UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

 

Commission file number: 0-31641

 

SCI ENGINEERED MATERIALS, INC.

(Exact name of registrant as specified in its charter)

 

Ohio 31-1210318
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

2839 Charter Street, Columbus, Ohio 43228

(Address of principal executive offices) (Zip Code)

 

(614) 486-0261

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o Accelerated filer o Non-accelerated filer o 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 o No x

 

3,987,592 shares of Common Stock, without par value, were outstanding at July 31, 2015.

 

 

 
 

 

 

FORM 10-Q

 

SCI ENGINEERED MATERIALS, INC.

 

Table of Contents

 

        Page No.
         
PART I. FINANCIAL INFORMATION 3
         
  Item 1. Financial Statements 3
         
      Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014 3
         
      Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited) 5
         
      Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited) 6
         
      Notes to Financial Statements (unaudited) 7
         
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
         
  Item 4. Controls and Procedures 20
         
PART II. OTHER INFORMATION 22
         
  Item 1. Legal Proceedings N/A
         
  Item 1A.

Risk Factors

N/A
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds N/A
         
  Item 3. Defaults Upon Senior Securities N/A
         
  Item 4. Mine Safety Disclosures N/A
         
  Item 5. Other Information N/A
         
  Item 6. Exhibits 22
         
  Signatures 24

 

 

2
 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SCI ENGINEERED MATERIALS, INC.

 

BALANCE SHEETS

 

ASSETS

 

    June 30,     December 31,  
    2015     2014  
    (UNAUDITED)        
Current Assets                
Cash   $ 1,410,121     $ 1,011,956  
Accounts receivable, less allowance for doubtful accounts of $26,000 and $15,000, respectively     449,059       468,352  
Inventories     790,736       1,678,609  
Prepaid expenses     155,929       89,467  
Total current assets     2,805,845       3,248,384  
                 
                 
                 
Property and Equipment, at cost                
Machinery and equipment     7,503,816       7,478,909  
Furniture and fixtures     140,265       139,110  
Leasehold improvements     326,745       326,745  
Construction in progress     1,520       1,815  
      7,972,346       7,946,579  
Less accumulated depreciation     (5,423,980 )     (5,205,675 )
      2,548,366       2,740,904  
                 
                 
Other Assets                
Deposits     16,487       18,532  
Deferred financing fees     14,945       19,665  
Intangibles     38,985       9,229  
Total other assets     70,417       47,426  
                 
TOTAL ASSETS   $ 5,424,628     $ 6,036,714  

 

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

 

3
 

 

SCI ENGINEERED MATERIALS, INC.

 

BALANCE SHEETS

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

    June 30,     December 31,  
    2015     2014  
    (UNAUDITED)        
Current Liabilities                
Capital lease obligations, current portion   $ 138,043     $ 145,896  
Notes payable, current portion     265,901       298,209  
Accounts payable     473,035       424,539  
Customer deposits     526,319       1,281,573  
Accrued compensation     78,162       93,392  
Accrued expenses and other     143,612       115,126  
Total current liabilities     1,625,072       2,358,735  
                 
Capital lease obligations, net of current portion     269,241       339,191  
Notes payable, net of current portion     500,979       610,568  
Total liabilities     2,395,292       3,308,494  
                 
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     454,058       466,134  
Common stock, no par value, authorized 15,000,000 shares; 3,986,745 and 3,935,398 shares issued and outstanding, respectively     9,962,908       9,907,990  
Additional paid-in capital     2,028,930       1,960,260  
Accumulated deficit     (9,416,560 )     (9,606,164 )
      3,029,336       2,728,220  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 5,424,628     $ 6,036,714  

 

 

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

 

4
 

 

SCI ENGINEERED MATERIALS, INC.

 

STATEMENTS OF OPERATIONS

 

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

(UNAUDITED)

 

    THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,  
    2015     2014     2015     2014  
                         
Revenue   $ 2,228,686     $ 3,098,376     $ 4,956,493     $ 5,690,876  
                                 
Cost of revenue     1,591,999       2,517,906       3,650,401       4,523,633  
                                 
Gross profit     636,687       580,470       1,306,092       1,167,243  
                                 
General and administrative expense     316,534       300,151       659,238       632,742  
                                 
Research and development expense     91,221       72,202       188,864       157,808  
                                 
Marketing and sales expense     125,972       139,449       236,276       263,689  
                                 
Income from operations     102,960       68,668       221,714       113,004  
                                 
Other (expense) income                                
Interest     (14,630 )     (17,346 )     (30,579 )     (33,324 )
Gain (loss) on disposal of equipment, net     (205 )     249       (494 )     (255 )
      (14,835 )     (17,097 )     (31,073 )     (33,579 )
                                 
Income before provision for income taxes     88,125       51,571       190,641       79,425  
                                 
Income tax expense     (1,037 )     (1,037 )     (1,037 )     (1,619 )
                                 
Net income     87,088       50,534       189,604       77,806  
                                 
Dividends on preferred stock     (6,038 )     (6,038 )     (12,076 )     (12,076 )
                                 
INCOME APPLICABLE TO COMMON SHARES   $ 81,050     $ 44,496     $ 177,528     $ 65,730  
                                 
Earnings per share - basic and diluted (Note 6)                                
Income per common share                                
Basic   $ 0.02     $ 0.01     $ 0.04     $ 0.02  
Diluted   $ 0.02     $ 0.01     $ 0.04     $ 0.02  
                                 
Weighted average shares outstanding                                
Basic     3,978,728       3,861,222       3,959,601       3,858,575  
Diluted     4,030,435       3,861,222       3,987,178       3,858,575  

 

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

 

5
 

 

SCI ENGINEERED MATERIALS, INC.

 

STATEMENTS OF CASH FLOWS

 

SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

(UNAUDITED)

 

    2015     2014  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income   $ 189,604     $ 77,806  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and accretion     225,932       275,761  
Amortization     915       915  
Stock based compensation     105,123       85,236  
Net loss on disposal of equipment     494       255  
Inventory reserve     (153,157 )     42,000  
Change in allowance for doubtful accounts     11,318       10,000  
Changes in operating assets and liabilities:                
Accounts receivable     7,975       7,752  
Inventories     1,041,030       698,091  
Prepaid expenses     (66,462 )     (23,224 )
Other assets     6,634       1,833  
Accounts payable     48,496       (35,271 )
Accrued expenses and customer deposits     (747,096 )     (629,362 )
Net cash provided by operating activities     670,806       511,792  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Proceeds on sale of equipment     -       250  
Purchases of property and equipment     (28,788 )     (18,335 )
Net cash used in investing activities     (28,788 )     (18,085 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Principal payments on capital lease obligations and notes payable     (219,701 )     (172,009 )
Payment of cumulative dividends on preferred stock     (24,152 )     -  
Net cash used in financing activities     (243,853 )     (172,009 )
                 
NET INCREASE IN CASH     398,165       321,698  
                 
CASH - Beginning of period     1,011,956       622,727  
                 
CASH - End of period   $ 1,410,121     $ 944,425  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Cash paid during the period for:                
Interest   $ 31,471     $ 33,678  
Income taxes     1,037       1,619  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES                
Property and equipment purchased by capital lease     -       396,165  
Provisional patent acquired by common stock exchange     30,540       -  
Increase in asset retirement obligation     5,100       5,100  

 

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

 

6
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 1. Business Organization and Purpose

 

SCI Engineered Materials, Inc. (“SCI”, or the “Company”), formerly Superconductive Components, Inc., an Ohio corporation, was incorporated in 1987.  The Company operates in one segment as a global supplier and manufacturer of advanced materials for Physical Vapor Deposition (“PVD”) Thin Film Applications.  The Company is focused on specific markets within the PVD industry (Photonics, Thin Film Solar, Glass, Thin Film Battery and Transparent Electronics).  Substantially all of the Company’s revenues were generated from customers with multi-national operations.  Through collaboration with end users and Original Equipment Manufacturers the Company develops innovative customized solutions enabling commercial success.

 

Note 2. Summary of Significant Accounting Policies

 

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation of the results of operations for the periods presented have been included. The financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2014. Interim results are not necessarily indicative of results for the full year.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Note 3. Common Stock and Stock Options

 

Stock Based Compensation - Compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period. Non cash stock based compensation expense was $52,972 and $41,763 for the three months ended June 30, 2015 and 2014, respectively. Non cash stock based compensation expense was $105,123 and $85,236 for the six months ended June 30, 2015 and 2014, respectively. Unrecognized compensation expense was $431,150 as of June 30, 2015 and will be recognized through 2019. 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.

 

The non-employee board members received compensation of 21,347 and 10,500 aggregate shares of common stock of the Company during the six months ended June 30, 2015 and June 30, 2014, respectively. The increased shares were the result of new directors that joined the Company during 2014. The stock had an aggregate value of $24,378 and $11,970 for the six months ended June 30, 2015 and 2014, respectively, and was recorded as non-cash stock compensation expense in the financial statements.

 

 

7
 

 

 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3. Common Stock and Stock Options (continued)

 

During April 2015, the Board of Directors approved the acquisition of rights to a provisional patent owned by one of the directors, and any subsequent patents for this technology related to the application of Zinc based Transparent Conductive Oxide in displays, and the value thereof for 30,000 shares of common stock of the Company. The value of the shares of common stock at the time of acquisition was $30,540.

 

The cumulative status of options granted and outstanding at June 30, 2015, and December 31, 2014, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

 

Employee Stock Options

 

          Weighted  
          Average  
    Stock Options     Exercise Price  
             
Outstanding at January 1, 2014     486,500     $ 5.20  
  Granted     172,357       0.84  
  Expired     (55,000 )     2.78  
Outstanding at December 31, 2014     603,857     $ 4.18  
  Expired     (30,000 )     2.40  
  Forfeited     (1,000 )     3.10  
Outstanding at June 30, 2015     572,857     $ 4.27  
Options exercisable at December 31, 2014     285,700     $ 5.26  
Options exercisable at June 30, 2015     291,150     $ 5.66  

 

Non-Employee Director Stock Options

 

          Weighted  
          Average  
    Stock Options     Exercise Price  
             
Outstanding at January 1, 2014     220,000     $ 4.26  
  Expired     (120,000 )     5.15  
Outstanding at December 31, 2014     100,000     $ 3.20  
  Expired     (60,000 )     2.67  
Outstanding at June 30, 2015     40,000     $ 4.00  
Options exercisable at December 31, 2014     100,000     $ 3.20  
Options exercisable at June 30, 2015     40,000     $ 4.00  

 

Exercise prices for options ranged from $0.84 to $6.00 at June 30, 2015. The weighted average option price for all options outstanding was $4.26 with a weighted average remaining contractual life of 4.8 years.

 

 

8
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 4. Preferred Stock

 

On April 28, 2015, the Board of Directors authorized a total payment of $24,152 for a cash dividend on convertible preferred stock, Series B, to shareholders of record as of December 31, 2014. The payment was made during June 2015. Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares. Dividends on the Series B preferred stock were $6,038 for the three months ended June 30, 2015 and 2014 and $12,076 for the six months ended June 30, 2015 and 2014. The Company had accrued dividends on Series B preferred stock of $205,292 at June 30, 2015, and $217,368 at December 31, 2014. These amounts are included in Convertible preferred stock, Series B on the balance sheet at June 30, 2015 and December 31, 2014.

 

Note 5. Inventories

 

Inventories consisted of the following:   June 30,     December 31,  
    2015     2014  
    (unaudited)        
Raw materials   $ 177,752     $ 814,307  
Work-in-process     545,780       842,760  
Finished goods     105,474       212,968  
Inventory reserve     (38,270 )     (191,426 )
    $ 790,736     $ 1,678,609  

 

During the second quarter of 2015 the Company removed certain slow moving inventory items recognizing a corresponding decrease in its inventory reserve and no net effect on total inventory.

 

Note 6. Earnings Per Share

 

Basic income per share is calculated as income applicable to common shareholders divided by the weighted average of common shares outstanding. Diluted earnings per share is calculated as diluted income applicable to common shareholders divided by the diluted weighted average number of common shares. 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 three and six months ended June 30, 2015 and 2014, all convertible preferred stock and common stock options listed in Note 3 that were out-of-the-money or anti-dilutive were excluded from diluted earnings per share. The following is provided to reconcile the earnings per share calculations:

 

    Three months ended June 30,     Six months ended June 30,  
    2015     2014     2015     2014  
                         
Income applicable to common shares   $ 81,050     $ 44,496     $ 177,528     $ 65,730  
                                 
Weighted average common shares outstanding - basic     3,978,728       3,861,222       3,959,601       3,858,575  
                                 
Effect of dilution     51,707       -       27,577       -  
Weighted average shares outstanding - diluted     4,030,435       3,861,222       3,987,178       3,858,575  

 

9
 

 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 7. Notes Payable

 

On August 8, 2013, the Company issued a Promissory Note (the “Note”) in the amount of $128,257 to The Huntington National Bank, as Lender, with a maturity date of August 5, 2016. This Note replaced an existing promissory note to The Huntington National Bank.

 

The Note is collateralized by a blanket lien on all of the Company’s assets including, without limitation, inventory, 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 percentage points over LIBOR. Under no circumstance will the interest rate be less than 5% per annum or more than the maximum rate allowed by applicable law.

 

- Monthly payments of approximately $3,800, including interest, beginning in September 2013.

 

The interest rate on the Note was 5% at June 30, 2015 and December 31, 2014. As of June 30, 2015 there was an outstanding balance of $52,298 on this Note. The Company expects to maintain compliance with all covenants of this Note through at least June 30, 2016.

 

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), now known as the Ohio Development Services Agency (ODSA). 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. On August 13, 2013, ODSA and the Company agreed to a modification to the payment schedule. Interest and servicing payments of $1,656 were paid monthly from August 2013 through January 2014. Beginning in February 2014, monthly payments of approximately $10,500, including principal, interest and servicing fee are due through October 2018. A final payment of approximately $71,900 is due November 2018. The loan is collateralized by the related project equipment. This loan is also subject to certain covenants, including job creation and retention. On July 21, 2014, the Company and ODSA signed a second amendment relating to the job creation and retention. As of June 30, 2015 there was an outstanding balance of $458,493 on this loan. The Company expects to maintain compliance with all covenants of this loan through at least June 30, 2016.

 

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). On December 20, 2013, OAQDA and the Company signed a Fourth Amendment to the Loan Documents and agreed to a modification to the payment schedule. Interest and servicing payments of $2,121 were payable quarterly from October 2013 through March 2014. Beginning in June 2014, quarterly payments of approximately $17,300, including principal, interest at 3% and servicing fees are due through December 2017. A final payment of approximately $50,400 is due February 2018. This loan is also subject to certain covenants, including job creation. Included in the above amendment is a waiver for the job creation commitment, due to market conditions, for the duration of the term of the Loan Agreement.

 

 

10
 

    

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS  

 

Note 7. Notes Payable (continued)

 

The Company expects to maintain compliance with all covenants of this loan at least through June 30, 2016. The loan is collateralized by the related project equipment. As of June 30, 2015 there was an outstanding balance of $208,010 on this loan.

 

An Intercreditor Agreement exists as part of the above mentioned loans with agencies of the State of Ohio. The OAQDA and ODSA 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. The Company expects to maintain compliance with all covenants of these loans through at least June 30, 2016.

 

During 2006, the Company was approved for a 166 Direct Loan from the Ohio Department of Development, now known as the ODSA, 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. On August 8, 2013, ODSA and the Company agreed to a modification to the payment schedule. Interest and servicing payments of approximately $400 were paid monthly from August 2013 through January 2014. Beginning in February 2014, monthly payments of approximately $6,100, including principal, interest and servicing fee are payable through July 2015. A final payment of approximately $42,200 is due August 2015. The loan is collateralized by the related project equipment. As of June 30, 2015 the loan had a balance of $48,077. This loan is also subject to certain covenants, including job creation and retention. The Company expects to maintain compliance with all covenants of this loan through the remainder of this loan.

 

Note 8. Income Taxes

 

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

 

    Three months ended June 30,     Six months ended June 30,  
    2015     2014     2015     2014  
Federal - deferred   $ -     $ -     $ -     $ -  
State and local     (1,037 )     (1,037 )     (1,037 )     (1,619 )
    $ (1,037 )   $ (1,037 )   $ (1,037 )   $ (1,619 )

 

 

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. A full valuation allowance has been recorded against the realizability of the net deferred tax assets at June 30, 2015 and December 31, 2014.   The Company has net operating loss carryforwards available for federal and state tax purposes of approximately $4,300,000 which expire in varying amounts through 2034.

 

 

11
 

 

SCI ENGINEERED MATERIALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

Note 9. Liquidity

 

Management has forecasted revenues and related costs as well as investing plans and financing needs to determine liquidity to meet cash flow requirements and believes the Company will have sufficient liquidity at least through June 30, 2016.  This forecast was based on current cash levels and debt obligations, and the best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the markets in which the Company operates.  The Company’s ability to maintain current operations is dependent upon its ability to achieve these forecasted results, which the Company believes will occur. 

 

 

12
 

 

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

  

The following discussion should be read in conjunction with the Financial Statements and Notes contained herein and with those in our Form 10-K for the year ended December 31, 2014.

 

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our intent, belief, and expectations, such as statements concerning our future profitability and operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements contained in this Quarterly Report on Form 10-Q and in other statements we make involve risks and uncertainties including, without limitation, the factors set forth under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2014, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our business and financial condition and could cause actual results to differ materially from plans and projections. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statements are made or reflect the occurrence of unanticipated events, unless necessary to prevent such statements from becoming misleading. New factors emerge from time to time and it is not possible for us to predict all factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Overview

 

SCI Engineered Materials, Inc. (“SCI”, “we” or the “Company”), formerly Superconductive Components, Inc., an Ohio corporation, was incorporated in 1987.  We operate in one segment as a global supplier and manufacturer of advanced materials for Physical Vapor Deposition (“PVD”) Thin Film Applications.  We are focused on specific markets within the PVD industry (Photonics, Thin Film Solar, Glass, Thin Film Battery and Transparent Electronics).  Substantially all of our revenues are generated from customers with multi-national operations.  We have made considerable resource investment in the Thin Film Solar industry and a few customers have adopted our products.  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. Through collaboration with end users and Original Equipment Manufacturers we develop innovative customized solutions enabling commercial success.

 

 

13
 

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

 

Executive Summary

 

The Company’s financial metrics generally improved for the second quarter and first half of 2015 compared to the same time periods last year despite lower revenue.

 

Gross profit was $636,687 for the three months ended June 30, 2015 compared to $580,470 for the same three months in 2014. This was an increase of $56,217, or 9.7%. Gross profit was $1,306,092 for the six months ended June 30, 2015 compared to $1,167,243 for the first six months of 2014. This was an increase of $138,849, or 11.9%. Gross profit increased due to increased volume from customer demand in our thin film solar market and overall product mix despite a decrease in revenue due to reduced volume from certain photonics customers that occurs from time to time. Total revenue decreased approximately $900,000 during the second quarter of 2015 compared to the same time period in 2014 and approximately $700,000 for the six months ended June 30, 2015 versus 2014.

 

Operating expenses were $533,727 and $511,802 for the three months ended June 30, 2015 and 2014, respectively. This was an increase of $21,925, or 4.3%. Operating expenses were $1,084,378 and $1,054,239 for the six months ended June 30, 2015 and 2014, respectively. This was an increase of $30,139, or 2.9%. Included in this increase was higher research and development expense. We continue to invest in developing new products for all of our markets including transparent conductive oxide systems within the thin film solar industry. We also have ongoing development efforts with our thin film battery materials and transparent electronic products. These efforts include accelerating time to market for those products and involve ongoing research & development expense.

 

For the three months ended June 30, 2015, we had net income after income taxes of $87,088 compared to $50,534 for the three months ended June 30, 2014. We had income applicable to common shares of $81,050 for the three months ended June 30, 2015 compared to $44,496 for the same period in 2014.

 

For the six months ended June 30, 2015, we had net income after income taxes of $189,604 compared to $77,806 for the six months ended June 30, 2014. We had income applicable to common shares of $177,528 for the six months ended June 30, 2015 compared to $65,730 for the same period in 2014.

 

Several new customers are currently conducting extensive product testing and qualification activities. We are optimistic this will result in increased orders. Late in the third quarter of 2014 we received new orders from Asia for approximately $400,000 of Transparent Conductive Oxide materials. Due to shipping terms related to these targets the revenue was recognized during the first quarter of 2015. Subsequently, follow-on orders were received for more than $500,000 of the same materials. Approximately $400,000 of revenue was recognized from these orders during the second quarter of 2015 and the balance is expected during the third quarter. Our strategy implemented a few years ago to add manufacturing capacity and marketing support for thin film solar applications is beginning to show progress. We entered the second quarter of 2015 with expectations of follow-on orders for thin film solar products; however, a temporary slowdown in our customers’ order patterns occurred. These customers continue to increase their manufacturing capacity and we expect to receive additional orders later this year.

 

14
 

 

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

 

RESULTS OF OPERATIONS

 

Three and six months ended June 30, 2015 (unaudited) compared to three and six months ended June 30, 2014 (unaudited):

 

Revenue

 

For the three months ended June 30, 2015, we had total revenue of $2,228,686. This was a decrease of $869,690, or 28.1%, compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, we had total revenue of $4,956,493. This was a decrease of $734,383, or 12.9%, compared to the six months ended June 30, 2014. Total revenue decreased due to reduced volume from demand from certain photonics customers. Revenue in our thin film solar market grew due to increased volume from customer demand. We expect revenue for the second half of 2015 to be less than the first half of 2015 due to lower cost of a high priced raw material used to manufacture products as well as lower volume in our thin film solar market.

 

Revenue from product sales is recognized on shipping terms or 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.

 

Gross Profit

 

Gross profit was $636,687 for the three months ended June 30, 2015 compared to $580,470 for the same three months in 2014. This was an increase of $56,217, or 9.7%. Gross profit as a percentage of revenue (gross margin) was 28.6% for the second quarter of 2015 compared to 18.7% for the same period in 2014. Gross profit was $1,306,092 for the six months ended June 30, 2015 compared to $1,167,243 for the same six months in 2014. This was an increase of $138,849, or 11.9%. The increase in gross profit and gross margin was attributed to increased sales of thin film solar products and improved overall product mix. A decrease in cost and volume of a high priced, low margin raw material used to manufacture products also contributed to the increase in gross margin. Gross profit is anticipated to be lower in the second half of 2015 compared to the first half of 2015 due to lower revenue.

 

General and Administrative Expense

 

General and administrative expense for the three months ended June 30, 2015 increased 5.5% to $316,534 from $300,151 for the three months ended June 30, 2014. The increase was primarily due to higher professional fees and non-cash stock based compensation expense of approximately $14,000.      

 

General and administrative expense for the six months ended June 30, 2015 increased to $659,238 from $632,742 for the six months ended June 30, 2014, or 4.2%. The first six months of 2015 included higher travel expenses of approximately $20,000 and non-cash stock based compensation expense of approximately $28,000. These expenses were partially offset by lower professional fees of approximately $14,000.

 

15
 

 

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

 

Professional Fees

 

Included in general and administrative expense was $47,686 and $42,603 for professional fees for the three months ended June 30, 2015 and 2014, respectively, and $116,378 and $130,365 for professional fees for the six months ended June 30, 2015 and 2014, respectively. These continued expenses are primarily related to SEC compliance costs for legal, accounting and stockholder relations fees.

 

Research and Development Expense

 

Research and development expense for the three months ended June 30, 2015 was $91,221 compared to $72,202 for the same period in 2014, an increase of 26.3%. Research and development expense for the six months ended June 30, 2015 was $188,864 compared to $157,808 for the same period in 2014, an increase of 19.7%. The increase is primarily due to sponsored research which began late in 2014. We have a collaborative program with a university to evaluate our TCO materials in liquid crystal display applications.

 

We continue to invest in developing new products for all of our markets including transparent conductive oxide systems within the thin film solar industry. We also have ongoing development efforts with our thin film battery materials and transparent electronic products. These efforts include accelerating time to market for those products and involve ongoing research & development expense. Late in the second quarter of 2015 we hired a Product Development Engineer for our research team to focus on display applications. She has depth of experience at display manufacturing as well as post-doctoral experience at a university recognized for their expertise in display applications. The added direct expense will be partially offset by lower expenses from our university partner.

 

Marketing and Sales Expense

 

Marketing and sales expense for the three months ended June 30, 2015 decreased 9.7% to $125,972 from $139,449 for the same period in 2014. The decrease was primarily related to lower compensation and travel expense of approximately $43,000, partially offset by higher sales consultant and commission fees of approximately $30,000.

 

Marketing and sales expense for the six months ended June 30, 2015 decreased 10.4% to $236,276 from $263,689 for the same period in 2014. The decrease was primarily related to lower compensation expense of approximately $56,000 and travel expense of $28,000, partially offset by higher sales consultant and commission fees of approximately $58,000.

 

Stock Compensation Expense

 

Included in operating expenses were non cash stock based compensation costs of $52,489 and $41,763 for the three months ended June 30, 2015 and 2014, respectively, and $104,158 and $85,236 for the six months ended June 30, 2015 and 2014, 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 $431,150 as of June 30, 2015 and will be recognized through 2019.

 

 

16
 

 

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

 

Interest

 

Interest was $14,630 and $17,346 for the three months ended June 30, 2015 and 2014, respectively and $30,579 and $33,324 for the six months ended June 30, 2015 and 2014, respectively. The decrease was due to continued payments reducing principal balances.

 

Income Applicable to Common Shares

 

Income applicable to common shares was $81,050 for the three months ended June 30, 2015 compared to income applicable to common shares of $44,496 for the three months ended June 30, 2014. Income applicable to common shares was $177,528 for the six months ended June 30, 2015 compared to $65,730 for the six months ended June 30, 2014. The higher gross profit in 2015 primarily contributed to the improved income applicable to common shares.

 

Common Shares

 

The following schedule represents our outstanding common stock during the period of 2015 through 2024 assuming all outstanding stock options are exercised during the year of expiration. Based on outstanding shares at July 31, 2015, if each shareholder exercises his or her options, it would increase our common shares by 612,857 to 4,600,449 by December 31, 2024. Assuming all such options are exercised in the year of expiration, the effect on shares outstanding is illustrated as follows:

 

 

 

Options due to

expire

 Potential

shares

outstanding

Weighted

average

exercise price

2015 40,000 4,027,592 $4.00
2016 31,000 4,058,592 $3.25
2018 5,000 4,063,592 $3.10
2019 364,500 4,428,092 $6.00
2024 172,357 4,600,449 $0.84

 

Liquidity and Capital Resources

 

Cash

 

As of June 30, 2015 cash on hand was $1,410,121. Cash on-hand was $1,011,956 at December 31, 2014, an increase of $398,165, or 39.3%. We believe, based on forecasted sales and expenses that cash flow from operations will be adequate to sustain operations at least through June 30, 2016.

 

17
 

 

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

 

Working Capital

 

At June 30, 2015 working capital was $1,180,773 compared to $889,649 at December 31, 2014, an increase of $291,124 or 32.7%. As discussed below cash increased approximately $400,000 during the six months ended June 30, 2015. Accounts receivable decreased approximately $19,000. Inventories decreased approximately $888,000 due to shipments during the first six months of 2015. During the second quarter of 2015 we removed certain slow moving inventory items recognizing a corresponding decrease in our inventory reserve and no net effect on total inventory. Customer deposits decreased approximately $755,000 due to orders shipped during the first six months of 2015. Prepaid expenses increased approximately $66,000 due to purchases of raw material not received as of June 30, 2015. Accounts payable increased approximately $48,000. Current debt obligations decreased approximately $40,000 during the first six months of 2015.

 

Cash from Operations

 

Net cash provided by operating activities was approximately $671,000 for the six months ended June 30, 2015 and approximately $512,000 for the six months ended June 30, 2014. In addition to the changes in various current assets and liabilities mentioned above, non-cash expenses for depreciation, accretion and amortization decreased to approximately $227,000 during the first six months of 2015 from $277,000 during 2014, a decrease of approximately 18%. Included in expenses were non cash stock based compensation costs of approximately $105,000 for the six months ended June 30, 2015 and $85,000 for the six months ended June 30, 2014.

 

Cash from Investing Activities

 

Cash of approximately $29,000 and $18,000 was used for investing activities during the six months ended June 30, 2015 and 2014, respectively.

 

Cash from Financing Activities

 

Cash of approximately $220,000 and $172,000 was used in financing activities for principal payments to third parties for capital lease obligations and notes payable during the six months ended June 30, 2015 and 2014, respectively. We paid $24,152 for cumulative dividends on preferred stock during 2015. We incurred new capital lease obligations of approximately $396,000 during the first half of 2014. The need for the additional equipment in 2014 was to support increasing sales in our core photonics market.

 

Supplemental Disclosures of Noncash Activities

 

During April 2015, the Board of Directors approved the acquisition of rights to a provisional patent owned by one of the directors, and any subsequent patents for this technology related to the application of Zinc based Transparent Conductive Oxide in displays, and the value thereof for 30,000 shares of common stock of the Company. The value of the shares of common stock at the time of acquisition was $30,540.

 

Debt Outstanding

 

Total debt outstanding decreased during the first six months of 2015 from approximately $1,394,000 to approximately $1,174,000, or 16%.

 

18
 

 

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

 

Liquidity

 

We have forecasted revenues and related costs as well as investing plans and financing needs to determine liquidity to meet cash flow requirements and believe we will have sufficient liquidity at least through June 30, 2016.  This forecast was based on current cash levels and debt obligations, and the best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the markets 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. 

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements including special purpose entities.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Financial Statements and accompanying notes . Note 2 to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2014 describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, revenue recognition, tax valuation allowance, stock based compensation and assessing changes in which impairment of certain long-lived assets may occur. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. Depreciable and useful lives estimated for property and equipment, licenses and patents are based on initial expectations of the period of time these assets and intangibles will benefit us. Changes in circumstances related to a change in our business, change in technology or other factors could result in these assets becoming impaired, which could adversely affect the value of these assets.

 

19
 

 

Item 4. Controls and Procedures

 

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Due to a segregation of duties material weakness described below, and based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2015, the Company’s disclosure controls and procedures were not effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief 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 operation, changes in shareholder’s equity and cash flows for all periods presented.

 

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 is subject to the risk that those internal controls may become inadequate because of changes in business conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

20
 

 

Item 4. Controls and Procedures (continued)

 

Management previously disclosed a material weakness in internal control over financial reporting in its annual report on Form 10-K, filed on February 11, 2015 for the year ended December 31, 2014, relating to insufficient segregation of duties consistent with control objectives. Management is aware of the risks associated with the lack of segregation of duties due to the small number of employees currently working with general administrative and financial matters. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions shall be performed by separate individuals. In order to remediate this weakness, we will need to hire additional employees. Although we will periodically reevaluate this situation, at this point we consider that the risks associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. Until we are able to hire additional employees, we will continue to report to the Audit Committee and the Board of Directors at least monthly (and more often as necessary). We believe this will continue to mitigate this weakness. This reporting includes balance sheets, statements of operations, statements of cash flows, and other detail supporting these statements.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal controls over financial reporting for the three months ended June 30, 2015 that materially affected or were reasonably likely to materially affect our disclosure controls and procedures. Additionally, there were no changes in our internal controls that could materially affect our disclosure controls and procedures subsequent to the date of their evaluation.

 

 

21
 

 

Part II. Other Information

 

Item 6. Exhibits

 

3.1 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)

 

3.2 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)

 

3.3 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).

 

4.1 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).

 

4.2 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).

 

4.3 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)

 

4.4 Form 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).

 

4.5 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).

 

4.6 Description of the Material Terms of the Stock Option Grant for Executive Officers and Board of Directors (Incorporated by reference to the Company’s Current Report on Form 8-K dated January 2, 2009, filed January 6, 2009).

 

4.7 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)

 

4.8 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
 

 

Item 6. Exhibits (continued)

 

10.1 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 March 26, 2012).

 

10.2 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, filed April 9, 2012).

 

10.3 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).

 

10.4 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 October 19, 2012).

 

10.5 Description of amendment to the Loan Agreement between the Company and the Ohio Development Services Agency, formerly known as the Ohio Department of Development (Incorporated by reference to the Company’s Current Report on Form 8-K, dated March 19, 2013).

 

10.6 Description of modification to payment schedules between the Company and the Ohio Development Services Agency, formerly known as the Ohio Department of Development and Description of Business Loan Agreement between the Company and The Huntington National Bank dated as of October 8, 2013 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated August 12, 2013).

 

10.7 Description of amendment to Loan Documents between the Company and the Ohio Air Quality Development Authority dated as of December 20, 2013 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated December 26, 2013).

 

10.8 Description of amendment to the Loan Agreement between the Company and the Ohio Development Services Agency, formerly known as the Ohio Department of Development (Incorporated by reference to the Company’s Current Report on Form 8-K, dated July 24, 2014).

 

22.1 Description of matters submitted to vote of security holders (Incorporated by reference to the Company’s Current Report on Form 8-K, dated June 11, 2015).

 

31.1 Rule 13a-14(a) Certification of Principal Executive Officer.*

 

31.2 Rule 13a-14(a) Certification of Principal Financial Officer.*

 

32.1 Section 1350 Certification of Principal Executive Officer and Certification of Principal Financial Officer and Principal Accounting Officer.*

 

 

23
 

 

Item 6. Exhibits (continued)

 

 

99.1 Press Release dated August 3, 2015, entitled “SCI Engineered Materials, Inc. Reports Second Quarter 2015 Results.”*

 

101 The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2015 and December 31, 2014 (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, (iv) Notes to Financial Statements.*

 

* Filed with this report

   

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   
  SCI ENGINEERED MATERIALS, INC.
   
Date:  August 3, 2015 /s/ Daniel Rooney
 

Daniel Rooney, Chairman of the Board of Directors,

President and Chief Executive Officer (Principal Executive Officer)

   
  /s/ Gerald S. Blaskie
 

Gerald S. Blaskie, Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

   

 

 

 

 

24

 

 

 

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Daniel Rooney, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q 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: August 3, 2015 /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 Quarterly Report on Form 10-Q 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: August 3, 2015 /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 Quarterly Report of SCI Engineered Materials, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel Rooney, Chairman of the Board of Directors, 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
  Chairman of the Board of Directors,
President and Chief Executive Officer of SCI Engineered Materials, Inc.
(Principal Executive Officer)
  August 3, 2015

 

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of SCI Engineered Materials, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2015 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.
(Principal Financial Officer and Principal Accounting Officer)
  August 3, 2015