(Mark One)

For the quarterly period ended September 30, 2013

or

 

For the transition period from                         to                       

 

Commission file number: 0-31641

 

(Exact name of registrant as specified in its charter)

 

 

(Address of principal executive offices) (Zip Code)

 

(Registrant’s telephone number, including area code)

 

(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  x  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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

 

3,844,898 shares of Common Stock, without par value, were outstanding at October 31, 2013.

  

 

 

			Page No.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Balance Sheets as of September 30, 2013 (unaudited)
		and December 31, 2012	3
		Statements of Operations for the Three and Nine Months
		Ended September 30, 2013 and 2012 (unaudited)	5
		Statements of Cash Flows for the Nine Months
		Ended September 30, 2013 and 2012 (unaudited)	6
		Notes to Financial Statements (unaudited)	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and
		Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	N/A
	Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	N/A
	Item 1A.	Risk Factors	N/A
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	N/A
	Item 3.	Defaults Upon Senior Securities	N/A
	Item 4.	Mine Safety Disclosures	N/A
	Item 5.	Other Information	N/A
	Item 6.	Exhibits	23
	Signatures		25

  

 

 

 

	3

 

		-	Interest subject to change from time to time based on changes in LIBOR. The interest rate applied to the unpaid principal balance is at a rate of 4 percentage points over LIBOR. Under no circumstance will the interest rate be less than 5% per annum or more than the maximum rate allowed by applicable law.
		-	Monthly payments of approximately $3,800, including interest, beginning in September 2013.

Following is the income tax (expense) benefit for the three and nine months ended September 30:

 

 

	11

 

 SCI ENGINEERED MATERIALS, INC.

 

	12

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gross profit was $416,836 for the three months ended September 30, 2013 compared to $562,176 for the third quarter of 2012.  Gross profit as a percentage of revenue was 23.0% for the third quarter of 2013 compared to 28.4% for the third quarter of 2012.  The decreases were primarily related to less revenue due to the customer reorganization previously mentioned and product mix. 

For the three months ended September 30, 2013, we had a loss from operations of $52,343 compared to income from operations of $112,679 for the three months ended September 30, 2012.  We had a loss applicable to common shares of $76,322 for the three months ended September 30, 2013, compared to income applicable to common shares of $84,711 for the third quarter of 2012. 

We invested approximately $105,000 in new equipment during the first nine months of 2013 and approximately $590,000 during the full-year 2012.  Investment in equipment is expected to be less for 2013 versus last year.  Given identified market opportunities, we continue to invest in   internally financed research and development, marketing, and sales for all of our markets.

Previous investments have resulted in ongoing production orders with periodic releases and intermittent repeat orders from several customers, as well as trial and qualification orders that were shipped to customers in the solar and glass industries during the last two years.  We continue to work closely with all of our customers and are positioned to meet their near term product requirements.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

                Revenue

Gross profit was $416,836 for the three months ended September 30, 2013 compared to $562,176 for the same three months in 2012.  This was a decrease of $145,340, or 25.9%.  Gross profit as a percentage of revenue was 23.0% for the third quarter of 2013 compared to 28.4% for the same period in 2012.  The decreases can be attributed to the customer reorganization previously mentioned and product mix.   

Gross profit was $988,626 for the nine months ended September 30, 2013 compared to $1,400,352 for the same nine months in 2012.  This was a decrease of $411,726 or 29.4%.  The decrease in gross profit was attributed primarily to the customer that experienced an inventory adjustment during the first quarter of 2013, the customer that halted operations in 2012 and product mix.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

   

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Marketing and Sales Expense  

 

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

		Options due to expire		Potential shares outstanding			Weighted average exercise price
2013		-		3,844,898			-
2014		180,000		4,024,898		$	4.36
2015		140,000		4,164,898		$	2.97
2016		36,000		4,200,898		$	3.25
2017		-		4,200,898			-
2018		6,000		4,206,898		$	3.10
2019		450,000		4,656,898		$	6.00

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

    

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, 2012 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, revenue recognition, tax valuation, stock based compensation 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.

Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Due to a segregation of duties material weakness described below, and based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2013, the Company’s disclosure controls and procedures were not effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussions regarding required disclosure.  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.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operation, changes in shareholder’s equity and cash flows for all periods presented.

Inherent Limitations over Internal Controls