | ||||||
|
Total
other assets
|
55,468 | 63,267 | ||||||
|
TOTAL
ASSETS
|
$ | 6,861,794 | $ | 6,437,036 | ||||
The
accompanying notes are an integral part of these financial
statements.
3
SCI
ENGINEERED MATERIALS, INC.
BALANCE
SHEETS
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
June 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(UNAUDITED)
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Capital
lease obligation, current portion
|
$ | 390,825 | $ | 363,270 | ||||
|
Note
payable, current portion
|
63,336 | 62,394 | ||||||
|
Accounts
payable
|
386,297 | 263,468 | ||||||
|
Customer
deposits
|
830,083 | 1,319,455 | ||||||
|
Accrued
compensation
|
149,564 | 67,863 | ||||||
|
Accrued
expenses and other
|
222,065 | 210,294 | ||||||
|
Total
current liabilities
|
2,042,170 | 2,286,744 | ||||||
|
Capital
lease obligation, net of current portion
|
709,202 | 738,750 | ||||||
|
Note
payable, net of current portion
|
285,314 | 317,219 | ||||||
|
Total
liabilities
|
3,036,686 | 3,342,713 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
- | - | ||||||
|
SHAREHOLDERS'
EQUITY
|
||||||||
|
Convertible
preferred stock, Series B, 10% cumulative, nonvoting, no par value, $10
stated value, optional redemption at 103%; 24,297 shares
issued and outstanding
|
383,760 | 371,612 | ||||||
|
Common
stock, no par value, authorized 15,000,000 shares; 3,773,008 and 3,571,755
shares issued and outstanding, respectively
|
9,719,118 | 9,209,424 | ||||||
|
Additional
paid-in capital
|
1,500,061 | 1,412,382 | ||||||
|
Accumulated
deficit
|
(7,777,831 | ) | (7,899,095 | ) | ||||
| 3,825,108 | 3,094,323 | |||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 6,861,794 | $ | 6,437,036 | ||||
The
accompanying notes are an integral part of these financial
statements.
4
SCI
ENGINEERED MATERIALS, INC.
STATEMENTS
OF OPERATIONS
THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
|
THREE MONTHS ENDED JUNE 30,
|
SIX MONTHS ENDED JUNE 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
PRODUCT
REVENUE
|
$ | 2,354,405 | $ | 1,055,404 | $ | 4,357,005 | $ | 2,710,514 | ||||||||
|
CONTRACT
RESEARCH REVENUE
|
206,259 | 254,649 | 444,772 | 501,074 | ||||||||||||
| 2,560,664 | 1,310,053 | 4,801,777 | 3,211,588 | |||||||||||||
|
COST
OF PRIODUCT REVENUE
|
1,735,227 | 881,904 | 3,124,408 | 2,169,047 | ||||||||||||
|
COST
OF CONTRACT RESEARCH
|
159,289 | 179,159 | 333,519 | 366,031 | ||||||||||||
| 1,894,516 | 1,061,063 | 3,457,927 | 2,535,078 | |||||||||||||
|
GROSS
PROFIT
|
666,148 | 248,990 | 1,343,850 | 676,510 | ||||||||||||
|
MARKETING
AND SALES EXPENSE
|
155,908 | 146,358 | 310,230 | 314,450 | ||||||||||||
|
GENERAL
AND ADMINISTRATIVE EXPENSE
|
314,981 | 288,347 | 596,211 | 703,383 | ||||||||||||
|
RESEARCH
AND DEVELOPMENT EXPENSE
|
147,505 | 79,247 | 200,761 | 204,577 | ||||||||||||
|
INCOME
(LOSS) FROM OPERATIONS
|
47,754 | (264,962 | ) | 236,648 | (545,900 | ) | ||||||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
|
Interest
income
|
1,607 | 2,352 | 2,663 | 4,846 | ||||||||||||
|
Interest
expense
|
(23,109 | ) | (28,635 | ) | (44,931 | ) | (57,223 | ) | ||||||||
|
Financing
expense
|
- | (76,387 | ) | - | (76,387 | ) | ||||||||||
|
Gain
on disposal of equipment
|
10,251 | - | 10,251 | - | ||||||||||||
| (11,251 | ) | (102,670 | ) | (32,017 | ) | (128,764 | ) | |||||||||
|
INCOME
(LOSS) BEFORE PROVISION FOR INCOME TAX
|
36,503 | (367,632 | ) | 204,631 | (674,664 | ) | ||||||||||
|
INCOME
TAX EXPENSE
|
(21,670 | ) | (287 | ) | (83,367 | ) | (575 | ) | ||||||||
|
NET
INCOME (LOSS)
|
14,833 | (367,919 | ) | 121,264 | (675,239 | ) | ||||||||||
|
DIVIDENDS
ON PREFERRED STOCK
|
(6,074 | ) | (6,108 | ) | (12,149 | ) | (12,215 | ) | ||||||||
|
INCOME
(LOSS) APPLICABLE TO COMMON SHARES
|
$ | 8,759 | $ | (374,027 | ) | $ | 109,115 | $ | (687,454 | ) | ||||||
|
EARNINGS PER SHARE -
BASIC AND DILUTED (Note
6)
|
||||||||||||||||
|
INCOME
(LOSS) APPLICABLE TO COMMON SHARES PER COMMON SHARE
|
||||||||||||||||
|
Basic
|
$ | 0.00 | $ | (0.10 | ) | $ | 0.03 | $ | (0.19 | ) | ||||||
|
Diluted
|
$ | 0.00 | $ | (0.10 | ) | $ | 0.03 | $ | (0.19 | ) | ||||||
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||||||
|
Basic
|
3,742,039 | 3,562,259 | 3,727,074 | 3,562,149 | ||||||||||||
|
Diluted
|
3,882,826 | 3,562,259 | 3,873,231 | 3,562,149 | ||||||||||||
The
accompanying notes are an integral part of these financial
statements.
5
SCI
ENGINEERED MATERIALS, INC.
STATEMENTS
OF CASH FLOWS
SIX
MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net
income (loss)
|
$ | 121,264 | $ | (675,239 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
||||||||
|
Depreciation
and accretion
|
239,993 | 227,329 | ||||||
|
Amortization
|
1,544 | 1,544 | ||||||
|
Stock
based compensation
|
103,577 | 281,203 | ||||||
|
Financing
expense related to warrant expiration date extension
|
- | 76,387 | ||||||
|
Gain
on sale of equipment
|
(10,251 | ) | - | |||||
|
Deferred
taxes
|
72,000 | - | ||||||
|
Inventory
reserve
|
11,591 | 12,000 | ||||||
|
Credit
for doubtful accounts
|
- | (8,947 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(184,361 | ) | 138,422 | |||||
|
Inventories
|
(390,433 | ) | 393,752 | |||||
|
Prepaid
expenses
|
655,076 | (683,116 | ) | |||||
|
Other
assets
|
6,255 | (4,518 | ) | |||||
|
Accounts
payable
|
122,829 | 24,856 | ||||||
|
Accrued
expenses and customer deposits
|
(399,213 | ) | 158,394 | |||||
|
Net
cash from operating activities
|
349,871 | (57,933 | ) | |||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Proceeds
on sale of equipment
|
10,500 | - | ||||||
|
Purchases
of property and equipment
|
(153,742 | ) | (106,250 | ) | ||||
|
Net
cash used in investing activities
|
(143,242 | ) | (106,250 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds
from exercise of common stock options
|
15,145 | 1,550 | ||||||
|
Net
proceeds from exercise of common stock warrants
|
490,799 | - | ||||||
|
Payments
related to Preferred Series B dividend
|
- | (24,430 | ) | |||||
|
Principal
payments on capital lease obligations and note payable
|
(225,621 | ) | (171,492 | ) | ||||
|
Net
cash provided by (used in) financing activities
|
280,323 | (194,372 | ) | |||||
|
NET
INCREASE (DECREASE) IN CASH
|
486,952 | (358,555 | ) | |||||
|
CASH - Beginning of
period
|
1,107,216 | 1,399,050 | ||||||
|
CASH - End of
period
|
$ | 1,594,168 | $ | 1,040,495 | ||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
|
Cash
paid during the years for:
|
||||||||
|
Interest,
net
|
$ | 44,931 | $ | 57,223 | ||||
|
Income
taxes
|
1,650 | 2,450 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH FINANCING ACTIVITIES
|
||||||||
|
Property
and equipment purchased by capital lease
|
192,665 | 555,700 | ||||||
|
Machinery
& equipment accrued asset retirement obligation
increase
|
3,312 | 3,312 | ||||||
|
Financing
expense related to warrant extension
|
- | 76,387 | ||||||
The
accompanying notes are an integral part of these financial
statements.
6
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
Note
1. Business
Organization and Purpose
SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987. The
Company develops, commercializes technologies and manufactures ceramics and
metals for advanced applications in the physical vapor deposition industry
including: Photonics, Solar, Thin Film Battery, Semiconductor, and, to a lesser
extent High Temperature Superconductor (HTS) materials. Photonics
currently represents the Company’s largest market. Solar is an
industry that is exhibiting rapid growth. Thin Film Battery is a
developing market where manufacturers of batteries use the Company’s products to
produce very small power supplies with small quantities of stored
energy. Semiconductor is a developing
market.
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-Q 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, 2009. 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.
|
Stock
Based Compensation
Stock
Based Compensation - Compensation cost recognized in 2010 and 2009 includes
compensation cost for stock-based awards granted on or subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the Stock
Compensation Topic of the FASB Accounting Standards Codification. Non
cash stock based compensation costs were $103,577 and $281,203 for the six
months ended June 30, 2010 and 2009, respectively. On January
2, 2009, the Stock Option and Compensation Committee (the “Committee”) of the
Board of Directors of the Company approved the grant of options to purchase a
total of 450,000 shares of the Company’s common stock, effective January 2,
2009, to the Company’s Chief Executive Officer and three other executive
officers. The Committee also approved the grant of options to
purchase 90,000 shares to the four non-employee board
members. Pursuant to the terms of the agreements, the options have an
exercise price of $6.00 per share, the closing price of the Company’s common
stock as reported on the OTC Bulletin Board regulated quotation service on
January 2, 2009.
Reclassification
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.
7
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
|
Note
3.
|
Common
Stock and Stock Options
|
On May
31, 2010 a total of 40,833 common stock warrants were exercised at a price of
$2.88 per common share. The cash proceeds were
$117,599. On January 8, 2010 a total of 150,000 common stock
warrants, which were originally in the estates of Dr. Edward R. Funk Sc.D., and
Ingeborg V. Funk, founders of the Company, were exercised at a price of $2.50
per share. The cash proceeds received were $375,000.
A total
of 99,585 common stock warrants at a price of $2.88 expired on May 31,
2010. The Company has 246,639 common stock warrants at a price of
$3.00 due to expire in October 2010. The Company also has 20,000
common stock warrants at a price of $2.50 due to expire in November
2010.
The
cumulative status of options granted and outstanding at June 30, 2010, and
December 31, 2009, as well as options which became exercisable in connection
with the Stock Option Plans are summarized as follows:
Employee Stock
Options
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Stock Options
|
Exercise Price
|
|||||||
|
Outstanding
at December 31, 2008
|
362,750 | $ | 2.14 | |||||
|
Granted
|
450,000 | 6.00 | ||||||
|
Exercised
|
(6,250 | ) | 2.03 | |||||
|
Forfeited
|
(10,250 | ) | 3.05 | |||||
|
Outstanding
at December 31, 2009
|
796,250 | $ | 4.31 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(8,400 | ) | 1.55 | |||||
|
Forfeited
|
(500 | ) | 2.13 | |||||
|
Outstanding
at June 30, 2010
|
787,350 | $ | 4.34 | |||||
|
Shares
exercisable at December 31, 2009
|
369,325 | $ | 2.52 | |||||
|
Shares
exercisable at June 30, 2010
|
415,200 | $ | 2.94 | |||||
8
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
|
Note
3.
|
Common
Stock and Stock Options (continued)
|
Non-Employee Director Stock
Options
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Stock Options
|
Exercise Price
|
|||||||
|
Outstanding
at December 31, 2008
|
233,500 | $ | 2.54 | |||||
|
Granted
|
90,000 | 6.00 | ||||||
|
Exercised
|
(4,000 | ) | 2.13 | |||||
|
Expired
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Outstanding
at December 31, 2009
|
319,500 | $ | 3.52 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(1,000 | ) | 2.13 | |||||
|
Expired
|
(1,000 | ) | 2.13 | |||||
|
Forfeited
|
- | - | ||||||
|
Outstanding
at June 30, 2010
|
317,500 | $ | 3.53 | |||||
|
Shares
exercisable at December 31, 2009
|
259,500 | $ | 2.95 | |||||
|
Shares
exercisable at June 30, 2010
|
287,500 | $ | 3.27 | |||||
Exercise
prices for options range from $1.00 to $6.00 at June 30, 2010. The
weighted average option price for all options outstanding is $4.11 with a
weighted average remaining contractual life of 5.3 years.
|
Note
4.
|
Preferred
Stock
|
On
February 15, 2010 the Board of Directors voted not to authorize the payment of a
cash dividend on convertible preferred stock, Series B, to shareholders of
record as of December 31, 2009. Accrued dividends on the Series B
preferred stock were $12,149 and $12,215 for the six months ended June 30, 2010
and 2009, respectively.
|
Note
5.
|
Inventories
|
|
|
Inventories
are comprised of the following:
|
|
June
30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 406,942 | $ | 371,060 | ||||
|
Work-in-progress
|
844,965 | 506,288 | ||||||
|
Finished
goods
|
219,345 | 204,026 | ||||||
|
Inventory
reserve
|
(60,633 | ) | (49,597 | ) | ||||
| $ | 1,410,619 | $ | 1,031,777 | |||||
9
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
|
Note
6.
|
Earnings
Per Share
|
|
|
Basic
income (loss) per share is calculated as income (loss) available to common
stockholders divided by the weighted average of common shares
outstanding. Diluted earnings per share is calculated as income
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 June 30, 2009 all
common stock options and warrants were anti-dilutive due to the net
loss. The following is provided to reconcile the earnings per
share calculations:
|
|
For
three months ended June 30,
|
For
six months ended June 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Income
(loss) applicable to common shares
|
$ | 8,759 | $ | (374,027 | ) | $ | 109,115 | $ | (687,454 | ) | ||||||
|
Weighted
average common shares outstanding – basic
|
3,742,039 | 3,562,259 | 3,727,074 | 3,562,149 | ||||||||||||
|
Effect
of dilutions
|
140,787 | - | 146,157 | - | ||||||||||||
|
Weighted
average shares outstanding – diluted
|
3,882,826 | 3,562,259 | 3,873,231 | 3,562,149 | ||||||||||||
Note
7. Notes
Payable
In
December 2009, the Company issued a Promissory Note to The Huntington National
Bank, as Lender, pursuant to a Business Loan Agreement dated as of December 14,
2009. The Note is collateralized by a Commercial Security Agreement
granting the Lender a security interest in the Company’s inventory, equipment
and accounts receivable. As of June 30, 2010 there was no outstanding
balance on the Revolving Note.
Among
other items, the Revolving Note provides for the following:
|
|
·
|
At
no time shall the outstanding balance of the principal sum of the
Revolving Note exceed the lesser of (1) $500,000 or (2) an amount equal to
the sum of 80% of Eligible Accounts plus the lesser of (A) 50% of Eligible
inventory or (B) $200,000.
|
|
|
·
|
Interest
on the Revolving Note is subject to change from time to time based on
changes in an independent index (LIBOR). The index at the
inception of the Note was 0.235% per annum. The interest rate
to be applied to the unpaid principal balance will be at a rate of 2.75
percentage points over the index.
|
|
|
·
|
All
accrued interest is payable monthly. Any outstanding principal
and accrued interest owed on the Revolving Note matures on January 15,
2011.
|
10
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
Note
7. Notes
Payable (continued)
During
2006, the Company was approved for a 166 Direct Loan from the Ohio Department of
Development in the amount of $400,000. These funds were received in
July of 2008. The proceeds were used to reduce the balance on
outstanding capital lease obligations. The term of the loan is 84
months at an interest rate of 3%. There is also a one-quarter percent annual
servicing fee to be charged monthly on the outstanding principal
balance. During each of the first 12 months the Company made only
monthly servicing fee and interest payments per the loan
agreement. During months 13 through 84, the Company is making monthly
servicing fee, interest and principal payments. The loan principal
balance will be fully amortized over the last 72 months. The Note is
secured by a Security Agreement granting the Lender a security interest in the
project equipment.
Note
8. Concentration
Risk
At June
30, 2010 the Company had a prepaid expense of approximately $200,000 to a
supplier for the purchase of raw material. The supplier, with revenues of
several billion dollars, continues to deliver the raw material as agreed
upon.
At June
30, 2010 the Company had a receivable of approximately $190,000 from a
customer. This balance is consistent with month end balances for the
past year. None of the outstanding balance was past due as of June
30, 2010.
Note
9. Income
Taxes
Income
tax expense consists of the following for the six months ended June 30, 2010 and
2009, respectively:
|
2010
|
2009
|
|||||||
|
Federal
– deferred
|
$ | 72,000 | $ | - | ||||
|
State
and local
|
11,367 | 575 | ||||||
| $ | 83,367 | 575 | ||||||
11
|
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 and with those in our Form 10-K for the year ended
December 31, 2009.
Except
for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Those
statements include, but may not be limited to, all statements regarding our
intent, belief, and expectations, such as statements concerning our future
profitability and operating and growth strategy. Words such as
“believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,”
“estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions
are intended to identify forward-looking statements. Investors are
cautioned that all forward-looking statements contained in this Quarterly Report
on Form 10-Q and in other statements we make involve risks and uncertainties
including, without limitation, the factors set forth under the caption “Risk
Factors” included in our Annual Report on Form 10-K for the year ended December
31, 2009, and other factors detailed from time to time in our other filings with
the Securities and Exchange Commission. One or more of these factors
have affected, and in the future could affect our business and financial
condition and could cause actual results to differ materially from plans and
projections. Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, there can be no
assurance that any of the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake 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 us to predict all
factors, nor can we 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
SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987. We
develop, commercialize technologies and manufacture ceramics and metals for
advanced applications in the physical vapor deposition industry including:
Photonics, Solar, Thin Film Battery, Semiconductor, and, to a lesser extent HTS
materials. Photonics currently represents the largest market for our
targets. Solar is an industry that is exhibiting rapid growth and we
expect this market to grow quickly. Thin Film Battery is a developing
market where manufacturers of batteries use our products to produce very small
power supplies with small quantities of stored
energy. Semiconductor is a developing market for
us. In recent years we added to our sales staff for the purpose of
focusing on opportunities for our products in the Solar industry. We
also added staff to our Technology group for the development of innovative
products. Late in the second quarter of 2009 we received an order
from a solar customer that was in excess of $1 million. Nearly the
entire amount of this order shipped before December 31, 2009. Late in
the fourth quarter this same customer placed another order greater than $1
million. Nearly the entire order shipped during the first half of
2010. We continue to receive ongoing orders from this
customer.
12
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Executive
Summary
For the
six months ended June 30, 2010, we had revenues of $4,801,777. This
was an increase of $1,590,189, or 49.5%, compared to the six months ended June
30, 2009. The increase in revenues can be attributed to an increase
in product revenue, particularly in the Solar market. Product revenue
increased $1,646,491, or 60.7%, for the six months ended June 30, 2010 from the
same period in 2009. Contract research revenue decreased to
$444,772 from $501,074 for the first half of 2010 compared to the first half of
2009, due to the completion of certain milestones related to these
programs.
Gross
profit increased $667,340 to $1,343,850, or 98.6% for the six months ended June
30, 2010 compared to the same six months in 2009. The increase in
gross profit can be attributed to the increase in product revenue as mentioned
above, particularly in the Solar market. During the second quarter of
2010 we incurred higher costs related to qualification of new products versus
the same period last year. Our products continue to be evaluated by a
growing number of companies engaged in the global solar market. Gross
margin was 28.0% of total revenues for the first six months of 2010 compared to
21.1% for the same period in 2009, reflecting higher product volume and improved
product mix.
For the
six months ended June 30, 2010, we had income before provision for income tax of
$204,631 compared to a loss of $674,664 for the six months ended June 30,
2009. We had income applicable to common shares of $109,115 for the
six months ended June 30, 2010 compared to a loss of $687,454 for the same
period in 2009. This increase can be attributed to the increase in
revenue previously mentioned and a reduction of operating expenses of
approximately $115,000. Non-cash stock based compensation expenses decreased to
approximately $100,000 in the first half of 2010 from approximately $281,000 in
the first half of 2009. In addition, the first half of 2009 included
a one time non-cash charge of $76,387 for a financing charge related to the
extension of expiration dates for common stock purchase warrants.
Given
current market opportunities, we continued to invest in expanding production,
R&D, marketing, and sales. This has resulted in trial and
qualification orders that were shipped to customers in the solar industry
throughout 2009 and the first half of 2010. This should allow us to
gain market share and to be poised to receive large orders in targeted
applications.
In April
of 2010, we received ISO 9001:2008 registration, an internationally recognized
quality standard. Prior to April 2010 we were ISO 9001:2000
registered.
During
the first quarter of 2010 a total of 150,000 common stock warrants, which were
originally in the estates of Dr. Edward R. Funk Sc.D., and Ingeborg V. Funk,
founders of our company, were exercised at a price of $2.50 per
share. The cash proceeds received were $375,000. During
the second quarter of 2010 a total of 40,833 common stock warrants were
exercised at a price of $2.88 per common share. The related cash
proceeds were $117,599.
During
the fourth quarter of 2009 we were notified we had been awarded a grant in the
amount of $775,400 by the Ohio Department of Development’s Third Frontier
Photovoltaic Program (TFPVP) to commercialize advanced technology for high power
density rotatable ceramic sputtering targets. These targets are used
in the manufacture of thin film photovoltaics. This technology will
enable manufacturers to operate rotatable sputtering targets at higher power
densities than current technology. The approval of the grant
was received during January 2010 and the work on the contract commenced in the
first quarter of 2010. The work on the contract is expected to
continue through the first quarter of 2012.
13
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
During
the third quarter of 2009 we received notification from the Department of Energy
(DOE) of an Assistance Agreement in the amount of approximately $750,000 which
was subject to final approval by the DOE. The award was
subsequently finalized at approximately $650,000. This grant
provides support for Phase II of a Small Business Innovation Research (SBIR)
award entitled “Homogenous BSCCO-2212 Round Wires for Very High Field Magnet
Applications.” The work on the contract is expected to continue
through August 2011.
In July
2009, we were selected by a customer as a subcontractor for an award granted by
the Ohio Department of Development. This award is entitled
“Ohio-Based Manufacturing of Thin-Film Photovoltaics” and provides support for
the development of alternate transparent conductive oxides. The tasks which
we had been involved are not expected to be completed and it is anticipated that
the program will conclude during the third quarter of 2010. We
could not provide material that met the customer’s revised timeline and
specifications. We billed approximately $5,000 to the customer for
our work on the contract and we do not expect to perform any additional
work. The original amount of the subcontract work to be performed by
us was $125,000.
We
received notification during the fourth quarter of 2008 from the Ohio Department
of Development’s Third Frontier Advanced Energy Program (TFAEP) of an award in
the amount of $708,715. This grant provides support to commercialize
technologies for the manufacture of rotatable ceramic sputtering targets for the
production of transparent conductive oxide-coated glass used in manufacturing
thin film photovoltaic solar cell panels. The work on the
contract began in January of 2009 and is expected to continue through January
2011.
During
the third quarter of 2008 we received notification from the Department of Energy
of a Notice of Financial Assistance Award in the amount of approximately
$750,000. The initial $125,000 was formally approved during
2008. The remaining balance was approved in February
2009. This grant provides support for Phase II of a Small Business
Innovation Research (SBIR) award entitled “Flux Pinning Additions to Increase Jc
Performance in BSCCO-2212 Round Wire for Very High Field
Magnets.” The work on the contract began during the third quarter of
2008 and is expected to continue through the first quarter of 2011.
We
received notification during the second quarter of 2008 from the Department of
Energy of a Notice of Financial Assistance Award in the amount of
$99,961. This award provided support for Phase I of an SBIR award
entitled “Homogenous BSCCO-2212 Round Wires for Very High Field Magnet
Applications.” The work on the contract began during the third
quarter of 2008 and was completed during the first quarter of
2009.
14
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
|
|
RESULTS
OF OPERATIONS
|
Six
and three months ended June 30, 2010 (unaudited) compared to six and three
months ended June 30, 2009 (unaudited):
|
|
Revenues
|
Revenues
for the six months ended June 30, 2010 were $4,801,777 compared to $3,211,588,
for the same period last year, an increase of $1,590,189 or
49.5%. The increase in revenues can be attributed to an increase in
product revenue, particularly in the Solar market. Product revenue
increased $1,646,491, or 60.7%, for the six months ended June 30, 2010 from the
same period in 2009. Contract research revenue decreased to $444,772
from $501,074 for the first half of 2010 compared to the first half of
2009. Revenues for the three months ended June 30, 2010 were
$2,560,664 compared to $1,310,053, for the same period last year, an increase of
$1,250,611 or 95.5%. As previously mentioned this increase can be
attributed to an increase in product revenue, particularly in the Solar
market. Product revenue increased $1,299,001, or 123.1%, for the
three months ended June 30, 2010 from the same period in 2009. Contract research
revenue decreased to $206,259 from $254,649 for the second quarter of 2010
compared to the second quarter of 2009, due to the completion of certain
milestones related to these programs.
|
|
Gross
Profit
|
Gross
profit for the six months ended June 30, 2010 was $1,343,850, which represented
gross margin of 28.0% of total revenue compared to $676,510 and 21.1% of total
revenue for the six months ended June 30, 2009. Gross profit for the
three months ended June 30, 2010 was $666,148, which represented gross margin of
26.0% of total revenue compared to $248,990 and 19.0% of total revenue for the
three months ended June 30, 2009. The increase in gross profit and
gross margin can be attributed to the increase in product revenue previously
mentioned, particularly in the Solar market. During the second
quarter of 2010 we incurred higher costs related to qualification of new
products versus the same period last year. Our products continue to
be evaluated by a growing number of companies engaged in the global solar
market.
Marketing
and Sales Expense
Marketing
and Sales expense for the six months ended June 30, 2010 decreased 1.3% to
$310,230 from $314,450 for the same period in 2009. The decrease was
due to less non-cash stock based compensation expense of approximately $21,000
as well as less travel related expenses of approximately
$7,000. These reductions, along with a slight decrease in wages
helped offset an increase of approximately $36,000 in manufacturer’s sales
representative commissions in the first half of 2010. Marketing and Sales
expense for the three months ended June 30, 2010 increased 6.5% to $155,908 from
$146,358 for the same period in 2009. The increase was due to higher
manufacturer’s sales representative commissions in the second quarter of 2010
compared to the same period in 2009.
|
|
General
and Administrative Expense
|
General
and administrative expense for the six months ended June 30, 2010 decreased to
$596,211 from $703,383, or 15.2%, for the six months ended June 30,
2009. The decrease was the result of less non-cash stock based
compensation expense of approximately $135,000. General and administrative
expense for the three months ended June 30, 2010 was $314,981 compared to
$288,347 for the three months ended June 30, 2009, an increase of
9.2%. The increase was the result of the reinstatement of wage cuts
introduced during the second quarter of 2009 as well as higher professional
fees.
|
|
Research
and Development Expense
|
Research
and development expense for the first six months of 2010 was $200,761 compared
to $204,577 for the same period in 2009, a decrease of
1.9%. Research and development expense for the three
months ended June 30, 2010 was $147,505 compared to $79,247 for the same period
in 2009, an increase of 86.1%. During the first quarter of 2010 most
of our research and development resources were applied to ongoing R&D
contracts. The second quarter saw a return to more internal research
involved with the solar industry.
15
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
|
|
Interest
Income and Expense
|
Interest
income was $2,663 and $4,846 for the six months ended June 30, 2010 and 2009,
respectively. Interest income was $1,607 and $2,352 for the
three months ended June 30, 2010 and 2009, respectively. The
decrease in interest rates reduced the amount of interest earned.
Interest
expense was $44,931 and $57,223 for the six months ended June 30, 2010 and 2009,
respectively. Interest expense was $23,109 and $28,635 for the three
months ended June 30, 2010 and 2009, respectively. The decrease was
due to the maturity of four capital leases plus more principal and less interest
being applied to ongoing capital lease payments.
|
|
Other
Expense
|
|
|
A
one time non-cash financing expense associated with the extension of a
warrant expiration date was approximately $76,000 during the six and three
months ended June 30, 2009. There was no such expense in
2010.
|
|
|
Income
Tax Expense
|
|
|
Income
tax expense for the six months ended June 30, 2010 was $83,367 compared to
$575 for the six months ended June 30, 2009. Income tax expense
for the three months ended June 30, 2010 was $21,670 compared to $287 for
the three months ended June 30, 2009. The deferred tax benefit
of $156,000 at December 31, 2009 was reduced by $72,000 during the first
half of 2010 to account for the expected usage of prior net operating
losses against current year income.
|
|
|
INCOME
(LOSS) APPLICABLE TO COMMON SHARES
|
Income
applicable to common shares was $109,115, or $0.03 per common share, for the six
months ended June 30, 2010 compared to a loss applicable to common shares of
$687,454, or $(0.19) per common share for the six months ended June 30,
2009. The income or loss applicable to common shares includes income
or loss after provision for income tax and the accretion of Series B preferred
stock dividends. Dividends on the Series B preferred stock accrue at
10% annually on the outstanding shares. Accrued dividends on the
Series B preferred stock were $12,149 and $12,215 for the six months ended June
30, 2010 and 2009, respectively. Basic income or loss per common
share before provision for income tax was $0.05 and $(0.19) for the six months
ended June 30, 2010 and 2009, respectively.
Income
applicable to common shares was $8,759, or $0.00 per common share, for the three
months ended June 30, 2010 compared to a loss applicable to common shares of
$374,027, or $(0.10) per common share for the three months ended June 30,
2009. The income or loss applicable to common shares includes income
or loss after provision for income tax and the accretion of Series B preferred
stock dividends. Dividends on the Series B preferred stock accrue at
10% annually on the outstanding shares. Accrued dividends on the
Series B preferred stock was $6,074 and $6,108 for the three months ended June
30, 2010 and 2009, respectively. Basic income or loss per common
share before provision for income tax was $0.01 and $(0.10) for the three months
ended June 30, 2010 and 2009, respectively.
16
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Basic and
diluted income applicable to common shares for the six months ended June 30,
2010 was $0.03 per common share based on 3,727,074 and 3,873,231 weighted
average shares outstanding, respectively. The weighted averaged
shares outstanding were 3,562,149 at June 30, 2009. All outstanding
common stock equivalents were anti-dilutive for the six months ended June 30,
2009 due to the net loss.
Basic and
diluted income applicable to common shares for the three months ended June 30,
2010 was $0.00 per common share based on 3,742,039 and 3,882,826 weighted
average shares outstanding, respectively. The weighted averaged
shares outstanding were 3,562,259 at June 30, 2009. All outstanding
common stock equivalents were anti-dilutive for the three months ended June 30,
2009 due to the net loss.
The
following schedule represents our outstanding common shares during the period of
2010 through 2019 assuming all outstanding stock options and stock warrants are
exercised during the year of expiration. If each shareholder
exercises his or her options or warrants, it could increase our common shares by
1,371,489 to 5,144,497 by December 31, 2019. Exercise prices for
options and warrants range from $1.00 to $6.00 at June 30,
2010. Assuming all such options and warrants are exercised in the
year of expiration, the effect on shares outstanding is illustrated as
follows:
|
Options and Warrants due to expire
|
Potential Shares Outstanding
|
|||||||
|
2010
|
301,639 | 4,074,647 | ||||||
|
2011
|
62,500 | 4,137,147 | ||||||
|
2012
|
160,600 | 4,297,747 | ||||||
|
2013
|
30,250 | 4,327,997 | ||||||
|
2014
|
180,000 | 4,507,997 | ||||||
|
2015
|
140,000 | 4,647,997 | ||||||
|
2016
|
37,000 | 4,684,997 | ||||||
|
2017
|
- | 4,684,997 | ||||||
|
2018
|
9,500 | 4,694,497 | ||||||
|
2019
|
450,000 | 5,144,497 | ||||||
LIQUIDITY
AND WORKING CAPITAL
At June
30, 2010, working capital was $2,123,551 compared to $1,266,378 at June 30,
2009. We provided cash from operations of approximately $350,000 for the six
months ended June 30, 2010. We used approximately $58,000 in cash
from operations for the six months ended June 30, 2009. Non-cash
items including depreciation, accretion and amortization, stock based
compensation, financing expense of warrant extension, change in deferred tax
asset, inventory reserve on excess and obsolete inventory, and provision for
doubtful accounts were approximately $429,000 and $590,000, respectively, for
the six months ended June 30, 2010 and 2009. Accounts receivable,
inventory, prepaid expenses and other assets decreased approximately $87,000 for
the six months ended June 30, 2010. Accounts receivable, inventory,
prepaid expenses and other assets increased approximately $155,000 for the six
months ended June 30, 2009. Accounts payable, accrued expenses and
customer deposits decreased approximately $276,000 for the six months ended June
30, 2010. Accounts payable, accrued expenses and customer deposits
increased approximately $183,000 for the six months ended June 30,
2009. Cash of approximately $143,000 and $106,000 was used for
investing activities for the six months ended June 30, 2010 and 2009,
respectively. The amounts invested were used to purchase machinery
and equipment for increased production capacity and new product
lines.
17
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Cash of
approximately $280,000 was provided by financing activities during the six
months ended June 30, 2010. Principal payments to third parties for
capital lease obligations and a note payable approximated
$226,000. Proceeds received from the exercise of common stock
warrants were $490,799. Proceeds received from the exercise of common
stock options were $15,145. We incurred new capital lease obligations
of approximately $193,000 for new production equipment.
During
the six months ended June 30, 2009 cash of approximately $194,000 was used for
financing activities. Principal payments to third parties for capital
lease obligations approximated $171,000. Proceeds received from the
exercise of common stock options were $1,550. Payments related to Series B
Preferred stock dividends were $24,430. We incurred new capital lease
obligations of approximately $556,000 for new production equipment.
As of
June 30, 2010, cash on-hand was $1,594,168. We believe, based on
forecasted sales and expenses, that funding will be adequate to sustain
operations at least through June 30, 2011.
We have
the ability to draw on a Revolving Note from The Huntington National
Bank. The principal amount of the Revolving Note is
$500,000. As of June 30, 2010 there was no outstanding balance on the
Revolving Note.
|
|
We
desire 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
our Form 10-K filed with the Securities and Exchange Commission on
February 17, 2010, have affected or could affect our actual results and
could cause such results to differ materially from those expressed in any
forward-looking statements made by us. Investors should
consider carefully these risks and speculative factors inherent in and
affecting our business and an investment in our common
stock.
|
While we
have had profitable operations in three of the past four years, profits have not
been consistent and we financed the historical losses primarily from additional
investments and loans by our major shareholders and private offerings of common
stock and warrants to purchase common stock. We cannot assure you that we will
be able to raise additional capital in the future to fund our
operations. While certain of our major shareholders 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 us or guaranteeing bank debt in the future.
We will
continue to seek new financing or equity financing
arrangements. However, we cannot be certain that it will be
successful in efforts to raise additional funds.
Off
Balance Sheet Arrangements
We have
no off balance sheet arrangements including special purpose
entities.
18
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
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 our Annual Report on Form 10-K for the year
ended December 31, 2009 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 collectability 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
benefit us. 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
4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on
an evaluation under the supervision and with the participation of our
management, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended ("Exchange Act") were effective as of June 30, 2010 to
ensure that information required to be disclosed in reports that are filed or
submitted under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
Inherent
Limitations over Internal Controls
Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of assets that could have a material effect on the financial
statements.
19
|
Item
4.
|
Controls
and Procedures (continued)
|
Management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our internal controls will prevent or detect all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected. Also, any evaluation of the effectiveness of controls in
future periods is subject to the risk that those internal controls may become
inadequate because of changes in business conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Internal
Controls over Financial Reporting
Management
previously disclosed a material weakness in internal control over financial
reporting in its annual report on Form 10-K, filed on February 17, 2010 for the
year ended December 31, 2009, relating to insufficient segregation of duties
consistent with control objectives. Management is aware of the risks
associated with the lack of segregation of duties due to the small number of
employees currently working with general administrative and financial
matters. Due to our size and nature, segregation of all conflicting
duties may not always be possible and may not be economically
feasible. However, to the extent possible, the initiation of
transactions, the custody of assets and the recording of transactions shall be
performed by separate individuals.
In order
to remediate this weakness, we will need to hire additional
employees. Although we will periodically reevaluate this situation,
at this point we consider that the risks associated with such lack of
segregation of duties and the potential benefits of adding employees to
segregate such duties are not cost justified. Until we are able to
hire additional employees, we will continue to report to the Audit Committee and
the Board of Directors at least monthly (and more often as
necessary). We believe this will continue to mitigate this
weakness. This reporting includes balance sheets, statements of
operations, statements of cash flows, and other detail supporting these
statements.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal controls over financial reporting for the six
months ended June 30, 2010 that materially affected or were reasonably likely to
materially affect our disclosure controls and
procedures. Additionally, there were no changes in our internal
controls that could materially affect our disclosure controls and procedures
subsequent to the date of their evaluation. As a result, no
corrective actions were required or undertaken.
20
Part
II. Other Information
|
Item
6.
|
Exhibits.
|
|
10.1
|
Description
of exercise of 40,833 common stock warrants (Incorporated by reference to
the Company’s Current Report on Form 8-K, dated June 4,
2010).
|
|
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 and Certification of
Principal Financial Officer and Principal Accounting
Officer.*
|
|
99.1
|
Press
Release dated July 27, 2010, entitled “SCI Engineered Materials, Inc.
Reports Second Quarter 2010 Results.”
|
|
*
Filed with this
report
|
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.
|
SCI
ENGINEERED MATERIALS, INC.
|
|
|
Date: July
27, 2010
|
/s/ Daniel Rooney
|
|
Daniel
Rooney, Chairman of the Board of
Directors,
President and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
/s/ Gerald S. Blaskie
|
|
|
Gerald
S. Blaskie, Vice President and Chief
Financial
Officer
|
|
|
(Principal
Financial Officer and Principal
Accounting
Officer)
|
21