UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2012

 

Commission File Number: 0-31641

 

SCI ENGINEERED MATERIALS, 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.)

 

2839 Charter Street

Columbus, Ohio 43228

(Address of principal executive offices)

Registrant’s telephone number, including area code: (614) 486-0261

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  ¨ No x

 

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 past 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 at least 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

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

  

The aggregate market value of the Registrant’s common equity held by non-affiliates of the Registrant was approximately $5,086,255 on June 30, 2012 . For purposes of this disclosure, shares of common stock held by persons who hold more than 10% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates . This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

 

There were 3,832,898 shares of the Registrant’s Common Stock outstanding on March 11, 2013.

 

Documents Incorporated By Reference

 

Portions of our Proxy Statement for the 2013 Annual Meeting of Stockholders are incorporated by reference in Part III.

 

 

 
 

 

 

  Table of Contents Page

 

Part I

 

Item 1. Business 3
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 12
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Mine Safety Disclosures 12
     
Part II    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
Item 9A. Controls and Procedures 19
Item 9B. Other Information 21
     
Part III    
     
Item 10. Directors, Executive Officers and Corporate Governance 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 21
Item 13. Certain Relationships and Related Transactions, and Director Independence 21
Item 14. Principal Accountant Fees and Services 21
Item 15. Exhibits and Financial Statement Schedules 22
     
  Signatures 25

 

Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 26A of the Securities Act of 1933, as amended. The words “anticipate,” “believe,” “expect,” “estimate,” and “project” and similar words and expressions identify forward-looking statements, which speak only as of the date hereof. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors, including, but not limited to, the factors discussed in “Risk Factors.” The Company undertakes no obligation to publicly update or revise any forward-looking statements.

 

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PART I

 

ITEM 1. BUSINESS

 

Introduction

 

SCI Engineered Materials, Inc. (“SCI”, “we” or the “Company”), formerly Superconductive Components, Inc., an Ohio corporation, was incorporated in 1987. We operate in the Physical Vapor Deposition (“PVD”) industry in which we develop, commercialize technologies, and manufacture ceramics and metals for advanced applications in: Photonics, Solar, Thin Film Battery, and, to a lesser extent High Temperature Superconductor (“HTS”) materials. Photonics currently represents the largest market for our targets. We have been slowly gaining traction in the solar industry and we expect adoption of our products by current and new customers. 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.

 

History of the Company

 

The late Dr. Edward Funk, Sc.D., and his late wife Ingeborg founded SCI in 1987. Dr. Funk, formerly a Professor of Metallurgy at The Ohio State University and a successful entrepreneur, envisioned significant market potential for the newly discovered High Temperature Superconductivity (“HTS”) material YBCO (T c of 90 o K). Our first product was a 99.999% pure, co-precipitated YBCO 1-2-3 powder. Over the years we expanded our product line by adding other High T c Powders, sintered shapes, single crystal substrates, and non-superconducting sputtering targets.

 

We opened a subdivision, Target Materials Inc. (“TMI”), in 1991 to supply the increasing worldwide demand for sputtering and laser ablation targets. We became a full service manufacturer of high performance thin film materials, providing a wide selection of metals, ceramics, and alloys for sputtering targets, evaporation sources, and other Physical Vapor Deposition (“PVD”) applications. We served the Research & Development market as well as the Industrial and Decorative Coating markets. During this time, we began to manufacture targets for the Photovoltaic, Flat Panel Display, and Semiconductor industries.

 

SCI and TMI were merged in 2002. We continued to manufacture complex ceramic, metal, and alloy products for the photonic, photovoltaic, thin film battery, media storage, flat panel display, and semiconductor industries.

 

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.

 

For over two and a half decades we have been developing considerable expertise in the development and manufacturing ramp-up of novel materials, such as Transparent Conductive Oxides for Thin Film Solar applications and targets for thin film batteries as well as Bismuth Strontium Calcium Copper Oxide (a superconductor powder). Today, we serve a diverse base of domestic and multi-national corporations, universities, and leading research institutions. We actively seek to partner with organizations to provide solutions for difficult material challenges.

 

Throughout our history, we have conducted funded research primarily under grants from entities such as the Department of Energy, the National Science Foundation, NASA, and the Ohio Department of Development. These activities are generally limited to funded research that is consistent with our focus on near term commercial applications in our principal markets.

 

Business

 

We are a supplier of materials to the PVD industry. Our customers need our materials to produce nano layers of metals and oxides for advanced material systems. PVD coatings range from everyday items to complex computer processors. Every day applications include transparent anti-scratch coatings on eyeglasses, coatings on kitchen faucets, as well as low emissivity glass for household windows. More technically advanced applications for our products include semiconductors, thin film solar, flat panel displays, photonics and an emerging technology - Thin Film Battery.

 

3
 

 

We are focused on three distinct markets within the PVD industry (Photonics, Thin Film Solar, and Thin Film Battery). We continue to pursue niche opportunities where our core competencies give us an advantage. We receive requests from potential customers in other markets within the PVD industry; however, at this time we have chosen not to pursue them. This disciplined approach enables us to focus on those opportunities that are the best fit for our capabilities and also offer the greatest long-term return. Considerations include our core strengths, resource requirements, and time-to-market.

 

The production and sale of High Temperature Superconductor materials was the initial focus of our operations and these materials continue to be manufactured in low volumes. We continue to work with private companies and government agencies to develop new and improved products for future applications; however, our principal business focus is on products positioned for near term commercialization.

 

Photonics currently represents the largest market for our materials. Our customers are continually identifying new materials that improve the utility of optical coatings. This includes improvements in their ability to focus, filter or reflect light, all of which increase the potential demand for the types and amounts of materials we sell in this market. Photonic applications continue to expand as new methods are found to manipulate light waves to enhance the various properties of light.

 

We have developed new products for the Thin Film Solar (“TFS”) market. We are well positioned in the TFS area having supplied materials to that market for over 10 years from the early stages of TFS development. Since the beginning of 2007, we have added over $4 million of new manufacturing equipment, as well as Engineering and Sales staff to develop new materials to support the solar market. We were awarded a grant of approximately $700,000 in 2008 and a second grant in 2009 for approximately $775,000 from the Ohio Department of Development to assist in the commercialization of TFS products. Our new materials are Transparent Conductive Oxides (“TCO”). Every square foot of a TFS panel is coated with up to 3 layers of TCO, 1 micron thick. We continue to increase our visibility in the global arena by attending various trade shows targeted at the solar market. We have added exclusive representatives for Korea, China, Taiwan and Japan. Commercialization and market expansion is expected to continue in 2013. During 2011 and 2012, we purchased over $1.5 million of the approximately $3 million in equipment and infrastructure improvements that were planned in 2011 and 2012; however, TFS met difficult market conditions during 2012 and we scaled back our capital expansion accordingly. We are poised to benefit as TFS grows.

 

We continued to develop transparent conductive oxide systems for the solar and glass industries and added domestic and international customers for these products. Despite short term uncertainties, the solar industry is projected to have strong growth for the next few decades. In addition, the Thin Film Solar (TFS) market, which we serve, is expected to gain market share during that period. Given current market opportunities, we continue to invest in research and development, marketing, and sales. These investments have resulted in ongoing production orders from several customers, as well as trial and qualification orders that were shipped to customers in the solar industry throughout 2011 and 2012. Early in July 2012, we received increased orders for solar products that were scheduled to ship during the third quarter of 2012. In August, a customer announced it was reorganizing its manufacturing operations which impacted our shipments for the remainder of 2012. We had no shipments to this customer during the final four months of 2012. This customer represented approximately 5% of our revenue in 2012. In late December, we were notified by this customer that it expected to restart operations during the second quarter of 2013. We continue to work closely with all of our customers and are positioned to meet their near term product requirements.

 

Thin Film Battery is a developing market where manufacturers of batteries use our targets, especially lithium orthophosphate (Li3PO4) and lithium cobalt oxide (LiCoO) as key elements to produce power supplies with small quantities of stored energy. A typical Thin Film Battery would be produced via PVD with five or more thin layers. These batteries are often one centimeter square but only 15 microns thick. Following several years of industry developments, some Thin Film Battery customers announced their batteries are commercially available. Our customers anticipate the unique properties of these batteries could be used in applications in medical devices, integrated circuits, RFID, smart cards, hand held electronics and many other applications.

 

We continue to invest in developing new products for all current markets. These efforts include accelerating time to market and involve research and development expense beyond the scope of specific government grants and awards.

 

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We had total revenue of $8.8 million and $9.2 million during the years ended December 31, 2012, and 2011, respectively. Total revenue decreased primarily due to less contract revenue of approximately $379,000 in 2012 compared to 2011 as two grants drew to a close in 2011. Year over year product revenue remained constant in 2012 despite the loss of $450,000 of revenue from a large customer which closed its manufacturing facility during the first quarter of 2011. The loss of this customer’s revenue was offset by increased demand from new and existing customers. Contract revenue is expected to be less in 2013 due to the remaining grant drawing to a close in the first quarter of 2013. We do not rely on contract revenue as a main part of our business and do not believe that this reduction will have an adverse effect on our business.

 

Our largest customer represented approximately 48% of total revenues in 2012 and 47% in 2011. We had contract research revenue of $226,369 and $605,586 representing 2.6% and 6.6% of total revenue for the years ended December 31, 2012 and 2011, respectively.

 

Marketing and Sales

 

Europe and Asia, as well as the Americas, have high demand for sputtering targets. We continue to expand our global marketing reach. We have a manufacturer’s representative in the Korean market and also for Taiwan and China. In 2011, we added a distributor for Japan. We use various distribution channels to reach end user markets, including direct sales by our employees, independent manufacturers’ representatives in the United States, and independent distributors and manufacturers’ representatives for international markets. Also, the internet provides tremendous reach for new customers to be able to identify us as a source of their product needs. We have an operating website www.sciengineeredmaterials.com, which includes expanded online product inquiry capabilities and additional product information.

 

Ceramics

 

We are capable of producing ceramic powders via several different processing techniques including solid state and precipitation. Ceramic targets can also be produced in a variety of ways depending on the end user applications. Production techniques include sintering, cold isostatic pressing and hot pressing.

 

Most of our products are manufactured from component chemicals and metal oxides supplied by various vendors. If we suddenly lost the services of a supplier, there could be a disruption in our manufacturing process until the supplier was replaced. We have identified several firms as potential back-up suppliers that would be capable of supplying these materials to us as necessary. During 2011 we experienced a material interruption from a primary supplier of a raw material. We qualified a second source within a week and no disruptions were experienced by our customers.

 

Metals

 

In addition to the ceramic targets previously mentioned, we produce metal sputtering targets and backing plates. The targets are bonded to the backing plates for application in the PVD industry. These targets can be produced by casting, hot pressing and machining of metals and metal alloys depending on the application.

 

Applications for metal targets are highly varied from applying decorative coatings for end uses such as sink faucets to the production of various electronic, photonic and semiconductor products.

 

We purchase various metals of reasonable high purity (often above 99.9%) for our applications. We are not dependent on a single source for these metals and do not believe losing a vendor would materially affect our business.

 

We have continually added production processes and testing equipment for many product compositions that can be used as PVD materials.

 

Competition

 

We have a number of domestic and international competitors in both the ceramic and metal fields, many of whom have resources far in excess of our resources. Tosoh, Materion, Kurt Lesker and Heraeus are competing suppliers in regard to targets.

 

5
 

 

Suppliers

 

Principal suppliers in 2012 were Silicon HQ, Sincemat Company, and Johnson Matthey. In every case, we have established alternate vendors that can be used to ensure availability of required materials. As volume grows, we may enter into alliances or purchasing contracts with these or other vendors.

 

Research and Development

 

We are developing sputtering targets for semiconductor applications, which could be used to produce high K dielectric films via PVD processing. We have ongoing development for product improvements and new Transparent Conductive Oxide (TCO) and transparent dielectric materials for Thin Film Solar and wide area glass coating applications. We focus our research and development efforts in areas that build on our expertise in multi-component ceramic oxides.

 

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 cease early in 2013.

 

During the third quarter of 2009 we received notification from the Department of Energy (DOE) of an Assistance Agreement in the amount of 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, with the exception of final reporting, was completed during 2011. The final reporting was completed during 2012.

 

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. 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 was completed, with the exception of final reporting, during 2011. The final reporting was completed during 2012.

 

Contract research revenues were $226,369 during 2012 and $605,586 during 2011 . The granting agency may suspend or terminate the award in whole or in part if we fail to materially comply with the terms and conditions. We expect to complete the award while complying with the terms and conditions. We intend to continue to seek funded research opportunities within our core competencies that maintain and expand technical understanding within our company.

 

We have certain proprietary knowledge and trade secrets related to the manufacture of ceramic oxide PVD materials and patents covering some HTS products.

 

New Product Initiatives

 

During 2012 and 2011, we developed, produced and sold prototypes and innovative evaluation targets for glass coating applications. We anticipate commercializing this product in 2013.

 

We continue to develop TCO target materials for the Thin Film Solar market in partnership with both original equipment manufacturers and Thin Film Solar Cell panel fabricators.  A combination of the Third Frontier Programs and the loans provided by the Ohio Department of Development and the Ohio Air Quality Development Authority have enabled us to accelerate both our development of new products and expanding our manufacturing capacity to meet demands in an evolving market place.

 

We are exploring opportunities in the area of high dielectric constant (Hi-K) gate dielectrics for solid state memory applications.  We have developed contacts within the R&D departments of several companies developing next generation memory products and have been supplying materials for their research efforts. We foresee the development of a market for these materials as devices continue to shrink in size.

 

We continue to pursue research and development opportunities with respect to new and innovative materials and processes to be used in connection with the production of solid state Thin Film Batteries.  Presently, there are a few manufacturers of Thin Film Batteries in the United States, each in various stages of development from prototype to commercial activity.  In addition, globally there are several firms and research institutes conducting tests on Thin Film Batteries.  We believe this market may potentially become large with growth expected during the next few years.  There are numerous applications for Thin Film Batteries, including, but not limited to, active RFID tags, battery on chip, portable electronics, medical implant devices, and remote sensors.  Given the many potential uses for Thin Film Batteries, we anticipate that the market for materials will grow in direct correlation to the Thin Film Battery market itself.

 

6
 

 

We currently face competition from other producers of materials used in connection with the manufacture of Thin Film Batteries. We believe that we have certain competitive advantages in terms of quality.  We intend to actively market our materials to Thin Film Battery producers in the upcoming year in order to maintain our strong presence in this market. 

          

Intellectual Property

 

We have received a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method from the United States Patent and Trademark Office.  We also have received a patent for a process to join two individual strongly linked super-conductors utilizing a melt processing technique.

 

In the future, we may submit additional patent applications covering various inventions, which have been developed by us.  Because the publication of U.S. patent applications can be delayed for up to one year, they tend to lag behind actual discoveries and we may not be the first creator of inventions covered by pending patent applications or the first to file patent applications for such inventions.  Additionally, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed.

 

We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property.  Unfortunately, these may be invalidated, circumvented or challenged.  In addition, the laws of some foreign countries in which our products may be produced or sold may not protect our intellectual property rights to the same extent as the laws of the United States.

 

Employees

 

We had 25 full-time employees as of December 31, 2012. One of these employees held a PhD in Material Science. We have never experienced a work stoppage and consider our relations with employees to be good. The employees do not have a bargaining unit.

 

Environmental Matters

 

We handle all materials according to Federal, State and Local environmental regulations and include Material Safety Data Sheets (MSDS) with all shipments to customers.  We maintain a collection of MSDS sheets for all raw materials used in the manufacture of products and maintenance of equipment and insure that all personnel follow the handling instructions contained in the MSDS for each material.  We contract with a reputable fully permitted hazardous waste disposal company to dispose of the small amount of hazardous waste materials generated.

 

Collections and Write-offs

 

We collected receivables in an average of 20 days in 2012. We have occasionally been forced to write-off negligible amount of accounts receivable as uncollectible. We consider credit management critical to our success.

 

Seasonal Trends

 

We have not experienced and do not expect to experience seasonal trends in future business operations.

 

 

 

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ITEM 1A. RISK FACTORS

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The following factors have affected or could affect actual results and could cause such results to differ materially from those expressed in any forward-looking statements made. Investors should consider carefully the following risks and speculative factors inherent in and affecting the business of SCI and an investment in our common stock.

 

We have limited marketing and sales capabilities.

 

We continue to expand our marketing reach into Asia. We added a manufacturing representative for the Korean market and another for the Taiwanese and Chinese markets. In 2011 we added support for Japan. We currently have a non exclusive representative supporting our marketing development in Europe. We must continue to develop appropriate marketing, sales, technical, customer service and distribution capabilities, or enter into agreements with third parties to provide these services to successfully market our products. A failure to develop these capabilities or obtain third-party agreements could adversely affect us.

 

Our success depends on our ability to retain key management personnel.

 

Our success depends in large part on our ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel. The loss of services of one of our executive officers or other key personnel, or our failure to attract and retain other executive officers or key personnel could have a material adverse effect on our business, operating results and financial condition. Although we have been successful in planning for and retaining highly capable and qualified successor management in the past, there can be no assurance that we will be able to do so in the future.

 

We have a history of operating losses and may incur losses in the future.

 

For the year ended December 31, 2012, we had a loss from operations of $264,000 compared to $642,000 for the year ended December 31, 2011. We provide no assurances that we will be able to operate profitably in the future. As of December 31, 2012, we had an accumulated deficit of approximately $9,099,000.

 

Management’s plans with respect to the objective of improving liquidity and profitability in future years include continuing to expand our business into new markets for our products and increasing our sales and presence in those markets which we presently serve. Management believes that the actions that will be taken by us provide the opportunity for improved liquidity and profitability. However, no assurances are made that such actions will result in sustained profitability.

  

Our competitors have far greater financial and other resources than we have.

 

The market for PVD materials is a substantial market with significant competition in both ceramic and metal materials. While we believe that our products enjoy certain competitive advantages in design, function, quality, and availability, considerable competition exists from well-established firms such as Materion Corporation, Kurt Lesker, Heraeus and Tosoh, all of which have more financial resources than us. We cannot provide assurance that developments by others will not render our products or technologies obsolete or less competitive.

 

Our revenues depend on patents and proprietary rights that may not be enforceable.

 

We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property. These may be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products may be produced or sold may not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information could adversely affect us.

 

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Rights we have to patents and pending patent applications may be challenged.

 

We have received, from the United States Patent and Trademark Office, a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method, and have also received a patent for a process to join two individual strongly linked super-conductors utilizing a melt processing technique. In the future, we may submit additional patent applications covering various applications. The patent applications that we may file in the future may not result in patents being issued, and any patents issued may not afford meaningful protection against competitors with similar technology, and may be challenged by third parties.

 

Because U.S. patent applications are maintained in secret until patents are issued, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Moreover, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed. We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial costs. Litigation may also be necessary to enforce any patents held by or issued to us or to determine the scope and validity of others' proprietary rights, which could result in substantial costs.

 

The rapid technological changes of our industry may adversely affect us if we do not keep pace with advancing technology.

 

The PVD market is characterized by rapidly advancing technology. Our success depends on our ability to keep pace with advancing technology and processes and industry standards. We have focused our development efforts on sputtering targets. We intend to continue to develop innovative materials and integrate those advances to the thin film coatings industry. However, our development efforts may be rendered obsolete by research efforts and technological advances made by others, and materials other than those we currently use may prove more advantageous.

 

Additional development of our products may be necessary due to uncertainty regarding development of markets.

 

Some of our products are in the early stages of commercialization and we believe that it will be several years before these products will have significant commercial end-use applications, and that significant additional development work may be necessary to improve the commercial feasibility and acceptance of these products. There can be no assurance that we will be able to commercialize any of the products currently under development.

 

To date, there has been no widespread commercial use of HTS products. Additionally, the market for the Thin Film Battery materials is still in its early stages. At present, we have several customers for the materials we produce for Thin Film Batteries.  Since we have begun producing materials for the Thin Film Battery market, we have experienced no problems securing the supplies needed to produce the materials.  We do not anticipate supply problems in the near future.  However, changes in production methods and advancing technologies could render our current products obsolete and new production protocols may require supplies that are less available in the marketplace, which may cause a slowing or complete halt to production as well as expanding costs which we may or may not be able to pass on to our customers. Some of our materials are in early stages of development for Thin Film Solar applications. The TFS market is expected to grow significantly during the next few years.

 

Changes in the strategies of key trade customers may adversely affect our business.

 

Our products are sold in a highly competitive global marketplace which continues to experience increased concentration. We may be negatively affected by changes in the strategies of our trade customers, such as inventory de-stocking, limitations on access to shelf space, delisting of our products, and other conditions. If we lose a key customer or if sales of our products to a key customer materially decrease, our financial condition and results of operations may be adversely affected.

 

If solar technology is not suitable for widespread adoption or takes longer to develop than we anticipate, our sales may not be sufficient to achieve profitability.

 

The Solar energy market is at a relatively early stage of development, and the extent to which solar modules will be widely adopted is uncertain. Although the industry has experienced rapid growth, recent overcapacity in the market has created difficulties for some of our current and potential customers in the Thin Film Solar industry. Adoption of our products by parts of this market is important to our long term growth. If the technology proves unsuitable for widespread adoption at economically attractive rates of return or if demand for Thin Film Solar modules fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient sales to achieve profitability.

 

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Our failure to comply with our debt covenants could have a material adverse effect on our business, financial condition or results of operations.

 

Our debt agreements contain certain covenants. A breach of any of these covenants could result in a default under the applicable agreement. If a default were to occur, we would likely seek a waiver of that default, attempt to reset the covenant, or refinance the instrument and accompanying obligations. If we were unable to obtain this relief, the default could result in the acceleration of the total due related to that debt obligation. If a default were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Any of these events, if they occur, could materially adversely affect our results of operations, financial condition, and cash flows.

 

A lack of credit and/or limited financing availability to the Company, its vendors, dealers, or end users could adversely affect our business.

 

Our liquidity and financial condition could be materially and adversely affected if our ability to borrow money from new or existing lenders to finance our operations is reduced or eliminated. Similar adverse effects may also result if we realize lessened credit availability from trade creditors. Additionally, many of our customers require availability of financing to facilitate the purchase of our products. As a result, a continuing period of reduced credit availability in the marketplace could have adverse effects on our business.

 

Take over defense provisions in Ohio law and our corporate governance documents may delay or prevent takeover attempts preventing our shareholders from realizing a premium on their stock.

 

Various provisions of the Ohio corporation laws as well as our corporate governance documents may inhibit changes in control not approved by our Board of Directors and may have the effect of depriving our investors of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover. In addition, the existence of these provisions may adversely affect the market price of our common stock. These provisions include:

 

· A requirement that a special meeting of the shareholders must be called by our Board of Directors, Chairman, the President or the holders of shares with voting powers of at least fifty percent (50%);

 

· Advanced notice requirements for shareholder proposals and nominations; and

 

· The availability of “blank check preferred stock.”

 

Our Board of Directors can use these and other provisions to prevent, delay or discourage a change in control of the company or a change in our management. Any such delay or prevention of a change in control of management could deter potential acquirers or prevent the completion of a takeover transaction to which our shareholders could receive a substantial premium over the current market price of our common stock, which may in turn limit the price investors might be willing to pay for our common stock.

 

Provisions in our Articles of Incorporation and Code of Regulations provide for indemnification of officers and directors which could require us to divert funds away from our business and operations.

 

Our Articles of Incorporation and Code of Regulation provide for the indemnification of our officers and directors. We may be required to advance costs incurred by an officer or director to pay judgments, fines and expenses incurred by an officer or director, including reasonable attorneys’ fees, as a result of actions or proceedings in which our officers and directors are involved by reason being or having been an officer or director of our company. Funds paid in satisfaction of judgments, fines, and expenses may be funds we need for operation and growth of our business.

 

10
 

  

The market for our common stock is limited, and as such our shareholders may have difficulty reselling their shares when desired or at attractive market prices.

 

Our stock price and our listing may make it more difficult for our shareholders to resell shares when desired or at attractive prices. In 2001, our stock began trading on The Over the Counter Bulletin Board, now known as the OTC Markets. Our common stock trades in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks. This has the effect of limiting the pool of potential purchases of our common stock at present price levels. Shareholders may find greater percentage spreads between bid and asked prices, and more difficulty in completing transactions and higher transaction costs when buying or selling our common stock than they would if our stock were listed on a major stock exchange, such as The New York Stock Exchange or The Nasdaq National Market.

 

Our common stock has been subject to the Securities and Exchange Commission’s “penny stock” regulations, which may limit the liquidity of common stock held by our shareholders .

 

At the present time, our common stock trades on the OTC Markets’ OTCQB Market Tier under the symbol “SCIA:OTCQB.” Our common stock trades on the OTC Bulletin Board. Based on its trading price, our common stock is considered a “penny stock” for purposes of federal securities laws, and therefore has been subject to regulations, which affected the ability of broker-dealers to sell our securities. Broker-dealers who recommend a “penny stock” to persons (other than established customers and accredited investors) must make a special written suitability determination and receive the purchaser’s written agreement to a transaction prior to sale.

 

If penny stock regulations apply to our common stock, it may be difficult to trade the stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers may be discouraged from effecting transactions in common stock because of the sales practice and disclosure requirements for penny stock. This could adversely affect the liquidity and/or price of our common stock, and impede the sale of the common stock in the secondary market.

 

The increasing costs of being a public company may strain our resources and impact our business, financial condition and results of operations.

 

As a public company, we are subject to reporting requirements of the Securities Exchange Act of 1934, as amended or the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls for financial reporting. We are required to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting.

 

These requirements may place a strain on our systems and resources in the future and may require us to hire additional accounting and financial staff with the appropriate public company experience and technical accounting knowledge. In addition, the failure to maintain such internal controls can result in our being unable to provide timely and reliable financial information which could potentially subject us to sanctions and investigations of the Securities and Exchange Commission or events could have an adverse effect on our business, financial condition or results of operation. Although we have taken steps to maintain our internal control structure as required by the Exchange Act and the Sarbanes-Oxley Act, we cannot provide any assurances that controlled deficiencies will not occur in the future.

 

Our Articles of Incorporation authorize us to issue additional shares of stock.

 

We are authorized to issue up to 15,000,000 shares of common stock, which may be issued by our board of directors for such consideration, as they may consider sufficient without seeking shareholder approval. The issuance of additional shares of common stock in the future may reduce the proportionate ownership and voting power of current shareholders.

 

Our Articles of Incorporation authorize us to issue up to 260,000 shares of preferred stock. The issuance of preferred stock in the future could create additional securities which would have dividend and liquidation preferences prior to the outstanding shares of common stock. These provisions could also impede a non-negotiated change in control.

 

11
 

 

We have not paid dividends on our common stock in the past and do not expect to do so in the future.

 

We have never declared or paid cash dividends on our shares of common stock and do not expect to do so in the foreseeable future. We intend to retain future earnings for use in the business. As a result, investors must rely on sales of the common stock after price appreciation, which may not occur, as the only way to realize future gains on their investments.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2. PROPERTIES.

 

Our office and manufacturing facilities are located at 2839 Charter Street, Columbus, Ohio, where we occupy approximately 32,000 square feet. We moved our operations into this facility in 2004. The lease on the property expires on August 16, 2014. We believe these facilities are in good condition and adequate for our current needs. We anticipate the need for additional manufacturing and warehouse space in 2014 or 2015.

 

We are current on all operating lease liabilities.

 

ITEM 3. LEGAL PROCEEDINGS.

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market for Common Stock

 

Our common stock currently trades on the OTC Markets’ OTCQB Market Tier under the symbol “SCIA:OTCQB.” The following table sets forth for the periods indicated the high and low bid quotations for our common stock.

 

    High     Low  
                 
Fiscal 2012                
                 
Quarter Ended March 31, 2012   $ 1.65     $ 1.10  
                 
Quarter Ended June 30, 2012     1.65       1.01  
                 
Quarter Ended September 30, 2012     2.40       1.02  
                 
Quarter Ended December 31, 2012     2.40       1.01  
                 
                 
Fiscal 2011                
                 
Quarter Ended March 31, 2011   $ 3.50     $ 2.30  
                 
Quarter Ended June 30, 2011     3.30       2.25  
                 
Quarter Ended September 30, 2011     3.30       1.01  
                 
Quarter Ended December 31, 2011     2.50       1.50  

 

 

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The quotations provided herein may reflect inter-dealer prices without retail mark-up, markdown, or commissions, and may not represent actual transactions.

 

Based on its trading price, our common stock is considered a “penny stock” for purposes of federal securities laws, and therefore has been subject to certain regulations, which are summarized below.

 

Our common stock is classified as a penny stock and as such, broker dealers trading our common stock will be subject to the disclosure rules for transactions involving penny stocks, which require the broker dealer to determine if purchasing our common stock is suitable for a particular investor. The broker dealer must also obtain the written consent of purchasers to purchase our common stock. The broker dealer must also disclose the best bid and offer prices available for our stock and the price at which the broker dealer last purchased or sold our common stock. These additional burdens imposed on broker dealers may discourage them from effecting transactions in our common stock, which could make it difficult for an investor to sell their shares.

 

Holders of Record

 

As of December 31, 2012, there were approximately 425 holders of record of our common stock and 3,826,898 shares outstanding. At December 31, 2012 there were approximately 45 holders of Series B Preferred stock and 24,152 shares outstanding.

 

Dividends

 

We have never paid cash dividends on our common stock and do not expect to pay any dividends in the foreseeable future. We intend to retain future earnings for use in the business.

 

Equity Compensation Plan Information

 

The following table sets forth additional information as of December 31, 2012, concerning shares of our common stock that may be issued upon the exercise of options and rights under our existing equity compensation plans and arrangements approved by our shareholders. The information includes the number of shares covered by and the weighted average exercise price of, outstanding options and other rights, and the number of shares remaining available for future grants (excluding the shares to be issued upon exercise of outstanding options and other rights).

 

   

 

 

Number of Securities to be issued upon exercise of outstanding options and rights

(a)

   

 

 

 

Weighted-average exercise price of outstanding options and rights

(b)

   

Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

 
                         
Equity compensation plans approved by security holders (1)     842,250     $ 4.83       268,000  

________________

(1) Equity compensation plans approved by shareholders include our 2011 Stock Option Plan, 2006 Stock Option Plan and 1995 Stock Option Plan.

 

 

ITEM 6. SELECTED FINANCIAL DATA.

 

Not applicable.

 

 

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

 

Executive Summary

 

During 2012 and 2011 we invested approximately $1.9 million in new equipment. We continued to develop transparent conductive oxide systems for the solar and glass industries and added domestic and international customers for these products. Despite short term uncertainties, the solar industry is projected to have strong growth for the next few decades. In addition, the Thin Film Solar (TFS) market, which we serve, is expected to gain market share during that period. Given current market opportunities, we continue to invest in research and development, marketing, and sales. These 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 industry throughout 2011 and 2012. In August 2012, a customer announced it was reorganizing its manufacturing operations which impacted our shipments for the remainder of 2012. We had no shipments to this customer during the final four months of 2012. This customer represented approximately 5% of our revenue in 2012. In December 2012, we were notified by this customer that it expected to restart operations during the second quarter of 2013. We continue to work closely with all of our customers and are positioned to meet their near term product requirements.

 

During the period from 2007 through 2012, we invested over $4 million in new equipment to increase our manufacturing capacity and expand our testing capabilities to position the Company to become a meaningful supplier of Zinc Oxide based Transparent Conductive Oxides (TCO) to the TFS and glass industries.

 

We continue to invest in developing new products for all current markets including our ongoing efforts in transparent conductive oxide systems. These efforts include accelerating time to market for those products and involve research and development expense beyond the scope of specific government grants and awards.

 

For the year ended December 31, 2012, we had total revenue of $8,757,149. This was a decrease of $395,555, or 4.3% when compared to 2011. Total revenue decreased primarily due to less contract revenue of approximately $379,000 in 2012 compared to 2011 as two grants drew to a close in 2011. Product revenue in 2012 remained constant despite lower revenue from a high priced raw material and the loss of a large customer which closed its manufacturing facility during the first quarter of 2011. We shipped approximately $450,000 to this customer during 2011 versus approximately $1.9 million during 2010. In 2012, the loss of this revenue was offset by sales to new and existing customers.

 

Gross profit was $1,657,162 for year ended December 31, 2012 compared to $1,533,692 for 2011, an increase of 8.1%. The increase in gross profit in 2012 was attributed to improved product mix and improved production efficiencies which resulted in lower production costs. Gross margin was 18.9% for 2012 compared to 16.8% in 2011.

 

We continue to invest in developing new products for the photonics and solar industries including transparent conductive oxide systems. These efforts include accelerating time to market for those products and involve research and development expense beyond the scope of specific government grants and awards. Research and development is integral to the sales process, which involves a long selling cycle of product trials prior to full production orders.

 

Loss from operations was $264,479 for the year ended December 31, 2012 compared to $641,675 for the year ended December 31, 2011. Loss applicable to common stock was $350,124 for the year ended December 31, 2012 compared to $914,758 for the year ended December 31, 2011. The improvement was attributed to the increase in gross profit and a reduction in research and development expenses. We had $136,889 in non-cash stock compensation expense during 2012 compared to $115,406 during 2011. These charges had a material effect on our Statements of Operations each year. These ongoing non-cash stock compensation charges will continue in 2013.

 

Given current market opportunities, we continue to invest in research and development, marketing, and sales. This has resulted in trial and qualification orders that were shipped to customers in the solar industry throughout 2012 and 2011. This should allow us to gain market share and be poised to receive large orders in Thin Film Solar applications as this market grows, which we anticipate could begin growing during the second half of 2013.

 

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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-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, the accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and license 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 profit 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. 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.

 

Year 2012 As Compared to Year 2011

 

Revenue

 

For the year ended December 31, 2012, we had total revenue of $8,757,149. This was a decrease of $395,555, or 4.3% when compared to 2011. Total revenue decreased primarily due to less contract revenue of approximately $379,000 in 2012 compared to 2011 as two grants drew to a close in 2011. Year over year product revenue remained constant in 2012 despite lower revenue from a high priced raw material and the loss of $450,000 of revenue from a large customer which closed its manufacturing facility during the first quarter of 2011. The loss of this customer’s revenue was offset by increased demand from new and existing customers. We anticipate that product revenue will be less in the first quarter of 2013 compared to the first quarter of 2012 due to a periodic inventory adjustment by one of our large customers. We also anticipate that contract research revenue will be less in 2013 due to the remaining grant coming to a close during the first quarter of 2013. We do not rely on contract revenue as a main part of our business and do not believe that this reduction will have an adverse effect on our business.

 

Revenue from product sales is recognized upon shipment to customers. Provisions for discounts and rework costs for returns are established when products are shipped based on historical experience. Customer deposits represent cash received in advance of revenue earned.

 

Revenue from contract research provided for third parties is recognized on the percentage of completion method. Contract research revenue is recognized during the period qualifying expenses are incurred for the research that is performed as set forth under the terms of the grant award agreements.

 

Gross Profit

 

Gross profit was $1,657,162 for year ended December 31, 2012, compared to $1,533,692 for 2011, an increase of 8.1% despite the decrease in revenue. The increase in gross profit in 2012 was attributed to improved product mix and lower production costs due to improved manufacturing efficiencies. Gross profit was 18.9% of total revenue for 2012 compared to 16.8% in 2011.

 

15
 

 

General and Administrative Expense

 

General and administrative expense for the year ended December 31, 2012 increased to $1,109,197 from $1,042,865 for the year ended December 31, 2011, or 6.4%. General and administrative expense for 2012 included higher non-cash stock compensation expense of approximately $53,000 and higher professional fees of approximately $14,000. Also included in 2012 was expense of $30,000 to increase the allowance for doubtful accounts. These increases offset savings of approximately $30,000 related to compensation, rent and office expense. We continue to monitor all expenses.

 

Professional Fees

 

Included in General and administrative expense was $202,690 and $192,415 for professional fees for the years ended December 31, 2012 and 2011, respectively. An increase in accounting fees was partially offset by lower professional fees in other areas. These expenses were primarily related to SEC compliance costs for legal, accounting and stockholder relations’ fees.

 

Research and Development Expense

 

Research and development expense for the year ended December 31, 2012 was $309,816 compared to $619,940 during 2011, a decrease of 50.0%. Expense related to developing innovative transparent conductive oxide systems was lower by approximately $165,000 during 2012. In 2011 we worked through initial material production issues and implemented various test procedures. Additional savings during 2012 of approximately $123,000 included reductions in spending in other research areas due to less material required and lower compensation expense. A non-cash impairment charge of approximately $39,000 was included in 2011.

 

Marketing and Sales Expense

 

Marketing and sales expense for the year ended December 31, 2012 decreased 1.9% to $502,628 from $512,562 for the same period in 2011. The decrease was related to lower commissions to our outside manufacturing sales representatives and less travel expense.

 

Stock Compensation Expense

 

Included in operating expenses were non cash stock based compensation costs of $136,889 and $111,402 for the years ended December 31, 2012 and 2011, respectively. Compensation cost for all stock-based awards is based on the grant date fair value and recognized over the required service (vesting) period . Unrecognized non cash stock based compensation expense related to operating expense was $505,907 as of December 31, 2012 and will be recognized through 2017.

 

Interest Expense

 

Interest expense was $86,693 and $84,198 for the years ended December 31, 2012 and 2011, respectively. The slight increase was due to the addition of loan proceeds received from an agency of the State of Ohio and a promissory note from our bank.

 

Income Tax Benefit/Expense

 

Income tax benefit for the year ended December 31, 2012 was $27,348. Income tax expense for the year ended December 31, 2011 was $165,899. The tax benefit for the year ended December 31, 2012, primarily related to the reversal of an accrual. During 2011, we determined a full valuation allowance against our remaining deferred tax assets was necessary. As a result, we recorded a non-cash charge of $156,000 during 2011. The valuation allowance does not impact our ability to utilize our net operating loss carryforwards to offset taxable earnings in the future.

 

Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes ("ASC 740"). Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered.

 

Loss Applicable to Common Stock

 

Loss applicable to common stock was $350,124 for the year ended December 31, 2012 compared to a loss of $914,758 for the year ended December 31, 2011. This improvement was attributed to the increase in gross profit, lower operating expense and less income tax expense during 2012 compared to 2011. In addition, we had $136,889 and $115,406 in non-cash stock compensation expenses during 2012 and 2011, respectively. These charges had a material effect on our Statement of Operations.

 

16
 

 

 

Common Stock

 

The following schedule represents our outstanding common stock during the period of 2013 through 2019 assuming all outstanding stock options are exercised during the year of expiration. Based on outstanding shares at December 31, 2012, if each shareholder exercises his or her options, it would increase our common shares by 842,250 to 4,669,148 by December 31, 2019. Assuming all such options are exercised in the year of expiration, the effect on shares outstanding is illustrated as follows:

 

    Options     Potential     Weighted  
    due to     shares     Average  
Year   expire     outstanding     Exercise Price  
2013     30,250       3,857,148     $ 1.00  
2014     180,000       4,037,148     $ 4.36  
2015     140,000       4,177,148     $ 2.97  
2016     36,000       4,213,148     $ 3.25  
2017     -       4,213,148       -  
2018     6,000       4,219,148     $ 3.10  
2019     450,000       4,669,148     $ 6.00  

 

Liquidity and Capital Resources

 

Cash

 

As of December 31, 2012, cash on-hand was $630,819. Cash was $798,069 at December 31, 2011. In 2012, we invested approximately $588,000 in new production equipment. We received net proceeds of approximately $472,000 from a loan with an agency of the State of Ohio and our bank for this equipment. We believe, based on forecasted sales and expenses, that cash flow from operations will be adequate to sustain operations at least through December 31, 2013.

 

Working Capital

 

At December 31, 2012, working capital was $802,187 compared to $812,398 at December 31, 2011, a decrease of $10,211 or 1.3%. As discussed below cash decreased approximately $167,000 for the twelve months ended December 31, 2012. Accounts receivable decreased approximately $4,000. Inventories decreased approximately $230,000 due to less high priced raw material on hand at December 31, 2012 compared to December 31, 2011. Prepaid expenses increased approximately $144,000 due to payments made late in 2012 for raw material that was delivered during the first quarter of 2013. Accounts payable was lower by approximately $103,000 at December 31, 2012 compared to December 31, 2011 due to inventory received late in 2011 that was paid in 2012. Customer deposits increased approximately $59,000 due to deposits received late in 2012 for orders scheduled to ship in the first quarter of 2013. Current capital lease obligations decreased by approximately $71,000 while current notes payable decreased by approximately $115,000 due to scheduled monthly payments.

 

Cash from Operations

 

Net cash provided by operating activities was approximately $437,000 for the year ended December 31, 2012 and net cash used by operating activities was approximately $3,000 for the year ended December 31, 2011. In addition to the changes in various current assets and liabilities mentioned above, non cash expenses for depreciation, accretion and amortization increased to approximately $588,000 during 2012 from $538,000 during 2011, an increase of 9.2%. This increase is related to the purchase of additional machinery and equipment. Included in expenses were non cash stock based compensation costs of $136,889 and $115,406, and non cash inventory adjustments of approximately $42,000 and $8,000 for the years ended December 31, 2012 and 2011, respectively. A non cash charge during 2012 of $30,000 increased the allowance for doubtful accounts. Other non cash charges during 2011 were patent impairment of approximately $39,000 and deferred income taxes of $156,000.

 

17
 

 

Cash from Investing Activities

 

Cash of approximately $588,000 and $1,095,000 was used for investing activities during the years ended December 31, 2012 and 2011, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity and new product lines.

  

Cash from Financing Activities

 

Cash of approximately $17,000 was used in financing activities for the year ended December 31, 2012. Principal payments to third parties for capital lease obligations and notes payable approximated $950,000. Proceeds from notes payable were approximately $934,000 of which $462,000 was received from the Ohio Department of Development and used to pay a portion of the Note from The Huntington National Bank.

 

During the year ended December 31, 2011 cash of approximately $384,000 was provided by financing activities. Principal payments to third parties for capital lease obligations and notes payable approximated $480,000. Proceeds received from the exercise of common stock options were $41,350. Proceeds from notes payable were approximately $847,000 and were used to fund equipment. A payment of cumulative dividends on preferred stock was approximately $24,000. We incurred new capital lease obligations of approximately $185,000 for new production equipment during 2011.

 

Debt Outstanding

 

Total debt outstanding decreased during 2012 from approximately $1,775,000 to approximately $1,758,000, or approximately 1%. We paid cash of approximately $292,000 towards principal amounts of capital lease obligations during 2012 reducing capital lease obligations outstanding at December 31, 2012 to approximately $385,000. We received proceeds from notes payable during 2012 of approximately $934,000, of which $462,000 was used to reduce a short term note payable from our bank. In addition, we paid cash of approximately $196,000 towards principal amounts of notes payable.

 

Liquidity

 

We have forecasted revenues and related costs as well as investing plans and financing needs to determine our liquidity to meet cash flow requirements and believe we will have sufficient liquidity at least through December 31, 2013.  This forecast was based on current cash levels and debt obligations, and best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the industry in which we operate. Our ability to maintain current operations is dependent upon our ability to achieve these forecasted results, which we believe will occur. 

 

We do not currently have any available sources of funding.  Our revolving line of credit arrangement with our senior lender expired on April 13, 2012.  There was no balance outstanding under this arrangement at maturity.  We did not have the need to draw on the revolving line of credit since the original commitment date of January 13, 2009.  We do not anticipate the need for a similar credit facility in 2013; although we may pursue revolving credit arrangements as working capital requirements increase. Our ability to obtain a new line, if deemed necessary, is not certain.

 

Should projected sales levels fall below the minimum levels expected to be achievable, additional cost reduction actions could be instituted which might facilitate the continued operation of the Company but the achievement of such reductions and the timing of their impact are not readily predictable.

 

We believe, based upon existing cash levels and expectations of operating results, that we will have sufficient liquidity to continue operations throughout 2013.

 

Government Grants and Contracts

 

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. Revenue totaled $217,260 during 2012 compared to $263,008 during 2011. Total expenditures for the project through December 31, 2012 were $685,230. The work on the contract is expected to conclude during the first quarter of 2013.

 

During the third quarter of 2009 we received notification from the Department of Energy (DOE) of an Assistance Agreement in the amount of 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.” Revenue was $2,278 during, 2012 compared to $290,645 during 2011. Total expenditures of the project through December 31, 2012 were $643,869. The work on the contract concluded in late 2011, with the exception of final reporting, which was completed in 2012.

 

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. 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.” Revenue was $6,831 during 2012 and $51,934 during 2011. Total expenditures of the project through December 31, 2012 were $748,683. The work on the contract began during the third quarter of 2008 and was completed, with the exception of final reporting, during 2011. The final reporting was completed during 2012.

 

18
 

  

We anticipate that contract research revenue will be less in 2013. We expect the remaining active grant to be completed during the first quarter of 2013. We do not rely on contract revenue as a main part of our business and do not believe that this reduction will have an adverse effect on our business.

 

The granting agency may suspend or terminate the award in whole or in part if we fail to materially comply with the terms and conditions. We expect to complete the award while complying with the terms and conditions.

 

Inflation

 

We believe there has not been a significant impact from inflation on our operations during the past three fiscal years.

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

 

This document contains forward-looking statements that reflect the views of management with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. See “Risk Factors” above. These uncertainties and other factors include, but are not limited to, the words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions which identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Our balance sheets as of December 31, 2012 and 2011, and the related statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2012 and 2011, together with the Report of Independent Registered Public Accounting Firm thereon appear beginning on Page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of the Company’s Principal Executive Officer and Principal Accounting 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 Principal Executive Officer and Principal Accounting Officer have concluded that as of December 31, 2012, 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 Principal Executive Officer and Principal Accounting 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 operations, changes in shareholder’s equity and cash flows for all periods presented.

 

19
 

 

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.

 

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 are 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.

 

Management's Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2012. The matter involving internal controls over financial reporting that management considered to be a material weakness under the standards of the Public Company Accounting Oversight Board (PCAOB) was 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 should 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.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and Rule 15d-15(f)) that occurred in the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

20
 

 

ITEM 9B. OTHER INFORMATION

 

None.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The information required by this item is included under the captions, “ Election of Directors ,” “ Executive Officers ” and “ Section 16(a) Beneficial Ownership Reporting Compliance ” in our proxy statement relating to our 2013 Annual Meeting of Shareholders scheduled to be held on June 14, 2013, and is incorporated herein by reference.

 

We have a Business Conduct Policy applicable to all employees of SCI. Additionally, the Chief Executive Officer ("CEO") and all senior financial officers, including the principal financial officer, the principal accounting officer or controller, or any person performing a similar function (collectively, the "Senior Financial Officers") are bound by the provisions of our code of ethics relating to ethical conduct, conflicts of interest, and compliance with the law. The code of ethics is posted on our website at http://www.sciengineeredmaterials.com/investors /main/corpgov.htm.

 

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendment to, waiver of, any provision of this code of ethics by posting such information on our website at the address and location specified above.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The information required by this item is included under the caption “ Executive Compensation ” in our proxy statement relating to our 2013 Annual Meeting of Shareholders scheduled to be held on June 14, 2013, and is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information required by this item is included under the captions “ Ownership of Common Stock by Directors and Executive Officers” and “ Ownership of Common Stock by Principal Shareholders ” in our proxy statement relating to our 2013 Annual Meeting of Shareholders scheduled to be held on June 14, 2013, and is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information required by this item is included under the caption “ Certain Relationships and Related Transactions, and Director Independence ” in our proxy statement relating to our 2013 Annual Meeting of Shareholders scheduled to be held on June 14, 2013, and is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information required by this item is included under the caption “ Fees of the Independent Public Accounting Firm for the year ended December 31, 2012” in our proxy statement relating to our 2013 Annual Meeting of Shareholders scheduled to be held on June 14, 2013, and is incorporated herein by reference.

 

 

21
 

 

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

  Exhibit Exhibit
  Number Description
     
  3(a) Certificate of Second Amended and Restated Articles of Incorporation of Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(a) to the Company’s initial Form 10-SB, filed on September 28, 2000)
     
  3(b) Restated Code of Regulations of Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(b) to the Company’s initial Form 10-SB, filed on September 28, 2000)
     
  3(c) Amendment to Articles of Incorporation recording the change of the corporate name to SCI Engineered Materials, Inc.  (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB filed November 7, 2007).
     
  4(a) SCI Engineered Materials, Inc. 2011 Stock Incentive Plan (Incorporated      by reference to the Company’s Definitive Proxy Statement for the 2011  Annual Meeting of Shareholders held on June 10, 2011, filed April 28,  2011).
     
  4(b) Superconductive Components, Inc. 2006 Stock Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders held on June 9, 2006, filed May 1, 2006).
     
  4(c) Description of the Material Terms of the Stock Option Grant and Cash Bonus Plan for Executive Officers (Incorporated by reference to the Company’s Current Report on Form 8-K, dated June 19, 2006, filed June 23, 2006)
     
  4(d) F orm of Incentive Stock Option Agreement under the Superconductive Components, Inc. 2006 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2006, filed June 23, 2006).
     
  4(e) Form of Non-Statutory Stock Option Agreement under the    Superconductive Components, Inc. 2006 Stock Incentive Plan  (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report  on Form 8-K dated June 19, 2006, filed June 23, 2006).
     
  4(f) Description of the Material Terms of the Stock Option Grant for Executive Officers and Board of Directors (Inc orporated by reference to the Company’s Current Report on Form 8-K dated January 2, 2009, filed January 6, 2009).
     
  4(g) Fourth Amended and Restated 1995 Stock Option Plan (Incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form S-8 (Registration No. 333-97583), filed on August 2, 2002)
     
  4(h) Form of Non-Statutory Stock Option Agreement Under the Superconductive Components, Inc. Fourth Amended and Restated 1995 Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 22, 2005)

 

 

22
 

 

     
  10(a) Employment Agreement entered into as of February 26, 2002, between Daniel Rooney and the Company (Incorporated by reference to Exhibit 10(a) to the Company’s Registration Statement on Form SB-2 (Registration No. 333-131605), filed on February 6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)
     
  10(b) Lease Agreement between Superconductive Components, Inc. and Duke Realty Ohio dated as of September 29, 2003, with Letter of Understanding dated February 17, 2004 (Incorporated by reference to Exhibit 10(a) to the Company’s Quarterly Report on Form 10-QSB, filed on March 31, 2004)
     
  10(c) License Agreement with Sandia Corporation dated February 26, 1996 (Incorporated by reference to Exhibit 10(f) to the Company’s Form 10-SB Amendment No. 1, filed on January 3, 2001)
     
  10(d) Nonexclusive License with The University of Chicago (as Operator of Argonne National Laboratory) dated October 12, 1995 (Incorporated by reference to Exhibit 10(g) to the Company’s Form 10-SB Amendment No. 1, filed on January 3, 2001)
     
  10(e) Nonexclusive License with The University of Chicago (as Operator of Argonne National Laboratory) dated October 12, 1995 (Incorporated by reference to Exhibit 10(h) to the Company’s Form 10-SB Amendment No. 1, filed on January 3, 2001)
     
  10(f) Ohio Department of Development Third Frontier Action Fund Award dated February 20, 2004 (Incorporated by reference to Exhibit 10(o) to the Company’s Annual Report on Form 10-KSB, filed on March 30, 2004)
     
  10(g) Ohio Department of Development Third Frontier Advanced Energy Program Award (Incorporated by reference to the Company’s Current Report on Form 8-K, filed December 16, 2008).
     
  10(h) Business Loan Agreement between the Company and The Huntington National Bank, dated as of January 13, 2009 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed January 23, 2009).
     
  10(i) Notification from the Ohio Department of Development Third Frontier Photovoltaic Program of grant to be awarded dated December 17, 2009 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed December 22, 2009).
     
  10(j) Description of amendment to the Loan Agreement between the Company and The Ohio Air Quality Development Authority (Incorporated by reference to the Company’s Current Report on Form 8-K, dated March 26, 2012).
     
  10(k) Description of amendment to the Loan Agreement between the Company and the Ohio Department of Development (Incorporated by reference to the Company’s Current Report on Form 8-K, dated April 9, 2012).
     
  10(l) Description of amendment to the Loan Agreement between the Company and The Ohio Air Quality Development Authority (Incorporated by reference to the Company’s Current Report on Form 8-K, filed July 10, 2012).

 

 

23
 

 

     
  10(m) Description of resolution to the Loan Agreement between the Company and The Ohio Air Quality Development Authority (Incorporated by reference to the Company’s Current Report on Form 8-K, filed October 19, 2012).
     
  10(n) Description of Business Loan Agreement between the Company and The Huntington National Bank, dated as of October 15, 2012 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed October 19, 2012).
     
  10(o) Description of amendment to the Loan Agreement between the Company and the Ohio Development Services Agency, formerly known as the Department of Development (Incorporated by reference to the Company’s Current Report on Form 10-K, dated March 19, 2013).
     
  14(a) SCI Engineered Materials Code of Ethics for the Chief Executive Officer and Chief Financial Officer (Incorporated by reference to the Company’s Current Report via the Company’s website at www.sciengineeredmaterials.com)
     
  22(a) Description of submission of matters to a vote of security holders (Incorporated by reference to the Company’s Current Report on Form 8-K, dated June 14, 2012).
     
  22(b) Description of submission of matters to a vote of security holders for the election of five members to the board of directors (Incorporated by reference to the Company’s Current Report on Form 8-K, dated June 13, 2011).
     
  23 Consent of Independent Registered Public Accounting Firm
     
  24 Powers of Attorney.
     
  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 March 19, 2013, entitled “SCI Engineered Materials, Inc., Reports Fourth Quarter and Full Year 2012 Results.”
     
  101 The Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting  Language): (i) Consolidated Balance Sheets at December 31, 2012 and  December 31, 2011 (ii) Consolidated Statements of Operations for the  year ended December 31 2012 and 2011, (iii)  Consolidated Statement of Changes in Equity for the years ended December 31, 2012 and December 2011, (iv) Consolidated Statements of Cash Flows for the year ended December 31, 2012 and 2011, and (v) Notes to Financial  Statements.
     

 _____________

* Filed herewith

 

 

24
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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:  March 19, 2013 By: /s/ Daniel Rooney
    Daniel Rooney, Chairman of the Board of Directors,
    President and Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 19 th day of March 2013.

 

 

Signature   Title
     
     
/s/ Daniel Rooney   Chairman of the Board of Directors, President, and
    Chief Executive Officer
    (principal executive officer)
     
/s/ Gerald S. Blaskie   Vice President and Chief Financial Officer
Gerald S. Blaskie   (principal financial officer and principal accounting officer)
     
Robert J. Baker*   Director
Robert J. Baker    
     
Edward W. Ungar*   Director
Edward W. Ungar    
     
Robert H. Peitz*   Director
Robert H. Peitz    
     
Walter J. Doyle*   Director
Walter J. Doyle    

  

*By: /s/ Daniel Rooney  
  Daniel Rooney, Attorney-in-Fact  

 

25
 

 

INDEX TO FINANCIAL STATEMENTS

 

 

    Page
Report of Independent Registered Public Accounting Firm   F-1
     
Balance Sheets   F-2
     
Statements of Operations   F-4
     
Statements of Shareholders’ Equity   F-5
     
Statements of Cash Flows   F-6
     
Notes to Financial Statements   F-7

 

 

 

 

26
 

 

Report of Independent Registered Public Accounting Firm

 

 

Board of Directors and Shareholders

SCI Engineered Materials, Inc.

Columbus, Ohio

 

 

We have audited the accompanying balance sheets of SCI Engineered Materials, Inc. (the “Company”) as of December 31, 2012 and 2011, and the related statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

 

 

 

 

Crowe Horwath LLP

Columbus, Ohio

March 19, 2013

 

F- 1
 

 

 PART I.  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
 SCI ENGINEERED MATERIALS, INC.
 
 BALANCE SHEETS
 
DECEMBER 31, 2012 AND 2011

  

ASSETS  
             
    2012     2011  
             
Current Assets            
    Cash   $ 630,819     $ 798,069  
    Accounts receivable                
      Trade, less allowance for doubtful accounts of $45,000 and $15,000, respectively     439,627       488,031  
      Contract     12,427       23,962  
      Other     1,248       5,610  
    Inventories     815,075       1,045,503  
     Prepaid expenses     209,422       65,292  
       Total current assets     2,108,618       2,426,467  
                 
                 
Property and Equipment, at cost                
    Machinery and equipment     7,015,504       6,135,664  
    Furniture and fixtures     137,911       134,666  
    Leasehold improvements     317,870       317,870  
    Construction in progress     12,195       323,326  
      7,483,480       6,911,526  
    Less accumulated depreciation     (4,254,302 )     (3,692,401 )
      3,229,178       3,219,125  
                 
                 
Other Assets                
    Deposits     15,332       18,425  
    Deferred financing fees     38,543       51,779  
    Intangibles     12,889       15,453  
       Total other assets     66,764       85,657  
                 
TOTAL ASSETS   $ 5,404,560     $ 5,731,249  

 

 The accompanying notes are an integral part of these financial statements. 

 

F- 2
 

 

 

SCI ENGINEERED MATERIALS, INC.
 
BALANCE SHEETS
 
DECEMBER 31, 2012 AND 2011
 
LIABILITIES AND SHAREHOLDERS' EQUITY

 

    2012     2011  
                 
Current Liabilities                
    Capital lease obligations, current portion   $ 221,366     $ 292,488  
    Notes payable, current portion     316,571       432,064  
    Accounts payable     260,531       363,790  
    Customer deposits     313,745       255,122  
    Accrued compensation     76,646       56,610  
    Accrued expenses and other     117,572       213,995  
        Total current liabilities     1,306,431       1,614,069  
                 
Capital lease obligations, net of current portion     163,331       384,697  
Notes payable, net of current portion     1,057,104       665,706  
        Total liabilities     2,526,866       2,664,472  
                 
Commitments and contingencies                
                 
Shareholders' Equity                
  Convertible preferred stock, Series B, 10% cumulative,                
      nonvoting, no par value, $10 stated value, optional                
      redemption at 103%;  optional shareholder conversion 2 shares for 1;                
      24,152 shares issued and outstanding     417,830       393,678  
  Common stock, no par value, authorized 15,000,000 shares;                
     3,826,898 and 3,802,898 shares issued and outstanding, respectively     9,800,100       9,766,740  
  Additional paid-in capital     1,758,358       1,678,981  
  Accumulated deficit     (9,098,594 )     (8,772,622 )
      2,877,694       3,066,777  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 5,404,560     $ 5,731,249  
                 

 

The accompanying notes are an integral part of these financial statements.

 

 

F- 3
 

 

SCI ENGINEERED MATERIALS, INC.
 
STATEMENTS OF OPERATIONS
 
YEARS ENDED DECEMBER 31, 2012 AND 2011

 

    2012     2011  
                 
Product revenue   $ 8,530,780     $ 8,547,118  
Contract research revenue     226,369       605,586  
Total revenue     8,757,149       9,152,704  
                 
Cost of product revenue     6,913,807       7,187,255  
Cost of contract research revenue     186,180       431,757  
Total cost of revenue     7,099,987       7,619,012  
                 
Gross profit     1,657,162       1,533,692  
                 
General and administrative expense     1,109,197       1,042,865  
                 
Research and development expense     309,816       619,940  
                 
Marketing and sales expense     502,628       512,562  
                 
Loss from operations     (264,479 )     (641,675 )
                 
Interest income     1,123       2,736  
Interest expense     (86,693 )     (84,198 )
(Loss) gain on disposal of equipment     (1,441 )     259  
Miscellaneous, net     (1,830 )     (1,829 )
Other expense     (88,841 )     (83,032 )
                 
Loss before income taxes     (353,320 )     (724,707 )
                 
Income tax (benefit) expense     (27,348 )     165,899  
                 
Net loss     (325,972 )     (890,606 )
                 
Dividends on preferred stock     (24,152 )     (24,152 )
                 
LOSS APPLICABLE TO COMMON STOCK   $ (350,124 )   $ (914,758 )
                 
Earnings per share - basic and diluted                
  (Note 6)                
                 
Loss per common share                
   Basic   $ (0.09 )   $ (0.24 )
  Diluted   $ (0.09 )   $ (0.24 )
                 
Weighted average shares outstanding                
  Basic     3,814,996       3,781,717  
   Diluted     3,814,996       3,781,717  
                 

 

The accompanying notes are an integral part of these financial statements.

 

 

F- 4
 

  

SCI ENGINEERED MATERIALS, INC.
 
 STATEMENTS OF SHAREHOLDERS' EQUITY
 
YEARS ENDED DECEMBER 31, 2012 AND 2011

 

 

    Convertible           Additional              
    Preferred Stock,     Common     Paid-In     Accumulated        
    Series B     Stock     Capital     Deficit     Total  
Balance 1/1/11   $ 393,678     $ 9,725,390     $ 1,587,727     $ (7,882,016 )   $ 3,824,779  
                                         
Accretion of cumulative dividends     24,152       -       (24,152 )     -       -  
                                         
Stock based compensation expense (Note 2F)     -       -       115,406       -       115,406  
                                         
Proceeds from exercise of stock options (Note 6)     -       41,350       -       -       41,350  
                                         
Payment of cumulative dividends     (24,152 )     -       -       -       (24,152 )
                                         
Net loss     -       -       -       (890,606 )     (890,606 )
                                         
Balance 12/31/11   $ 393,678     $ 9,766,740     $ 1,678,981     $ (8,772,622 )   $ 3,066,777  
                                         
Accretion of cumulative dividends     24,152       -       (24,152 )     -       -  
                                         
Stock based compensation expense (Note 2F)     -       -       103,529       -       103,529  
                                         
Common stock issued     -       33,360       -       -       33,360  
                                         
Net loss     -       -       -       (325,972 )     (325,972 )
                                         
Balance 12/31/12   $ 417,830     $ 9,800,100     $ 1,758,358     $ (9,098,594 )   $ 2,877,694  

 

The accompanying notes are an integral part of these financial statements.

 

 

F- 5
 

SCI ENGINEERED MATERIALS, INC.
           
STATEMENTS OF CASH FLOWS
           
YEARS ENDED DECEMBER 31, 2012 AND 2011

 

    2012     2011  
CASH FLOWS FROM OPERATING ACTIVITIES                
  Net loss   $ (325,972 )   $ (890,606 )
  Adjustments to reconcile net loss to net cash                
   provided by (used in) operating activities:                
    Depreciation and accretion     585,085       534,996  
    Amortization     2,564       3,088  
    Stock based compensation     136,889       115,406  
    Patent impairment     -       38,726  
    Loss (gain) on disposal of equipment     1,441       (259 )
    Deferred income taxes     -       156,000  
    Inventory reserve     42,365       7,635  
    Change in allowance for doubtful accounts     30,000       (530 )
    Changes in operating assets and liabilities:                
        Accounts receivable     34,301       164,944  
        Inventories     188,063       291,288  
        Prepaid expenses     (144,130 )     (13,922 )
        Other assets     16,329       (48,575 )
        Accounts payable     (103,260 )     (209,950 )
        Accrued expenses and customer deposits     (26,404 )     (151,456 )
              Net cash provided by (used in) operating activities     437,271       (3,215 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
  Proceeds on sale of equipment     -       425  
  Purchases of property and equipment     (587,939 )     (1,095,289 )
              Net cash used in investing activities     (587,939 )     (1,094,864 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
  Proceeds from exercise of stock options     -       41,350  
  Proceeds from notes payable     933,729       846,747  
  Principal payments on capital lease obligations and notes payable     (950,311 )     (479,549 )
  Payment for accumulated dividends on preferred stock     -       (24,152 )
              Net cash (used in) provided by financing activities     (16,582 )     384,396  
                 
NET DECREASE IN CASH   $ (167,250 )   $ (713,683 )
                 
CASH - Beginning of year     798,069       1,511,752  
                 
CASH - End of year   $ 630,819     $ 798,069  
                 
SUPPLEMENTAL DISCLOSURES OF CASH                
 FLOW INFORMATION                
  Cash paid during the year for:                
    Interest   $ 86,693     $ 84,198  
    Income taxes   $ 455     $ 713  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH                
 INVESTING AND FINANCING ACTIVITIES                
  Property and equipment purchased by capital lease   $ -     $ 185,000  
  Increase in asset retirement obligation   $ 8,640     $ 6,624  

 

The accompanying notes are an integral part of these financial statements.

 

F- 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 operates in the Physical Vapor Deposition (“PVD”) industry in which it develops, commercializes technologies, and manufactures ceramics and metals for advanced applications in: Photonics, Solar, Thin Film Battery, and, to a lesser extent High Temperature Superconductor (“HTS”) materials.

 

Note 2. Summary of Significant Accounting Policies

 

A. Cash - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash.

 

B. Fair Value of Financial Instruments - The estimated fair value of amounts reported in the financial statements have been determined using available market information and valuation methodologies, as applicable (see Note 9).

 

C. Concentrations of Credit Risk - The Company’s cash balances, which are at times in excess of federally insured levels, are maintained at a large regional bank and a global investment banking group, and are continually monitored to minimize the risk of loss. The Company grants credit to most customers, who are varied in terms of size, geographic location and financial strength. Customer balances are continually monitored to minimize the risk of loss.

 

The Company’s two largest customers accounted for 48% and 15% of total revenue in 2012. These two customers represented 30% of the Accounts Receivable trade balance at December 31, 2012. The Company subsequently collected all outstanding accounts receivables as of December 31, 2012 from these customers. A third customer had a balance of approximately $114,000, or 24% of the Accounts Receivable trade balance at December 31, 2012.

 

The Company’s two largest customers accounted for 47% and 13% of total revenue in 2011. These two customers represented 46% of the Accounts Receivable trade balance at December 31, 2011.

 

D. Accounts Receivable - The Company extends unsecured credit to customers under normal trade agreements, which require payment within 30 days. The Company does not charge interest on delinquent trade accounts receivable. Unless specified by the customer, payments are applied to the oldest unpaid invoice. Accounts receivable are presented at the amount billed.

 

Management estimates an allowance for doubtful accounts, which was approximately $45,000 and $15,000 as of December 31, 2012 and 2011, respectively. This estimate is based upon management’s review of delinquent accounts and an assessment of the Company’s historical evidence of collections. Specific accounts are charged directly to the reserve when management obtains evidence of a customer’s insolvency or otherwise determines that the account is uncollectible.

 

 

F- 7
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

E. Inventories - Inventories are stated at the lower of cost or market on an acquired or internally produced lot basis, and consist of raw materials, work-in-process and finished goods. Cost includes material, labor, freight and applied overhead. Inventory reserves are established for obsolete inventory, lower of cost or market, and excess inventory quantities based on management’s estimate of net realizable value. The Company had an inventory reserve of $100,000 at December 31, 2012 and $57,635 at December 31, 2011.

 

F. Property and Equipment - Property and equipment are carried at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the assets. Useful lives range from three years on computer equipment to sixteen years on certain equipment. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. Depreciation expense totaled $576,445 and $528,372 for the years ended December 31, 2012 and 2011, respectively. Expenditures for renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to operations as incurred. Construction in progress of approximately $12,000 at December 31, 2012 consisted of two pieces of equipment that were placed in service during the first quarter of 2013.

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. There was no property and equipment considered impaired during 2012 or 2011.

 

G. Deferred Financing Costs - Deferred financing costs are amortized over the term of the related debt using the straight-line method, the result of which is not materially different from the use of the interest method.  Deferred financing costs totaled $47,982 and $57,421 at December 31, 2012 and 2011, respectively.  The related amortization expense of these costs for the years ended December 31, 2012 and 2011 was $9,439 and $8,652, respectively, and is included in interest expense on the statements of operations.

 

H. Intangible Assets - The Company reviews intangible assets for impairment and performs detailed testing whenever impairment indicators are present. If necessary, an impairment loss is recorded for the excess of carrying value over fair value. As a result of this review, the Company recorded a non-cash impairment charge of approximately $39,000 during 2011.

 

Licenses - The Company secured licenses to produce various superconductive materials for periods up to the expiration of the applicable patents. The license fees were amortized over the expected life of the agreement or applicable patent, which was seventeen years. Cost and accumulated amortization of licenses at December 31, 2012 were $21,000. Cost and accumulated amortization of licenses at December 31, 2011 were $21,000 and $20,265, respectively. Amortization expense was $735 in 2012 and $1,259 during 2011.

 

 

 

F- 8
 

 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

Patent - The Company has secured patents for manufacturing processes used in its operations. Costs incurred to secure the patents have been capitalized and are being amortized over the life of the patents. Cost and accumulated amortization of the patents at December 31, 2012 were $36,473 and $23,584 respectively. Cost and accumulated amortization of the patents at December 31, 2011 were $36,473 and $21,755 respectively. Amortization expense was approximately $1,830 for the years ended December 31, 2012 and 2011. Amortization expense is estimated to be at least $1,830 for each of the next five years.

 

I. Revenue Recognition - Revenue from product sales is recognized upon shipment to customers. Provisions for discounts and rework costs for returns are established when products are shipped based on historical experience. Customer deposits represent cash received in advance of revenue earned.

 

Revenue from contract research provided for third parties is recognized on the percentage of completion method. Contract research revenue is recognized during the period in which qualifying expenses are incurred for the research that is performed as set forth under the terms of the grant award agreements.

 

J. Stock Based Compensation - Compensation cost for all stock-based awards is based on the grant date fair value and is recognized over the required service (vesting) period. Non cash stock based compensation expense was $103,529 and $115,406 for the years ended December 31, 2012 and 2011, respectively. In addition, 2012 included $33,360 of non cash stock based compensation expense for stock grants awarded to the four non-employee board members. Unrecognized compensation expense was $505,907 as of December 31, 2012 and will be recognized through 2017. There was no tax benefit recorded for this compensation cost as the expense primarily relates to incentive stock options that do not qualify for a tax deduction until, and only if, a qualifying disposition occurs.

 

K. Research and Development - Research and development costs are expensed as incurred. Research and development expense for the years ended December 31, 2012 and 2011 was $309,816 and $619,940, respectively. The Company continues to develop innovative transparent conductive oxide systems to further align activities with customer needs. Expense related to developing innovative transparent conductive oxide systems was lower during 2012 compared to 2011. These research and development endeavors have moved the Company beyond the scope of the current federal and state grants and awards.

 

L. Income Taxes - Income taxes are provided for by utilizing the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using presently enacted tax rates. Deferred tax assets are reduced by a valuation allowance which is established when “it is more likely than not” that some portion or all of the deferred tax assets will not be recognized.

 

 

F- 9
 

 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

M. Use of Estimates - 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, the 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 those estimates.

 

Note 3. Inventories

 

Inventories consist of the following at December 31:

 

    2012     2011  
Raw materials   $ 346,613     $ 273,992  
Work-in-process     408,491       664,216  
Finished goods     159,971       164,930  
      915,075       1,103,138  
Reserve for obsolete inventory     (100,000 )     (57,635 )
                 
    $ 815,075     $ 1,045,503  

 

F- 10
 

 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 4. Notes Payable

 

On October 16, 2012, the Company issued a Promissory Note (the “Note”) in the amount of $213,000 to The Huntington National Bank, as Lender, with a maturity date of February 28, 2014. This Note replaced an existing promissory note to the Huntington National Bank which had a balance of $213,000 and an original maturity date of December 31, 2012.

 

The Note is collateralized by the Company’s inventories, equipment and accounts receivable. Among other items, the Note provides for the following:

 

- 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 4.0 percentage points over LIBOR. Under no circumstance will the interest rate be less than 5.00% per annum or more than the maximum rate allowed by applicable law.

 

- Interest only payments through December 31, 2012, with a $25,000 principal payment due December 31, 2012 and another $25,000 due January 31, 2013. Monthly payments of approximately $6,000, including interest, beginning in January 2013 with remaining principal due at maturity in February 2014.

 

As of December 31, 2012 there was an outstanding balance of $188,000 on this Note.

 

During 2010, the Company applied and was approved for a 166 Direct Loan to borrow up to $744,250 with the Ohio Department of Development (ODOD). This loan was finalized in February 2011. The term of the loan is 84 months at a fixed interest rate of 3%. There is also a 0.25% annual servicing fee charged monthly on the outstanding principal balance. Payments of approximately $10,100, including interest, are payable monthly through November 2018. The loan is collateralized by the related project equipment. As of December 31, 2012 there was an outstanding balance of $672,667 on this loan.

 

During 2010, the Company also applied and was approved for a 166 Direct Loan through the Advanced Energy Program with the Ohio Air Quality Development Authority (OAQDA) to borrow up to approximately $1.4 million (this maximum commitment by the OAQDA was subsequently reduced to $368,906 on March 20, 2012). The interest rate was 3% at December 31, 2011 and increased to 10% effective with the first amendment dated March 20, 2012. A second amendment dated June 12, 2012 returned the interest rate to 3% effective April 10, 2012. There is also an annual servicing fee of $1,600 charged quarterly. The loan is being amortized over 84 months through March 2018. Payments were interest only through March 2012. Thereafter, payments of approximately $16,900, including interest, are payable quarterly. The loan is collateralized by the related project equipment. As of December 31, 2012 there was an outstanding balance of $326,329 on this loan.

 

 

F- 11
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 4. Notes Payable (Continued)

 

An Intercreditor Agreement exists as part of the above mentioned loans with agencies of the State of Ohio. The OAQDA and ODOD agree to shared lien and security interest through mutual covenants. These covenants include, but are not limited to, the creation of an agreed upon number of jobs, filing of quarterly and annual reports and various financial covenants. On March 20, 2012, the Company and OAQDA entered into The First Amendment to Loan Documents which, among other things, waived the debt service coverage r equirement for all quarters through and including December 31, 2012. On September 11, 2012, the OAQDA adopted a resolution which reduced the debt service coverage ratio effective March 31, 2013 and the Third Amendment to Loan Documents related to this resolution was signed on January 26, 2013. The Company is also required to maintain a certain debt to tangible net worth ratio. The Company expects to maintain compliance with all covenants through December 31, 2013.

 

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 and were used for the purchase of production equipment and to reduce the Company’s capital lease obligations on certain equipment. The term of the loan is 84 months at a fixed interest rate of 3%. There is also a 0.25% annual servicing fee to be charged monthly on the outstanding principal balance. The Company is making monthly servicing fee, interest and principal payments of approximately $6,000. The loan principal balance will be fully amortized at the end of the term in August 2015. The loan is collateralized by the related project equipment. As of December 31, 2012 the loan had a balance of $186,679. This loan is also subject to certain covenants, including job creation and retention. Due to market conditions the Company informed ODOD that it did not meet the agreed upon job creation covenant at December 31, 2012. Per the agreement, if the Company was unable to meet this requirement, the interest rate on the outstanding balance of the loan shall, at the option of ODOD, increase up to the rate of 6% per annum. On March 5, 2013, the Company signed a First Amendment to the Loan Agreement, and based on the number of jobs created, the job creation covenant was met and satisfied.

 

Notes payable at December 31 is included in the accompanying balance sheets as follows:

 

    2012     2011  
Huntington National Bank   $ 188,000     $ 300,000  
ODOD 166 Direct Loan     672,667       175,937  
OAQDA 166 Direct Loan     326,329       368,906  
ODOD 166 Direct Loan     186,679       252,927  
Total notes payable     1,373,675       1,097,770  
Less current portion     316,571       432,064  
Notes payable, net of current portion   $ 1,057,104     $ 665,706  

 

F- 12
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 4. Notes Payable (Continued)

 

Annual maturities of Notes Payable, for the next five years, are as follows:

 

2013   $ 316,571  
2014     342,523  
2015     221,939  
2016     179,145  
2017     184,589  

  

Note 5. Lease Obligations

 

Operating

 

The Company leases its facilities and certain office equipment under agreements classified as operating leases expiring at various dates through 2016. Rent expense, which includes various monthly rentals for the years ended December 31, 2012 and 2011 totaled $155,139 and $161,288, respectively. Future minimum lease payments at December 31, 2012 are as follows:

 

2013   $ 112,572  
2014     70,117  
2015     248  
2016     207  
Total minimum lease payments   $ 183,144  

 

Capital

 

The Company also leases certain equipment under capital leases. Future minimum lease payments, by year, with the present value of such payments, as of December 31, 2012 are shown in the following table.

 

2013   $ 238,989  
2014     94,810  
2015     54,012  
2016     24,672  
Total minimum lease payments     412,483  
Less amount representing interest     27,786  
Present value of minimum lease payments     384,697  
Less current portion     221,366  
Capital lease obligations, net of current portion   $ 163,331  

 

 

F- 13
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 5. Lease Obligations (continued)

 

The equipment under capital lease at December 31 is included in the accompanying balance sheets as follows:

 

    2012     2011  
Machinery and equipment   $ 1,030,405     $ 2,233,048  
Less accumulated depreciation     331,209       847,330  
Net book value   $ 699,196     $ 1,385,718  

 

These assets are amortized over a period of seven to ten years using the straight-line method and amortization is included in depreciation expense.

 

The capital leases are structured such that ownership of the leased asset reverts to the Company at the end of the lease term. Accordingly, leased assets are depreciated using the Company's normal depreciation methods and lives.  In 2012, ownership of certain assets were transferred to the Company in accordance with the terms of the leases and these assets have been excluded from the leased asset disclosure above.

 

Note 6. Common and Preferred Stock

 

Common Stock

 

During 2012, the four non-employee board members each received 6,000 shares of common stock of the Company with an aggregate value of $33,360. This was recorded as non cash stock compensation expense in the financial statements.

 

In 2011, proceeds of $41,350 were received from the exercise of 27,000 stock options. The exercise price for these options ranged from $1.50 to $2.55. The aggregate intrinsic value of these options was $16,080.

 

Preferred Stock

 

Shares of preferred stock authorized and outstanding at December 31, 2012 and 2011 were as follows:

 

    Shares     Shares  
    Authorized     Outstanding  
Cumulative Preferred Stock     10,000       -  
                 
Voting Preferred Stock     125,000       -  
                 
Cumulative Non-Voting Preferred Stock     125,000 (a)     24,152  

  

 

(a) Includes 700 shares of Series A Preferred Stock and 100,000 shares of Convertible Series B Preferred Stock authorized for issuance.

 

In January 1996, the Company completed an offering of 70,000 shares of $10 stated value 1995 Series B 10% cumulative non-voting convertible preferred stock. The shares are convertible to common shares at the rate of $5.00 per share. At the Company’s option, the Series B shares are redeemable at 103% of the stated value plus the amount of any accrued and unpaid cash dividends.

 

F- 14
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 6. Common and Preferred Stock (continued)

 

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, 2012 and 2011. During 2011, a Series B cash dividend of $24,152 was paid to shareholders of record as of December 31, 2010. At December 31, 2012 and 2011 the Company had accrued dividends on Series B preferred stock of $169,064 and $144,912, respectively. These amounts are included in convertible preferred stock, Series B on the balance sheet at December 31, 2012 and 2011.

 

Earnings Per Share

 

Basic income (loss) per share is calculated as income available (loss attributable) to common shareholders divided by the weighted average of common shares outstanding. Diluted earnings per share is calculated as diluted income available (loss attributable) to common stockholders divided by the diluted weighted average number of common shares outstanding. Diluted weighted average number of common shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive. For the years ended December 31, 2012 and 2011, all convertible and preferred stock and common stock options listed in Note 7 were excluded from diluted earnings per share due to being out-of-the-money or anti-dilutive.

 

Following is a summary of employee and director stock options and preferred stock, Series B at December 31, 2012 and 2011.

 

    December 31,     December 31,  
    2012     2011  
Options     842,250       986,750  
Preferred Stock, Series B     24,152       24,152  
      866,402       1,010,902  

 

The following is provided to reconcile the earnings per share calculations:

 

    2012     2011  
Loss applicable to common stock   $ (350,124 )   $ (914,758 )
Weighted average common shares outstanding - basic     3,814,996       3,781,717  
Effect of dilutions - stock options     -       -  
Weighted average shares outstanding - diluted     3,814,996       3,781,717  

 

  

 

F- 15
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 7. Stock Option Plans

 

On June 10, 2011, shareholders approved the SCI Engineered Materials, Inc. 2011 Stock Incentive Plan (the “2011 Plan”). The Company adopted the 2011 Plan as incentive to key employees, directors and consultants under which options to purchase up to 250,000 shares of the Company’s common stock may be granted, subject to the execution of stock option agreements. Incentive stock options may be granted to key employees of the Company and non-statutory options may be granted to directors who are not employees and to consultants and advisors who render services to the Company. Options may be exercised for periods up to 10 years from the date of grant at prices not less than 100% of fair market value on the date of grant. As of December 31, 2012 there were no stock options outstanding from the 2011 Plan.

 

On June 9, 2006, shareholders approved the Superconductive Components, Inc. 2006 Stock Incentive Plan. The Company adopted the 2006 Plan as incentive to key employees, directors and consultants under which options to purchase up to 600,000 shares of the Company’s common stock may be granted, subject to the execution of stock option agreements. Incentive stock options may be granted to key employees of the Company and non-statutory options may be granted to directors who are not employees and to consultants and advisors who render services to the Company. Options may be exercised for periods up to 10 years from the date of grant at prices not less than 100% of fair market value on the date of grant. As of December 31, 2012 there were 582,000 stock options outstanding from the 2006 Plan which expire at various dates through January 2, 2019.

 

On September 29, 1995, the Company adopted the 1995 Stock Option Plan as incentive to key employees, directors and consultants. As of December 31, 2012 there were 260,250 stock options outstanding from the 1995 Plan which expire at various dates through December 16, 2015. The Company adopted the 1995 Plan as incentive to key employees, directors and consultants under which options to purchase up to 900,000 shares of the Company’s common stock were available to be granted, subject to the execution of stock option agreements.

 

 

 

 

F- 16
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 7. Stock Option Plans (continued)

 

The cumulative status at December 31, 2012 and 2011 of options granted and outstanding, as well as options which became exercisable in connection with the Stock Option Plans is summarized as follows:

 

Employee Stock Options

 

 

          Weighted     Weighted        
          Average     Average     Aggregate  
          Exercise     Contractual     Intrinsic  
    Stock Options     Price     Term (yrs)     Value  
Outstanding at January 1, 2011     783,750     $ 4.35                  
Exercised     (17,000 )     1.55                  
Expired     (30,000 )     1.90                  
Outstanding at December 31, 2011     736,750     $ 4.52                  
Expired     (144,500 )     1.59                  
Outstanding at December 31, 2012     592,250     $ 5.23       5.1     $ -  
Options exercisable at December 31, 2011     419,375     $ 3.41       3.5     $ -  
Options exercisable at December 31, 2012     322,250     $ 4.59       4.3     $ -  
Options expected to vest     270,000     $ 6.00       6.0     $ -  

       

 

F- 17
 

 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 7. Stock Option Plans (continued)

 

Non-Employee Director Stock Options

 

          Weighted     Weighted        
          Average     Average     Aggregate  
          Exercise     Contractual     Intrinsic  
    Stock Options     Price     Term (yrs)     Value  
Outstanding at January 1, 2011     282,500     $ 3.60                  
Exercised     (10,000 )     1.50                  
Expired     (22,500 )     1.46                  
Outstanding at December 31, 2011     250,000     $ 3.87                  
Outstanding at December 31, 2012     250,000     $ 3.87       1.5     $ -  
Options exercisable at December 31, 2011     250,000     $ 3.87       2.5     $ -  
Options exercisable at December 31, 2012     250,000     $ 3.87       1.5     $ -  

       

Information related to the weighted average fair value of nonvested stock options for the year ended December 31, 2012 is as follows:

 

          Weighted  
          Average  
          Exercise  
    Stock Options     Price  
Employee Stock Options                
Nonvested  options  at  January 1, 2012     317,375     $ 5.98  
  Expired     (875 )     3.10  
  Vested     (46,500 )     5.91  
Nonvested options at December 31, 2012     270,000     $ 6.00  

 

Exercise prices range from $1.00 to $6.00 for options at December 31, 2012. The weighted average option price for all options outstanding was $4.83 with a weighted average remaining contractual life of 4.0 years at December 31, 2012. The weighted average option price for all options outstanding was $4.35 with a weighted average remaining contractual life of 4.4 years at December 31, 2011.

 

F- 18
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 8. Income Taxes

 

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31.

 

    2012     2011  
Deferred tax assets                
NOL carryforwards   $ 1,398,000     $ 1,436,000  
General business credits carryforwards     182,000       125,000  
Stock based compensation     80,000       80,000  
UNICAP     19,000       19,000  
Allowance for doubtful accounts     16,000       6,000  
Reserve for obsolete inventories     36,000       21,000  
Reserve for asset retirement     15,000       12,000  
Property and equipment     (88,000 )     (76,000 )
      1,658,000       1,623,000  
Valuation allowance     (1,658,000 )     (1,623,000 )
Net   $ -     $ -  

 

A valuation allowance has been recorded against the realizability of the net deferred tax asset such that no value is recorded for the asset in the accompanying financial statements. The valuation allowance totaled $1,658,000 and $1,623,000 at December 31, 2012 and 2011, respectively.

 

The Company has net operating loss carryforwards available for federal and state tax purposes of approximately $4,000,000 and $4,100,000, at December 31, 2012 and 2011, respectively, which expire in varying amounts through 2031.

 

For the years ended December 31, 2012 and 2011, a reconciliation of the statutory rate and effective rate for the provisions for income taxes consists of the following:

 

    Percentage  
    2012     2011  
Federal statutory rate     (35.0 )%     (35.0 )%
State/city tax     (8.4 )     1.4  
Non-deductible expense     11.3       5.6  
Valuation allowance     23.7       50.9  
Effective rate     (8.4 )%     22.9 %

 

 

F- 19
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 8. Income Taxes (continued)

 

Components of income taxes are as follows:

           

    2012     2011  
  Current   $ (27,000 )   $ 10,000  
  Deferred:                
   NOL utilization/expiration     38,000       82,000  
   General business credits     (57,000 )     (126,000 )
   Other temporary differences     (17,000 )     3,000  
   Change in valuation allowance     36,000       197,000  
  Total   $ (27,000 )   $ 166,000  

 

The Company follows guidance issued by the Financial Accounting Standards Board (“FASB”) with respect to accounting for uncertainty in income taxes.  A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than fifty percent likely of being realized on examination.  For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.

 

The Company has no unrecognized tax benefits under guidance related to tax uncertainties. The Company does not anticipate the unrecognized tax benefits will significantly change in the next twelve months. Any tax penalties or interest expense will be recognized in income tax expense. No interest and penalties related to unrecognized tax benefits were accrued at December 31, 2012 and 2011.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is open to federal and state tax audits until the applicable statute of limitations expire. There are currently no federal or state income tax examinations underway for the Company. The tax years 2009 through 2011 remain open to examination by the major taxing jurisdictions in which the Company operates.

 

Note 9. Fair Value of Financial Instruments

 

The fair value of financial instruments represents the price that would be received to sell an asset or paid to transfer a liability (an exit price), and not the price that would be paid to acquire an asset or received to assume a liability (an entry price). Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical cost amounts.

 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

 

· Cash and cash equivalents, short-term notes payable and capital lease obligations and current maturities of long-term notes payable and capital lease obligations: Amounts reported in the balance sheet approximate fair market value due to the short maturity of these instruments.

 

· Long-term note payable obligations: Amounts reported in the balance sheet approximate fair value as the interest rates on the obligations range from 3% to 5%, which approximates current fair market rates.

 

 

F- 20
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note10. Asset Retirement Obligation

 

Included in machinery and equipment is various production equipment, which per the Company’s building lease, is required to be removed upon termination of the related lease. Included in accrued expenses in the accompanying balance sheet is the asset retirement obligation that represents the expected present value of the liability to remove this equipment. There are no assets that are legally restricted for purposes of settling this asset retirement obligation.

 

Following is a reconciliation of the aggregate retirement liability associated with the Company’s obligation to dismantle and remove the machinery and equipment associated with its lease:

 

Balance at January 1, 2011   $ 25,594  
Increase in present value of the obligation        
(accretion expense in the corresponding amount        
charged against earnings)     6,624  
Balance at December 31, 2011   $ 32,218  
Increase in present value of the obligation        
(accretion expense in the corresponding amount        
charged against earnings)     8,640  
Balance at December 31, 2012   $ 40,858  

 

Note 11. Subsequent Events

 

On February 15, 2013 the four non-employee board members each received compensation of 1,500 shares of common stock of the Company with an aggregate value of approximately $10,000. This was recorded as non cash stock compensation expense in the financial statements during 2013.

 

On January 2, 2013, the Company entered into a capital lease agreement for $86,389 for the purchase of new production equipment. This lease includes a term of 60 months and an interest rate of 4.9%.

 

Note 12. Liquidity

 

Management has forecasted the Company’s revenues and related costs as well as its investing plans and financing needs to determine its liquidity to meet cash flow requirements and believes it will have sufficient liquidity at least through December 31, 2013.  This forecast was based on current cash levels and debt obligations, and management’s best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the industry in which the Company operates.    The Company’s ability to maintain current operations is dependent upon its ability to achieve these forecasted results, which management believes will occur. 

 

The Company does not currently have any available sources of funding.  The Company’s revolving line of credit arrangement with its senior lender expired on April 13, 2012.  There was no balance outstanding under this arrangement at maturity.  The Company did not have the need to draw on the revolving line of credit since the original commitment date of January 13, 2009.  The Company does not anticipate the need for a similar credit facility in 2013; although management may pursue revolving credit arrangements as working capital requirements increase. The Company’s ability to obtain a new line if deemed necessary is not certain.

 

Should projected sales levels fall below the minimum levels expected to be achievable by management, additional cost reduction actions could be instituted which might facilitate the continued operation of the Company but the achievement of such reductions and the timing of their impact are not readily predictable.

 

Management believes based upon the Company’s existing cash levels and its expectations of operating results that it will have sufficient liquidity to continue operations throughout 2013.

 

F- 21

 

   
 

 

   
 

 

   
 

 

   

 

 

Exhibit 23

 

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in Registration Statements No.333-97583, No. 333-67212 and No. 333-136694 on Forms S-8 of our report dated March 19, 2013, relating to the financial statements of SCI Engineered Materials, Inc., appearing in this Annual Report on Form 10-K.

 

 

 

Crowe Horwath LLP

 

 

 

Columbus, Ohio

March 19, 2013

 

 

 

 

 

 

 

 

 

 

  

Exhibit 24

 

 

POWER OF ATTORNEY

 

Each of the undersigned officers and/or directors of SCI Engineered Materials, Inc., an Ohio corporation (the “Company”), hereby appoints Daniel Rooney and Michael A. Smith as his or her true and lawful attorneys-in-fact, or any of them individually with power to act without the other, as his or her true and lawful attorney-in-fact, in his or her name and on his or her behalf, and in any and all capacities stated below, to sign and to cause to be filed with the Securities and Exchange Commission the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and any and all amendments thereto, hereby granting unto said attorneys, and to each of them, full power and authority to do and perform in the name and on behalf of the undersigned, in any and all such capacities, every act and thing whatsoever necessary to be done in and about the premises as fully as each of the undersigned could or might do in person, hereby granting to each such attorney full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney in counterparts if necessary, effective as of March 19, 2013.

 

Signature   Title
     
     
/s/ Daniel Rooney   President, Chief Executive Officer and Chairman of
Daniel Rooney   the Board of Directors and Director  (principal
    executive officer)
     
/s/ Gerald S. Blaskie   Vice President and Chief Financial Officer
Gerald S. Blaskie   (principal financial officer and principal accounting
    officer)
     
/s/ Robert H. Peitz   Director
Robert H. Peitz    
     
     
/s/ Walter J. Doyle   Director
Walter J. Doyle    
     
     
/s/ Robert J. Baker, Jr.   Director
Robert J. Baker, Jr.    
     
     
/s/ Edward W. Ungar   Director
Edward W. Ungar    
     

  

 

 

 

 

 

 

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 annual report on Form 10-K of SCI Engineered Materials, 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 registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s internal control over financial reporting.

 

Date: March 19, 2013 /s/ Daniel Rooney
  Daniel Rooney
  Chairman of the Board of Directors,
  President and Chief Executive Officer
  (Principal Executive Officer)

 

 

 

 

 

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 annual report on Form 10-K of SCI Engineered Materials, 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 registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s internal control over financial reporting.

 

Date: March 19, 2013 /s/ Gerald S. Blaskie
  Gerald S. Blaskie
  Vice President and Chief Financial Officer
   (Principal Financial Officer and Principal Accounting Officer)

 

 

 

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 Annual Report of SCI Engineered Materials, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2012 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. § 1350, as adopted pursuant to § 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
  SCI Engineered Materials, Inc.
  March 19, 2013

 

 

 

 

 

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 Annual Report of SCI Engineered Materials, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2012 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. § 1350, as adopted pursuant to § 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
  SCI Engineered Materials, Inc.
  March 19, 2013