NOTES
TO FINANCIAL STATEMENTS
Note
1. Business
Organization and Purpose
SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987. The
Company develops, commercializes technologies and manufactures ceramics and
metals for advanced applications in the physical vapor deposition industry
including: Photonics, Solar, Thin Film Battery, Semiconductor, and, to a lesser
extent High Temperature Superconductor (HTS) materials. Photonics
currently represents the Company’s largest market. Solar is an
industry that is exhibiting rapid growth. Thin Film Battery is a
developing market where manufacturers of batteries use the Company’s products to
produce very small power supplies with small quantities of stored
energy. Semiconductor is a developing
market.
Note
2. Summary
of Significant Accounting Policies
|
|
The
accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation of
the results of operations for the periods presented have been
included. The financial statements should be read in
conjunction with the audited financial statements and the notes thereto
for the year ended December 31, 2009. Interim results are not
necessarily indicative of results for the full
year.
|
|
|
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
|
Stock
Based Compensation - Compensation cost recognized in 2010 and 2009 includes
compensation cost for stock-based awards granted on or subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the Stock
Compensation Topic of the FASB Accounting Standards Codification. Non
cash stock based compensation costs were $103,577 and $281,203 for the six
months ended June 30, 2010 and 2009, respectively. On January
2, 2009, the Stock Option and Compensation Committee (the “Committee”) of the
Board of Directors of the Company approved the grant of options to purchase a
total of 450,000 shares of the Company’s common stock, effective January 2,
2009, to the Company’s Chief Executive Officer and three other executive
officers. The Committee also approved the grant of options to
purchase 90,000 shares to the four non-employee board
members. Pursuant to the terms of the agreements, the options have an
exercise price of $6.00 per share, the closing price of the Company’s common
stock as reported on the OTC Bulletin Board regulated quotation service on
January 2, 2009.
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
|
Note
3.
|
Common
Stock and Stock Options
|
On May
31, 2010 a total of 40,833 common stock warrants were exercised at a price of
$2.88 per common share. The cash proceeds were
$117,599. On January 8, 2010 a total of 150,000 common stock
warrants, which were originally in the estates of Dr. Edward R. Funk Sc.D., and
Ingeborg V. Funk, founders of the Company, were exercised at a price of $2.50
per share. The cash proceeds received were $375,000.
A total
of 99,585 common stock warrants at a price of $2.88 expired on May 31,
2010. The Company has 246,639 common stock warrants at a price of
$3.00 due to expire in October 2010. The Company also has 20,000
common stock warrants at a price of $2.50 due to expire in November
2010.
The
cumulative status of options granted and outstanding at June 30, 2010, and
December 31, 2009, as well as options which became exercisable in connection
with the Stock Option Plans are summarized as follows:
Employee Stock
Options
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
362,750
|
|
|
$
|
2.14
|
|
|
Granted
|
|
|
450,000
|
|
|
|
6.00
|
|
|
Exercised
|
|
|
(6,250
|
)
|
|
|
2.03
|
|
|
Forfeited
|
|
|
(10,250
|
)
|
|
|
3.05
|
|
|
Outstanding
at December 31, 2009
|
|
|
796,250
|
|
|
$
|
4.31
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(8,400
|
)
|
|
|
1.55
|
|
|
Forfeited
|
|
|
(500
|
)
|
|
|
2.13
|
|
|
Outstanding
at June 30, 2010
|
|
|
787,350
|
|
|
$
|
4.34
|
|
|
Shares
exercisable at December 31, 2009
|
|
|
369,325
|
|
|
$
|
2.52
|
|
|
Shares
exercisable at June 30, 2010
|
|
|
415,200
|
|
|
$
|
2.94
|
|
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
|
Note
3.
|
Common
Stock and Stock Options (continued)
|
Non-Employee Director Stock
Options
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
233,500
|
|
|
$
|
2.54
|
|
|
Granted
|
|
|
90,000
|
|
|
|
6.00
|
|
|
Exercised
|
|
|
(4,000
|
)
|
|
|
2.13
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2009
|
|
|
319,500
|
|
|
$
|
3.52
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(1,000
|
)
|
|
|
2.13
|
|
|
Expired
|
|
|
(1,000
|
)
|
|
|
2.13
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at June 30, 2010
|
|
|
317,500
|
|
|
$
|
3.53
|
|
|
Shares
exercisable at December 31, 2009
|
|
|
259,500
|
|
|
$
|
2.95
|
|
|
Shares
exercisable at June 30, 2010
|
|
|
287,500
|
|
|
$
|
3.27
|
|
Exercise
prices for options range from $1.00 to $6.00 at June 30, 2010. The
weighted average option price for all options outstanding is $4.11 with a
weighted average remaining contractual life of 5.3 years.
On
February 15, 2010 the Board of Directors voted not to authorize the payment of a
cash dividend on convertible preferred stock, Series B, to shareholders of
record as of December 31, 2009. Accrued dividends on the Series B
preferred stock were $12,149 and $12,215 for the six months ended June 30, 2010
and 2009, respectively.
|
|
Inventories
are comprised of the following:
|
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw
materials
|
|
$
|
406,942
|
|
|
$
|
371,060
|
|
|
Work-in-progress
|
|
|
844,965
|
|
|
|
506,288
|
|
|
Finished
goods
|
|
|
219,345
|
|
|
|
204,026
|
|
|
Inventory
reserve
|
|
|
(60,633
|
)
|
|
|
(49,597
|
)
|
|
|
|
$
|
1,410,619
|
|
|
$
|
1,031,777
|
|
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
|
Note
6.
|
Earnings
Per Share
|
|
|
Basic
income (loss) per share is calculated as income (loss) available to common
stockholders divided by the weighted average of common shares
outstanding. Diluted earnings per share is calculated as income
available to common stockholders divided by the diluted weighted average
number of common shares. Diluted weighted average number of
common shares has been calculated using the treasury stock method for
Common Stock equivalents, which includes Common Stock issuable pursuant to
stock options and Common Stock warrants. At June 30, 2009 all
common stock options and warrants were anti-dilutive due to the net
loss. The following is provided to reconcile the earnings per
share calculations:
|
|
|
|
For
three months ended June 30,
|
|
|
For
six months ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Income
(loss) applicable to common shares
|
|
$
|
8,759
|
|
|
$
|
(374,027
|
)
|
|
$
|
109,115
|
|
|
$
|
(687,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
3,742,039
|
|
|
|
3,562,259
|
|
|
|
3,727,074
|
|
|
|
3,562,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutions
|
|
|
140,787
|
|
|
|
-
|
|
|
|
146,157
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
3,882,826
|
|
|
|
3,562,259
|
|
|
|
3,873,231
|
|
|
|
3,562,149
|
|
Note
7. Notes
Payable
In
December 2009, the Company issued a Promissory Note to The Huntington National
Bank, as Lender, pursuant to a Business Loan Agreement dated as of December 14,
2009. The Note is collateralized by a Commercial Security Agreement
granting the Lender a security interest in the Company’s inventory, equipment
and accounts receivable. As of June 30, 2010 there was no outstanding
balance on the Revolving Note.
Among
other items, the Revolving Note provides for the following:
|
|
·
|
At
no time shall the outstanding balance of the principal sum of the
Revolving Note exceed the lesser of (1) $500,000 or (2) an amount equal to
the sum of 80% of Eligible Accounts plus the lesser of (A) 50% of Eligible
inventory or (B) $200,000.
|
|
|
·
|
Interest
on the Revolving Note is subject to change from time to time based on
changes in an independent index (LIBOR). The index at the
inception of the Note was 0.235% per annum. The interest rate
to be applied to the unpaid principal balance will be at a rate of 2.75
percentage points over the index.
|
|
|
·
|
All
accrued interest is payable monthly. Any outstanding principal
and accrued interest owed on the Revolving Note matures on January 15,
2011.
|
SCI
ENGINEERED MATERIALS, INC.
NOTES
TO FINANCIAL STATEMENTS
Note
7. Notes
Payable (continued)
During
2006, the Company was approved for a 166 Direct Loan from the Ohio Department of
Development in the amount of $400,000. These funds were received in
July of 2008. The proceeds were used to reduce the balance on
outstanding capital lease obligations. The term of the loan is 84
months at an interest rate of 3%. There is also a one-quarter percent annual
servicing fee to be charged monthly on the outstanding principal
balance. During each of the first 12 months the Company made only
monthly servicing fee and interest payments per the loan
agreement. During months 13 through 84, the Company is making monthly
servicing fee, interest and principal payments. The loan principal
balance will be fully amortized over the last 72 months. The Note is
secured by a Security Agreement granting the Lender a security interest in the
project equipment.
Note
8. Concentration
Risk
At June
30, 2010 the Company had a prepaid expense of approximately $200,000 to a
supplier for the purchase of raw material. The supplier, with revenues of
several billion dollars, continues to deliver the raw material as agreed
upon.
At June
30, 2010 the Company had a receivable of approximately $190,000 from a
customer. This balance is consistent with month end balances for the
past year. None of the outstanding balance was past due as of June
30, 2010.
Note
9. Income
Taxes
Income
tax expense consists of the following for the six months ended June 30, 2010 and
2009, respectively:
|
|
|
2010
|
|
|
2009
|
|
|
Federal
– deferred
|
|
$
|
72,000
|
|
|
$
|
-
|
|
|
State
and local
|
|
|
11,367
|
|
|
|
575
|
|
|
|
|
$
|
83,367
|
|
|
|
575
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with the Financial Statements
and Notes contained herein and with those in our Form 10-K for the year ended
December 31, 2009.
Except
for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Those
statements include, but may not be limited to, all statements regarding our
intent, belief, and expectations, such as statements concerning our future
profitability and operating and growth strategy. Words such as
“believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,”
“estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions
are intended to identify forward-looking statements. Investors are
cautioned that all forward-looking statements contained in this Quarterly Report
on Form 10-Q and in other statements we make involve risks and uncertainties
including, without limitation, the factors set forth under the caption “Risk
Factors” included in our Annual Report on Form 10-K for the year ended December
31, 2009, and other factors detailed from time to time in our other filings with
the Securities and Exchange Commission. One or more of these factors
have affected, and in the future could affect our business and financial
condition and could cause actual results to differ materially from plans and
projections. Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, there can be no
assurance that any of the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events, unless
necessary to prevent such statements from becoming misleading. New
factors emerge from time to time and it is not possible for us to predict all
factors, nor can we assess the impact of each such factor on the business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
Overview
SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987. We
develop, commercialize technologies and manufacture ceramics and metals for
advanced applications in the physical vapor deposition industry including:
Photonics, Solar, Thin Film Battery, Semiconductor, and, to a lesser extent HTS
materials. Photonics currently represents the largest market for our
targets. Solar is an industry that is exhibiting rapid growth and we
expect this market to grow quickly. Thin Film Battery is a developing
market where manufacturers of batteries use our products to produce very small
power supplies with small quantities of stored
energy. Semiconductor is a developing market for
us. In recent years we added to our sales staff for the purpose of
focusing on opportunities for our products in the Solar industry. We
also added staff to our Technology group for the development of innovative
products. Late in the second quarter of 2009 we received an order
from a solar customer that was in excess of $1 million. Nearly the
entire amount of this order shipped before December 31, 2009. Late in
the fourth quarter this same customer placed another order greater than $1
million. Nearly the entire order shipped during the first half of
2010. We continue to receive ongoing orders from this
customer.
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Executive
Summary
For the
six months ended June 30, 2010, we had revenues of $4,801,777. This
was an increase of $1,590,189, or 49.5%, compared to the six months ended June
30, 2009. The increase in revenues can be attributed to an increase
in product revenue, particularly in the Solar market. Product revenue
increased $1,646,491, or 60.7%, for the six months ended June 30, 2010 from the
same period in 2009. Contract research revenue decreased to
$444,772 from $501,074 for the first half of 2010 compared to the first half of
2009, due to the completion of certain milestones related to these
programs.
Gross
profit increased $667,340 to $1,343,850, or 98.6% for the six months ended June
30, 2010 compared to the same six months in 2009. The increase in
gross profit can be attributed to the increase in product revenue as mentioned
above, particularly in the Solar market. During the second quarter of
2010 we incurred higher costs related to qualification of new products versus
the same period last year. Our products continue to be evaluated by a
growing number of companies engaged in the global solar market. Gross
margin was 28.0% of total revenues for the first six months of 2010 compared to
21.1% for the same period in 2009, reflecting higher product volume and improved
product mix.
For the
six months ended June 30, 2010, we had income before provision for income tax of
$204,631 compared to a loss of $674,664 for the six months ended June 30,
2009. We had income applicable to common shares of $109,115 for the
six months ended June 30, 2010 compared to a loss of $687,454 for the same
period in 2009. This increase can be attributed to the increase in
revenue previously mentioned and a reduction of operating expenses of
approximately $115,000. Non-cash stock based compensation expenses decreased to
approximately $100,000 in the first half of 2010 from approximately $281,000 in
the first half of 2009. In addition, the first half of 2009 included
a one time non-cash charge of $76,387 for a financing charge related to the
extension of expiration dates for common stock purchase warrants.
Given
current market opportunities, we continued to invest in expanding production,
R&D, marketing, and sales. This has resulted in trial and
qualification orders that were shipped to customers in the solar industry
throughout 2009 and the first half of 2010. This should allow us to
gain market share and to be poised to receive large orders in targeted
applications.
In April
of 2010, we received ISO 9001:2008 registration, an internationally recognized
quality standard. Prior to April 2010 we were ISO 9001:2000
registered.
During
the first quarter of 2010 a total of 150,000 common stock warrants, which were
originally in the estates of Dr. Edward R. Funk Sc.D., and Ingeborg V. Funk,
founders of our company, were exercised at a price of $2.50 per
share. The cash proceeds received were $375,000. During
the second quarter of 2010 a total of 40,833 common stock warrants were
exercised at a price of $2.88 per common share. The related cash
proceeds were $117,599.
During
the fourth quarter of 2009 we were notified we had been awarded a grant in the
amount of $775,400 by the Ohio Department of Development’s Third Frontier
Photovoltaic Program (TFPVP) to commercialize advanced technology for high power
density rotatable ceramic sputtering targets. These targets are used
in the manufacture of thin film photovoltaics. This technology will
enable manufacturers to operate rotatable sputtering targets at higher power
densities than current technology. The approval of the grant
was received during January 2010 and the work on the contract commenced in the
first quarter of 2010. The work on the contract is expected to
continue through the first quarter of 2012.
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
During
the third quarter of 2009 we received notification from the Department of Energy
(DOE) of an Assistance Agreement in the amount of approximately $750,000 which
was subject to final approval by the DOE. The award was
subsequently finalized at approximately $650,000. This grant
provides support for Phase II of a Small Business Innovation Research (SBIR)
award entitled “Homogenous BSCCO-2212 Round Wires for Very High Field Magnet
Applications.” The work on the contract is expected to continue
through August 2011.
In July
2009, we were selected by a customer as a subcontractor for an award granted by
the Ohio Department of Development. This award is entitled
“Ohio-Based Manufacturing of Thin-Film Photovoltaics” and provides support for
the development of alternate transparent conductive oxides. The tasks which
we had been involved are not expected to be completed and it is anticipated that
the program will conclude during the third quarter of 2010. We
could not provide material that met the customer’s revised timeline and
specifications. We billed approximately $5,000 to the customer for
our work on the contract and we do not expect to perform any additional
work. The original amount of the subcontract work to be performed by
us was $125,000.
We
received notification during the fourth quarter of 2008 from the Ohio Department
of Development’s Third Frontier Advanced Energy Program (TFAEP) of an award in
the amount of $708,715. This grant provides support to commercialize
technologies for the manufacture of rotatable ceramic sputtering targets for the
production of transparent conductive oxide-coated glass used in manufacturing
thin film photovoltaic solar cell panels. The work on the
contract began in January of 2009 and is expected to continue through January
2011.
During
the third quarter of 2008 we received notification from the Department of Energy
of a Notice of Financial Assistance Award in the amount of approximately
$750,000. The initial $125,000 was formally approved during
2008. The remaining balance was approved in February
2009. This grant provides support for Phase II of a Small Business
Innovation Research (SBIR) award entitled “Flux Pinning Additions to Increase Jc
Performance in BSCCO-2212 Round Wire for Very High Field
Magnets.” The work on the contract began during the third quarter of
2008 and is expected to continue through the first quarter of 2011.
We
received notification during the second quarter of 2008 from the Department of
Energy of a Notice of Financial Assistance Award in the amount of
$99,961. This award provided support for Phase I of an SBIR award
entitled “Homogenous BSCCO-2212 Round Wires for Very High Field Magnet
Applications.” The work on the contract began during the third
quarter of 2008 and was completed during the first quarter of
2009.
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Six
and three months ended June 30, 2010 (unaudited) compared to six and three
months ended June 30, 2009 (unaudited):
Revenues
for the six months ended June 30, 2010 were $4,801,777 compared to $3,211,588,
for the same period last year, an increase of $1,590,189 or
49.5%. The increase in revenues can be attributed to an increase in
product revenue, particularly in the Solar market. Product revenue
increased $1,646,491, or 60.7%, for the six months ended June 30, 2010 from the
same period in 2009. Contract research revenue decreased to $444,772
from $501,074 for the first half of 2010 compared to the first half of
2009. Revenues for the three months ended June 30, 2010 were
$2,560,664 compared to $1,310,053, for the same period last year, an increase of
$1,250,611 or 95.5%. As previously mentioned this increase can be
attributed to an increase in product revenue, particularly in the Solar
market. Product revenue increased $1,299,001, or 123.1%, for the
three months ended June 30, 2010 from the same period in 2009. Contract research
revenue decreased to $206,259 from $254,649 for the second quarter of 2010
compared to the second quarter of 2009, due to the completion of certain
milestones related to these programs.
Gross
profit for the six months ended June 30, 2010 was $1,343,850, which represented
gross margin of 28.0% of total revenue compared to $676,510 and 21.1% of total
revenue for the six months ended June 30, 2009. Gross profit for the
three months ended June 30, 2010 was $666,148, which represented gross margin of
26.0% of total revenue compared to $248,990 and 19.0% of total revenue for the
three months ended June 30, 2009. The increase in gross profit and
gross margin can be attributed to the increase in product revenue previously
mentioned, particularly in the Solar market. During the second
quarter of 2010 we incurred higher costs related to qualification of new
products versus the same period last year. Our products continue to
be evaluated by a growing number of companies engaged in the global solar
market.
Marketing
and Sales Expense
Marketing
and Sales expense for the six months ended June 30, 2010 decreased 1.3% to
$310,230 from $314,450 for the same period in 2009. The decrease was
due to less non-cash stock based compensation expense of approximately $21,000
as well as less travel related expenses of approximately
$7,000. These reductions, along with a slight decrease in wages
helped offset an increase of approximately $36,000 in manufacturer’s sales
representative commissions in the first half of 2010. Marketing and Sales
expense for the three months ended June 30, 2010 increased 6.5% to $155,908 from
$146,358 for the same period in 2009. The increase was due to higher
manufacturer’s sales representative commissions in the second quarter of 2010
compared to the same period in 2009.
|
|
General
and Administrative Expense
|
General
and administrative expense for the six months ended June 30, 2010 decreased to
$596,211 from $703,383, or 15.2%, for the six months ended June 30,
2009. The decrease was the result of less non-cash stock based
compensation expense of approximately $135,000. General and administrative
expense for the three months ended June 30, 2010 was $314,981 compared to
$288,347 for the three months ended June 30, 2009, an increase of
9.2%. The increase was the result of the reinstatement of wage cuts
introduced during the second quarter of 2009 as well as higher professional
fees.
|
|
Research
and Development Expense
|
Research
and development expense for the first six months of 2010 was $200,761 compared
to $204,577 for the same period in 2009, a decrease of
1.9%. Research and development expense for the three
months ended June 30, 2010 was $147,505 compared to $79,247 for the same period
in 2009, an increase of 86.1%. During the first quarter of 2010 most
of our research and development resources were applied to ongoing R&D
contracts. The second quarter saw a return to more internal research
involved with the solar industry.
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
|
|
Interest
Income and Expense
|
Interest
income was $2,663 and $4,846 for the six months ended June 30, 2010 and 2009,
respectively. Interest income was $1,607 and $2,352 for the
three months ended June 30, 2010 and 2009, respectively. The
decrease in interest rates reduced the amount of interest earned.
Interest
expense was $44,931 and $57,223 for the six months ended June 30, 2010 and 2009,
respectively. Interest expense was $23,109 and $28,635 for the three
months ended June 30, 2010 and 2009, respectively. The decrease was
due to the maturity of four capital leases plus more principal and less interest
being applied to ongoing capital lease payments.
|
|
A
one time non-cash financing expense associated with the extension of a
warrant expiration date was approximately $76,000 during the six and three
months ended June 30, 2009. There was no such expense in
2010.
|
|
|
Income
tax expense for the six months ended June 30, 2010 was $83,367 compared to
$575 for the six months ended June 30, 2009. Income tax expense
for the three months ended June 30, 2010 was $21,670 compared to $287 for
the three months ended June 30, 2009. The deferred tax benefit
of $156,000 at December 31, 2009 was reduced by $72,000 during the first
half of 2010 to account for the expected usage of prior net operating
losses against current year income.
|
|
|
INCOME
(LOSS) APPLICABLE TO COMMON SHARES
|
Income
applicable to common shares was $109,115, or $0.03 per common share, for the six
months ended June 30, 2010 compared to a loss applicable to common shares of
$687,454, or $(0.19) per common share for the six months ended June 30,
2009. The income or loss applicable to common shares includes income
or loss after provision for income tax and the accretion of Series B preferred
stock dividends. Dividends on the Series B preferred stock accrue at
10% annually on the outstanding shares. Accrued dividends on the
Series B preferred stock were $12,149 and $12,215 for the six months ended June
30, 2010 and 2009, respectively. Basic income or loss per common
share before provision for income tax was $0.05 and $(0.19) for the six months
ended June 30, 2010 and 2009, respectively.
Income
applicable to common shares was $8,759, or $0.00 per common share, for the three
months ended June 30, 2010 compared to a loss applicable to common shares of
$374,027, or $(0.10) per common share for the three months ended June 30,
2009. The income or loss applicable to common shares includes income
or loss after provision for income tax and the accretion of Series B preferred
stock dividends. Dividends on the Series B preferred stock accrue at
10% annually on the outstanding shares. Accrued dividends on the
Series B preferred stock was $6,074 and $6,108 for the three months ended June
30, 2010 and 2009, respectively. Basic income or loss per common
share before provision for income tax was $0.01 and $(0.10) for the three months
ended June 30, 2010 and 2009, respectively.
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Basic and
diluted income applicable to common shares for the six months ended June 30,
2010 was $0.03 per common share based on 3,727,074 and 3,873,231 weighted
average shares outstanding, respectively. The weighted averaged
shares outstanding were 3,562,149 at June 30, 2009. All outstanding
common stock equivalents were anti-dilutive for the six months ended June 30,
2009 due to the net loss.
Basic and
diluted income applicable to common shares for the three months ended June 30,
2010 was $0.00 per common share based on 3,742,039 and 3,882,826 weighted
average shares outstanding, respectively. The weighted averaged
shares outstanding were 3,562,259 at June 30, 2009. All outstanding
common stock equivalents were anti-dilutive for the three months ended June 30,
2009 due to the net loss.
The
following schedule represents our outstanding common shares during the period of
2010 through 2019 assuming all outstanding stock options and stock warrants are
exercised during the year of expiration. If each shareholder
exercises his or her options or warrants, it could increase our common shares by
1,371,489 to 5,144,497 by December 31, 2019. Exercise prices for
options and warrants range from $1.00 to $6.00 at June 30,
2010. Assuming all such options and warrants are exercised in the
year of expiration, the effect on shares outstanding is illustrated as
follows:
|
|
|
Options and Warrants due to expire
|
|
|
Potential Shares Outstanding
|
|
|
2010
|
|
|
301,639
|
|
|
|
4,074,647
|
|
|
2011
|
|
|
62,500
|
|
|
|
4,137,147
|
|
|
2012
|
|
|
160,600
|
|
|
|
4,297,747
|
|
|
2013
|
|
|
30,250
|
|
|
|
4,327,997
|
|
|
2014
|
|
|
180,000
|
|
|
|
4,507,997
|
|
|
2015
|
|
|
140,000
|
|
|
|
4,647,997
|
|
|
2016
|
|
|
37,000
|
|
|
|
4,684,997
|
|
|
2017
|
|
|
-
|
|
|
|
4,684,997
|
|
|
2018
|
|
|
9,500
|
|
|
|
4,694,497
|
|
|
2019
|
|
|
450,000
|
|
|
|
5,144,497
|
|
LIQUIDITY
AND WORKING CAPITAL
At June
30, 2010, working capital was $2,123,551 compared to $1,266,378 at June 30,
2009. We provided cash from operations of approximately $350,000 for the six
months ended June 30, 2010. We used approximately $58,000 in cash
from operations for the six months ended June 30, 2009. Non-cash
items including depreciation, accretion and amortization, stock based
compensation, financing expense of warrant extension, change in deferred tax
asset, inventory reserve on excess and obsolete inventory, and provision for
doubtful accounts were approximately $429,000 and $590,000, respectively, for
the six months ended June 30, 2010 and 2009. Accounts receivable,
inventory, prepaid expenses and other assets decreased approximately $87,000 for
the six months ended June 30, 2010. Accounts receivable, inventory,
prepaid expenses and other assets increased approximately $155,000 for the six
months ended June 30, 2009. Accounts payable, accrued expenses and
customer deposits decreased approximately $276,000 for the six months ended June
30, 2010. Accounts payable, accrued expenses and customer deposits
increased approximately $183,000 for the six months ended June 30,
2009. Cash of approximately $143,000 and $106,000 was used for
investing activities for the six months ended June 30, 2010 and 2009,
respectively. The amounts invested were used to purchase machinery
and equipment for increased production capacity and new product
lines.
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
Cash of
approximately $280,000 was provided by financing activities during the six
months ended June 30, 2010. Principal payments to third parties for
capital lease obligations and a note payable approximated
$226,000. Proceeds received from the exercise of common stock
warrants were $490,799. Proceeds received from the exercise of common
stock options were $15,145. We incurred new capital lease obligations
of approximately $193,000 for new production equipment.
During
the six months ended June 30, 2009 cash of approximately $194,000 was used for
financing activities. Principal payments to third parties for capital
lease obligations approximated $171,000. Proceeds received from the
exercise of common stock options were $1,550. Payments related to Series B
Preferred stock dividends were $24,430. We incurred new capital lease
obligations of approximately $556,000 for new production equipment.
As of
June 30, 2010, cash on-hand was $1,594,168. We believe, based on
forecasted sales and expenses, that funding will be adequate to sustain
operations at least through June 30, 2011.
We have
the ability to draw on a Revolving Note from The Huntington National
Bank. The principal amount of the Revolving Note is
$500,000. As of June 30, 2010 there was no outstanding balance on the
Revolving Note.