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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-KSB
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2006
 Commission File Number: 0-31641
 SUPERCONDUCTIVE COMPONENTS, INC.
  Ohio
(State or other jurisdiction of 
incorporation or organization)
    
    31-1210318
(I.R.S. Employer
Identification No.)
 2839 Charter Street
Columbus, Ohio 43228
 (614) 486-0261
 Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, without par value(Title of Class)
 o
 þ o
 o þ
 o
  .
  o þ
 Documents Incorporated By Reference




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##### 



Table of Contents
  
 PagePart IItem 1.
    
    Description of Business
    
    
    3Item 2.
    
    Description of Property
    
    
    9Item 3.
    
    Legal Proceedings
    
    
    9Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    9Part IIItem 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    10Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    12Item 7.
    
    Financial Statements
    
    
    16Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    16Item 8A.
    
    Controls and Procedures
    
    
    16Item 8B.
    
    Other Information
    
    
    16Part IIIItem 9.
    
    Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act
    
    
    17Item 10.
    
    Executive Compensation
    
    
    17Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    17Item 12.
    
    Certain Relationships and Related Transactions
    
    
    17Item 13.
    
    Exhibits
    
    
    18Item 14.
    
    Principal Accountant Fees and Services
    
    
    20Signatures
    
    
    21EX-23EX-24EX-31.1EX-31.2EX-32.1EX-32.2
  Note Regarding Forward-Looking Statements
  2




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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Introduction
  History of the Company
 c o c
      Business
   3




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Marketing and Sales
  Ceramics
   Metals
    4




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Competition
  Research and Development
  .
    New Product Initiatives
     5




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Intellectual Property
    Employees
  Environmental Matters
  Collections and Write-offs
  Seasonal Trends
  6




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Risk Factors
  Historically we have experienced significant operating losses and may continue to do so in the
future.
   We have limited marketing and sales capabilities.
  Our success depends on our ability to retain key management personnel.
  We may need to seek additional capital in the future, which may reduce the value of our common
stock.
  Our competitors have far greater financial and other resources than we have.
   Government contracts may be terminated or suspended for noncompliance or other events beyond our
control.
  7




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Our revenues depend on patents and proprietary rights that may not be enforceable.
  Rights we have to patents and pending patent applications may be challenged.
  The rapid technological changes of our industry may adversely affect us if we do not keep pace with
advancing technology.
  Additional development of our products may be necessary due to uncertainty regarding development of
markets.
   The market for our common stock is limited, and as such our shareholders may have difficulty
reselling their shares when desired or at attractive market prices.
  8




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Prior to the fourth quarter of 2006 our common stock was subject to the Securities and Exchange
Commissions penny stock regulations, which limited the liquidity of common stock held by our
shareholders .
   Our Articles of Incorporation authorize us to issue additional shares of stock.
   We have not paid dividends on our common stock in the past and do not expect to do so in the
future.
  
 ITEM 2. DESCRIPTION OF PROPERTY.
   
 ITEM 3. LEGAL PROCEEDINGS.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  9




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PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 Market for Common Stock
  High
    
    LowFiscal 2005Quarter Ended March 31, 2005
    
    $
    2.50
    
    
    $
    1.75Quarter Ended June 30, 2005
    
    
    3.12
    
    
    
    1.75Quarter Ended September 30, 2005
    
    
    2.95
    
    
    
    2.25Quarter Ended December 31, 2005
    
    
    5.50
    
    
    
    2.25Fiscal 2006Quarter Ended March 31, 2006
    
    
    5.50
    
    
    
    3.50Quarter Ended June 30, 2006
    
    
    4.75
    
    
    
    3.25Quarter Ended September 30, 2006
    
    
    4.90
    
    
    
    3.00Quarter Ended December 31, 2006
    
    
    6.15
    
    
    
    3.10
    Holders of Record
  Dividends
  10




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Equity Compensation Plan Information
  Number of securitiesremaining available forNumber of Securities to
    
    
    
    
    
    
    issuance under equitybe issued upon exercise
    
    
    Weighted-average exercise
    
    
    compensation plansof outstanding options,
    
    
    price of outstanding
    
    
    (excluding securitieswarrants and rights
    
    
    options, warrants and rights
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity
compensation plans
approved by
security holders
(1)
    
    
    590,750
    
    
    $
    2.25
    
    
    
    274,950Equity compensation
plans not approved
by security holders
(2)
    
    
    17,500
    
    
    $
    2.88
    
    
    
    Total
    
    
    608,250
    
    
    $
    2.27
    
    
    
    274,950
 
 (1) Equity compensation plans approved by shareholders include our 2006 Stock Option
Plan.(2) Includes 17,500 stock purchase warrants that can be acquired to purchase 17,500
shares our common stock, which were issued by us in exchange for consideration in the form of goods
and services. 11




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
        Critical Accounting Policies
 .
 Year 2006 As Compared to Year 2005
 Revenues
   12




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Gross Margin
     Selling Expense
  General and Administrative Expense
  Research and Development Expense
  13




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Interest Income and Expense
   Income (Loss) Applicable To Common Shares
      Options and
    
    PotentialWarrants due
    
    Sharesto expire
    
    Outstanding2007
    
    
    
    
    
    
    3,440,1912008
    
    
    94,930
    
    
    
    3,535,1212009
    
    
    160,418
    
    
    
    3,695,5392010
    
    
    459,389
    
    
    
    4,154,9282011
    
    
    75,000
    
    
    
    4,229,9282012
    
    
    170,000
    
    
    
    4,399,9282013
    
    
    30,500
    
    
    
    4,430,4282014
    
    
    90,000
    
    
    
    4,520,4282015
    
    
    140,000
    
    
    
    4,660,4282016
    
    
    42,500
    
    
    
    4,702,928
 Liquidity and Working Capital
  14




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15




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Inflation
  Future Operating Results
  Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
  
 ITEM 7.
    
    FINANCIAL STATEMENTS
  
 ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 8A.
    
    CONTROLS AND PROCEDURES.
   
 ITEM 8B.
    
    OTHER INFORMATION
  16




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PART III
 
 ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT.
 Election of Directors Executive Officers Section 16(a) Beneficial Ownership Reporting Compliance
   
 ITEM 10. EXECUTIVE COMPENSATION.
 Executive Compensation
 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
 Ownership of Common
Stock by Directors and Executive Officers Ownership of Common Stock by Principal
Shareholders
 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 Certain Relationships and
Related Transactions
 17




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ITEM 13.
    
    EXHIBITS.
 Exhibit
    
    ExhibitNumber
    
    Description3(a)
    
    Certificate of Second Amended and Restated Articles of Incorporation of
Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(a) to the
Companys initial Form 10-SB, filed on September 28, 2000)3(b)
    
    Restated Code of Regulations of Superconductive Components, Inc.
(Incorporated by reference to Exhibit 3(b) to the Companys initial Form 10-SB, filed
on September 28, 2000)4(a)
    
    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(b)
    
    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(c)
    
    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(d)
    
    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).10(a)
    
    Employment Agreement entered into as of February 26, 2002, between Daniel
Rooney and the Company (Incorporated by reference to Exhibit 10(a) to the Companys
Registration Statement on Form SB-2 (Registration No. 333-131605), filed on February
6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)10(b)
    
    Lease Agreement between Superconductive Components, Inc. and Duke Realty
Ohio dated as of September 29, 2003, with Letter of Understanding dated February 17,
2004 (Incorporated by reference to Exhibit 10(a) to the Companys Quarterly Report on
Form 10-QSB, filed on March 31, 2004)10(c)
    
    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)10(d)
    
    License Agreement with Sandia Corporation dated February 26, 1996
(Incorporated by reference to Exhibit 10(f) to the Companys Form 10-SB Amendment No.
1, filed on January 3, 2001)10(e)
    
    Nonexclusive License with The University of Chicago (as Operator of
Argonne National Laboratory) dated October 12, 1995 (Incorporated by reference to
Exhibit 10(g) to the Companys Form 10-SB Amendment No. 1, filed on January 3, 2001)
 18




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Exhibit
    
    ExhibitNumber
    
    Description10(f)
    
    Nonexclusive License with The University of Chicago (as Operator of
Argonne National Laboratory) dated October 12, 1995 (Incorporated by reference to
Exhibit 10(h) to the Companys Form 10-SB Amendment No. 1, filed on January 3, 2001)10(g)
    
    Ohio Department of Development Third Frontier Action Fund Award dated
February 20, 2004 (Incorporated by reference to Exhibit 10(o) to the Companys Annual
Report on Form 10-KSB, filed on March 30, 2004)10(h)
    
    Description of the Material Terms of the Superconductive Components, Inc.
2005 Executive Bonus Plan (Incorporated by reference to Exhibit 10 to the Companys
Current Report on Form 8-K, filed on April 20, 2005)10(i)
    
    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)10(j)
    
    Department of Energy Award dated July 21, 2005 (Incorporated by reference
to Exhibit 10(k) to the Companys Registration Statement on Form SB-2 (Registration
No. 333-131605), filed on February 6, 2006, and amended by Pre-effective Amendment
No. 1 filed March 23, 2006)10(k)
    
    Subscription Agreement between the Company and the Estate of Edward R.
Funk, dated October 14, 2005 (Incorporated by reference to Exhibit 10(o) to the
Companys Registration Statement on Form SB-2 (Registration No. 333-131605), filed on
February 6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)10(l)
    
    Subscription Agreement between the Company and the Estate of Ingeborg V.
Funk, dated October 14, 2005 (Incorporated by reference to Exhibit 10(p) to the
Companys Registration Statement on Form SB-2 (Registration No. 333-131605), filed on
February 6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)10(m)
    
    Subscription Agreement between the Company and Robert H. Peitz, dated
October 14, 2005 (Incorporated by reference to Exhibit 10(q) to the Companys
Registration Statement on Form SB-2 (Registration No. 333-131605), filed on February
6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)10(n)
    
    Warrant to purchase common stock of Superconductive Components, Inc.
issued to the Estate of Edward R. Funk, dated October 19, 2005 (Incorporated by
reference to Exhibit 10(r) to the Companys Registration Statement Form on SB-2
(Registration No. 333-131605), filed on February 6, 2006, and amended by
Pre-effective Amendment No. 1 filed March 23, 2006)10(o)
    
    Warrant to purchase common stock of Superconductive Components, Inc.
issued to the Estate of Ingeborg V. Funk, dated October 19, 2005 (Incorporated by
reference to Exhibit 10(s) to the Companys Registration Statement on Form SB-2
(Registration No. 333-131605), filed on February 6, 2006, and amended by
Pre-effective Amendment No. 1 filed March 23, 2006)
 19




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Exhibit
    
    ExhibitNumber
    
    Description10(p)
    
    Warrant to purchase common stock of Superconductive Components, Inc.
issued to Robert H. Peitz, effective October 19, 2005 (Incorporated by reference to
Exhibit 10(t) to the Companys Registration Statement on Form SB-2 (Registration No.
333-131605), filed on February 6, 2006, and amended by Pre-effective Amendment No. 1
filed March 23, 2006)10(q)
    
    Conversion Agreement between the Company and the Estate of Edward R. Funk,
dated October 14, 2005 (Incorporated by reference to Exhibit 10(u) to the Companys
Registration Statement on Form SB-2 (Registration No. 333-131605), filed on February
6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)10(r)
    
    Conversion Agreement between the Company and the Estate of Ingeborg V.
Funk, dated October 14, 2005 (Incorporated by reference to Exhibit 10(v) to the
Companys Registration Statement on Form SB-2 (Registration No. 333-131605), filed on
February 6, 2006, and amended by Pre-effective Amendment No. 1 filed March 23, 2006)99.1
    
    Press Release dated March 7, 2007, entitled Superconductive Components,
Inc. Reports Record Results for the Fourth Quarter and 2006.23 *
    
    Consent of Independent Registered Accounting Firm24 *
    
    Powers of Attorney.31.1 *
    
    Rule 13a-14(a) Certification of Principal Executive Officer.31.2 *
    
    Rule 13a-14(a) Certification of Principal Financial Officer.32.1 *
    
    Section 1350 Certification of Principal Executive Officer.32.2 *
    
    Section 1350 Certification of Principal Financial Officer.
 
 *
    
    Filed herewith 
 ITEM 14.
    
    Principal Accountant Fees and Services
 Principal Accountant Fees
and Services
 20




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SIGNATURES
  SUPERCONDUCTIVE COMPONENTS, INC.Date: March 7, 2007
    
    
    
    By:
    
    /s/ Daniel RooneyDaniel Rooney, Chairman of the Board ofDirectors, President and Chief ExecutiveOfficer
 th
 Signature
    
    
    
    Title/s/ 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)Robert J. Baker*

Robert J. Baker
    
    
    
    DirectorEdward W. Ungar*
    
    
    
    DirectorEdward W. UngarRobert H. Peitz*
    
    
    
    DirectorRobert H. PeitzWalter J. Doyle*
    
    
    
    DirectorWalter J. Doyle
 
 *By:
    
    /s/ Daniel Rooney
Daniel Rooney, Attorney-in-Fact
 21




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INDEX TO FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    F-1Balance Sheet
    
    F-2Statements of Operations
    
    F-4Statements of Shareholders Equity
    
    F-5Statements of Cash Flows
    
    F-6Notes to Financial Statements
    
    F-8




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Report of Independent Registered Public Accounting Firm
 
    /s/ HAUSSER + TAYLOR LLCColumbus, OhioFebruary 26, 2007




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Part I. Financial Information
 Item 1. Financial Statements
 SUPERCONDUCTIVE COMPONENTS, INC.
 
 BALANCE SHEET
 DECEMBER 31, 2006
 ASSETS
 CURRENT ASSETSCash
    
    $
    648,494Accounts ReceivableTrade, less allowance for doubtful accounts of $25,000
    
    
    439,946Contract
    
    
    52,760Inventories
    
    
    713,625Prepaid expenses
    
    
    47,466Total current assets
    
    
    1,902,291PROPERTY AND EQUIPMENT, AT COSTMachinery and equipment
    
    
    2,697,368Furniture and fixtures
    
    
    23,643Leasehold improvements
    
    
    299,551Construction in process
    
    
    95,5903,116,152Less accumulated depreciation
    
    
    (2,012,312
    )1,103,840OTHER ASSETSDeposits
    
    
    289,816Intangibles
    
    
    30,894320,710TOTAL ASSETS
    
    $
    3,326,841
  F-2




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SUPERCONDUCTIVE COMPONENTS, INC.
 BALANCE SHEET
 DECEMBER 31, 2006
 LIABILITIES AND SHAREHOLDERS EQUITY
 CURRENT LIABILITIESCapital lease obligation, current portion
    
    $
    70,799Accounts payable
    
    
    297,161Accrued contract expenses
    
    
    27,258Accrued personal property taxes
    
    
    22,500Deferred revenue
    
    
    50,474Accrued expenses
    
    
    208,494Total current liabilities
    
    
    676,686CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION
    
    
    145,693COMMITMENTS AND CONTINGENCIES
    
    
    SHAREHOLDERS EQUITYConvertible preferred stock, Series B, 10% cumulative,
nonvoting, no par value, $10 stated value, optional
redemption at 103%; 25,185 shares issued and outstanding
    
    
    360,146Common stock, no par value, authorized 15,000,000
shares; 3,432,915 shares issued and outstanding
    
    
    9,007,817Additional paid-in capital
    
    
    995,586Accumulated deficit
    
    
    (7,859,087
    )2,504,462TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,326,841
  F-3




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SUPERCONDUCTIVE COMPONENTS, INC.
 
 STATEMENTS OF OPERATIONS
 YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005SALES REVENUE
    
    $
    8,003,700
    
    
    $
    3,167,743CONTRACT RESEARCH REVENUE
    
    
    42,092
    
    
    
    289,4398,045,792
    
    
    
    3,457,182COST OF SALES REVENUE
    
    
    6,240,140
    
    
    
    2,438,788COST OF CONTRACT RESEARCH
    
    
    17,408
    
    
    
    98,5336,257,548
    
    
    
    2,537,321GROSS MARGIN
    
    
    1,788,244
    
    
    
    919,861GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    928,506
    
    
    
    765,748RESEARCH AND DEVELOPMENT EXPENSES
    
    
    212,507
    
    
    
    183,403SALES AND PROMOTIONAL EXPENSES
    
    
    354,609
    
    
    
    237,569INCOME (LOSS) FROM OPERATIONS
    
    
    292,622
    
    
    
    (266,859
    )OTHER INCOME (EXPENSE)Interest income
    
    
    43,427
    
    
    
    9,843Interest expense
    
    
    (15,508
    )
    
    
    (75,624
    )Gain on disposal of equipment
    
    
    100
    
    
    
    2,250Miscellaneous, net
    
    
    (18,373
    )
    
    
    (2,830
    )9,646
    
    
    
    (66,361
    )INCOME ( LOSS) BEFORE PROVISION FOR INCOME TAX
    
    
    302,268
    
    
    
    (333,220
    )INCOME TAX EXPENSE
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    
    302,268
    
    
    
    (333,220
    )DIVIDENDS ON PREFERRED STOCK
    
    
    (25,185
    )
    
    
    (25,185
    )INCOME (LOSS) APPLICABLE TO COMMON SHARES
    
    $
    277,083
    
    
    $
    (358,405
    )EARNINGS PER SHARE  BASIC AND DILUTED(Note 2)NET INCOME (LOSS) PER COMMON SHARE BEFORE
DIVIDENDS ON PREFERRED STOCKBasic
    
    $
    0.09
    
    
    $
    (0.13
    )Diluted
    
    $
    0.08
    
    
    $
    (0.13
    )NET INCOME (LOSS) PER COMMON SHARE AFTER
DIVIDENDS ON PREFERRED STOCKBasic
    
    $
    0.08
    
    
    $
    (0.13
    )Diluted
    
    $
    0.07
    
    
    $
    (0.13
    )WEIGHTED AVERAGE SHARES OUTSTANDINGBasic
    
    
    3,427,236
    
    
    
    2,665,078Diluted
    
    
    3,982,905
    
    
    
    2,665,078
  F-4




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SUPERCONDUCTIVE COMPONENTS, INC.
 
 STATEMENTS OF SHAREHOLDERS EQUITY
 Years Ended December 31, 2006 and 2005
 Convertible
    
    
    
    
    
    
    AdditionalPreferred Stock,
    
    
    Common
    
    
    Paid-In
    
    
    AccumulatedSeries B
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance 12/31/04
    
    $
    309,776
    
    
    $
    7,541,653
    
    
    $
    558,674
    
    
    $
    (7,828,035
    )
    
    $
    582,068Accretion of cumulative dividends
    
    
    25,185
    
    
    
    
    
    
    
    (25,185
    )
    
    
    
    
    
    
    Common stock warrants issued with debt (Note 5)
    
    
    
    
    
    
    
    
    
    
    19,890
    
    
    
    
    
    
    
    19,890Conversion of debt to common stock (Note 6)
    
    
    
    
    
    
    461,469
    
    
    
    125,641
    
    
    
    
    
    
    
    587,110Stock option acceleration (Note 7)
    
    
    
    
    
    
    
    
    
    
    27,215
    
    
    
    
    
    
    
    27,215Proceeds from sale of common stock (net) (Note 6)
    
    
    
    
    
    
    1,044,428
    
    
    
    304,484
    
    
    
    
    
    
    
    1,348,912Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333,220
    )
    
    
    (333,220
    )Balance 12/31/05
    
    $
    334,961
    
    
    $
    9,047,550
    
    
    $
    1,010,719
    
    
    $
    (8,161,255
    )
    
    $
    2,231,975Accretion of cumulative dividends
    
    
    25,185
    
    
    
    
    
    
    
    (25,185
    )
    
    
    
    
    
    
    Stock based compensation expense (Note 2I)
    
    
    
    
    
    
    
    
    
    
    10,052
    
    
    
    
    
    
    
    10,052Proceeds from exercise of stock options (Note 6)
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,000Private placement and SB-2 registration (Note 6)
    
    
    
    
    
    
    (51,733
    )
    
    
    
    
    
    
    
    
    
    
    (51,733
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,268
    
    
    
    302,268Balance 12/31/06
    
    $
    360,146
    
    
    $
    9,007,817
    
    
    $
    995,586
    
    
    $
    (7,858,987
    )
    
    $
    2,504,562
  F-5




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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 
 STATEMENTS OF CASH FLOWS
 YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    302,268
    
    
    $
    (333,220
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation
    
    
    216,664
    
    
    
    199,415Amortization and accretion
    
    
    3,088
    
    
    
    3,088Stock based compensation expense
    
    
    10,052
    
    
    
    Warrants issued for consulting and debt
    
    
    
    
    
    
    36,465Acceleration of stock options
    
    
    
    
    
    
    27,215Gain on sale of equipment
    
    
    (100
    )
    
    
    (2,250
    )Decrease in inventory reserve
    
    
    (13,399
    )
    
    
    (26,269
    )Change in allowance for doubtful accounts
    
    
    
    
    
    
    (8,176
    )Changes in operating assets and liabilities:(Increase) decrease in assets:Accounts receivable
    
    
    (185,117
    )
    
    
    (131,919
    )Inventories
    
    
    (116,087
    )
    
    
    (22,700
    )Prepaid expenses
    
    
    (35,718
    )
    
    
    878Other assets
    
    
    (279,050
    )
    
    
    (2,010
    )Increase (decrease) in liabilities:Accounts payable
    
    
    1,521
    
    
    
    155,543Accrued expenses and deferred revenue
    
    
    19,538
    
    
    
    (261,417
    )Total adjustments
    
    
    (378,608
    )
    
    
    (32,137
    )Net cash used in operating activities
    
    
    (76,340
    )
    
    
    (365,357
    )CASH FLOWS FROM INVESTING ACTIVITIESProceeds on sale of equipment
    
    
    100
    
    
    
    2,250Purchases of property and equipment
    
    
    (333,857
    )
    
    
    (77,472
    )Net cash used in investing activities
    
    
    (333,757
    )
    
    
    (75,222
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from note payable, shareholders
    
    
    
    
    
    
    300,000Principal payments on notes payable, shareholders
    
    
    
    
    
    
    (200,000
    )Proceeds from exercise of common stock options
    
    
    12,000
    
    
    
    Payments related to registration of common stock
    
    
    (51,733
    )
    
    
    Proceeds from sale of common stock (net)
    
    
    
    
    
    
    1,348,912Principal payments on capital lease obligations
    
    
    (63,045
    )
    
    
    (37,027
    )Net cash (used in) provided by financing
activities
    
    
    (102,778
    )
    
    
    1,411,885
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 STATEMENTS OF CASH FLOWS (CONTINUED)
 YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005NET (DECREASE) INCREASE IN CASH
    
    $
    (512,875
    )
    
    $
    971,306CASH Beginning of period
    
    
    1,161,369
    
    
    
    190,063CASH End of period
    
    $
    648,494
    
    
    $
    1,161,369SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATIONCash paid during the years for:Interest, net
    
    $
    15,508
    
    
    $
    19,749Income taxes
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIESProperty and equipment purchased by capital lease
    
    $
    168,208
    
    
    $
    75,900Note payable converted to equity
    
    $
    
    
    
    $
    488,000Accrued interest converted to equity
    
    $
    
    
    
    $
    9,110Accounts payable converted to equity
    
    $
    
    
    
    $
    90,000Machinery & Equipment accrued asset retirement
obligation increase
    
    $
    3,312
    
    
    $
    2,410
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 Note 1.
    
    Business Organization and PurposeSuperconductive Components, Inc. (SCI or the Company), dba SCI Engineered
Materials, an Ohio corporation, was incorporated in 1987, to develop, manufacture
and market products based on or incorporating high temperature superconductive
(HTS) materials. The Company manufactures ceramic and metal targets for a variety
of industrial applications including: Photonics/Optical, Semiconductor, Thin Film
Batteries and, to a lesser extent HTS. Photonics/Optical currently represents the
Companys largest market for its targets. Thin Film Battery is a developing market
where manufacturers of batteries use the Companys targets to produce very small
power supplies, with small quantities of stored energy. The production and sale of
HTS materials was the initial focus of the Companys operations and these materials
continue to be a part of the Companys development efforts.Note 2.
    
    Summary of Significant Accounting PoliciesA.
    
    Inventories  Inventories are stated at the lower of cost or market on an acquired
or internally produced lot basis, and consist of raw materials, work-in-process and
finished goods. Cost includes material, labor, freight and applied overhead. Inventory
reserves are established for obsolete inventory and excess inventory quantities based on
managements estimate of net realizable value. The inventory reserve decreased $13,399
and $26,269 during 2006 and 2005, respectively. The decrease in the reserve is a result
of a portion of obsolete inventory sold at reduced prices.The Company enters into cancelable purchase commitment arrangements with some
suppliers. Estimated purchase commitments to these suppliers approximate $149,000
at December 31, 2006. The Company can cancel these commitments at the Companys
discretion without penalty.B.
    
    Property and Equipment  Property and equipment are carried at cost. Depreciation
is provided on the straight-line method based on the estimated useful lives of the assets
for financial reporting purposes and allowable accelerated methods for tax purposes.
Useful lives range from ten years on certain furniture and fixtures and leasehold
improvements to three years on computer equipment. Expenditures for renewals and
betterments are capitalized and expenditures for repairs and maintenance are charged to
operations as incurred.Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the fair
value is less than the carrying amount of the asset, a loss is recognized for the
difference. There have been no such impairment adjustments.C.
    
    Research and Development  Certain amounts in the prior year financial statements
pertaining to research and development have been reclassified to conform to the current
year presentation. Research and development costs are expensed as incurred. Research
and development expenses for the years ended December 31, 2006 and 2005 were $212,507 and
$183,403, respectively. The increase is due to an increase in wages and continued
development of Ruthenium, Transparent Conductive Oxide and High K dielectric materials.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (Continued)D.
    
    Contract research and development costs are expensed when the contracted work has
been performed or as milestone results have been achieved. These contracts vary from six
months to three years in duration. The terms of the contracts, which are fixed price,
require the Company to submit final reports and/or progress reports to the sponsor.
While the contracts are subject to cancellation, management believes that the Company
will comply with all terms of the contracts and that all of the amounts awarded to the
Company will be collected.Research revenue and expenses associated to third parties are separately identified
in the Statements of Operations.During 2006 and 2005, the Company earned $42,092 and $289,439, respectively, in
contract revenue.During 2005, the Company was awarded a nine-month contract in the amount of $99,793
that ended in 2006.E.
    
    Equipment  In 2004, the Company received funds of $517,935 from the Ohio
Department of Developments Third Frontier Action Fund (TFAF) for the purchase of
equipment related to the grants purpose. In a separate contract with the Department of
Energy the Company received $27,500 for the purchase of equipment related to the
contracts purpose. The Company has elected to record the funds disbursed as a contra
asset; therefore, the assets are not reflected in the Companys financial statements. As
assets were purchased, the liability initially created when the cash was received was
reduced with no revenue recognized or fixed asset recorded on the balance sheet. As of
December 31, 2006, the Company had disbursed the entire amount received. The grant and
contract both provide that as long as the Company performs in compliance with the
grant/contract, the Company retains the rights to the equipment. Management states that
the Company will be in compliance with the requirements and, therefore, will retain the
equipment at the end of the grant/contract.F.
    
    Licenses  The Company has secured licenses to produce various superconductive
materials for periods up to the expiration of the applicable patents. The license fees,
included in Other Assets on the balance sheet, are being amortized over the expected
life of the agreement or applicable patent, which is seventeen years. Cost and
accumulated amortization of licenses at December 31, 2006 are $21,000 and $13,972,
respectively. Amortization expense was $1,259 for the years ended December 31, 2006 and
2005. Amortization expense is estimated to be $1,259 for each of the next five years.
 F-9




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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (Continued)G.
    
    Patent  The Company has secured patents for manufacturing processes used in its
operations. Costs incurred to secure the patents have been capitalized, included in
Other Assets on the balance sheet, and are being amortized over the life of the
patents. Cost and accumulated amortization of the patent at December 31, 2006 are
$36,473 and $12,607, respectively. Amortization expense was $1,830 for the years ended
December 31, 2006 and December 31, 2005. Amortization expense is estimated to be $1,830
for each of the next five years.H.
    
    Income Taxes  Income taxes are provided for by utilizing the asset and liability
method which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities using presently enacted tax rates. Deferred
tax assets are recognized for net operating loss carryforwards, reduced by a valuation
allowance which is established when it is more likely than not that some portion or
all of the deferred tax assets will not be recognized.I.
    
    Stock Based Compensation  During 2005 the Company accounted for stock based
compensation using the intrinsic value method prescribed in APB Opinion No. 25,
Accounting for Stock Issued to Employees. The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard No. 123, Accounting for Stock
Based Compensation (SFAS 123), which established accounting and disclosure
requirements using a fair value based methodology. SFAS 123 allowed the intrinsic
value method to be used, and required disclosure of the impact to the financial
statements of utilizing the intrinsic value versus the fair value based method on a pro
forma basis, as set forth in the table below. For all periods prior to January 1,
2006, the Company utilized the fair value method as provided for in SFAS 123 to account
for stock based compensation to non-employees.The Companys pro forma information for 2005, in accordance with the provisions of
SFAS 123 is provided below. For purposes of pro forma disclosures, stock based
compensation was amortized to expense on a straight-line basis over the vesting
period.
 2006
    
    
    2005Net income (loss) applicable to common shares:As reported
    
    $
    277,083
    
    
    $
    (358,405
    )Deduct: total stock-based compensation expense determined
under the fair value method for all awards, net of related tax benefits
    
    
    
    
    
    
    (22,068
    )Pro forma net income (loss) under SFAS #123
    
    $
    277,083
    
    
    $
    (380,473
    )Basic and diluted income (loss) per share:As reported
    
    $
    0.08
    
    
    $
    (0.13
    )Pro forma under SFAS #123
    
    
    0.08
    
    
    $
    (0.14
    )
 For the twelve months ended December 31, 2006 and 2005, there was
$10,052 and $27,215 respectively, of stock based compensation cost included in
the determination of net income (loss) as reported.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (Continued)In December 2004, the FASB issued SFAS 123 (Revised), Shared Based Payment (SFAS
123R). SFAS 123R replaced SFAS 123, and superseded APB Opinion No. 25. Effective
January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123R and related interpretations using the modified-prospective transition method.
Under this method, compensation cost recognized in 2006 includes (a) compensation
cost for all stock-based awards granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123 and (b) compensation cost for all stock-based
awards granted on or subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS 123R. Stock based
compensation expense recognized in 2006 was $10,052.In December 2005, the Board of Directors approved the acceleration of vesting of
unvested stock options previously awarded to employees and officers of the Company.
As a result of this action, options to purchase 149,500 shares of common stock that
would otherwise have vested over the next one to five years became fully vested.
The decision to accelerate the vesting of these options was considered to be in the
best interest of the Companys shareholders and was made primarily to reduce
non-cash compensation expense that would have been recorded in future periods
following the adoption of FAS 123R.J.
    
    Income (Loss) Per Common Share  Income (loss) per common share amounts are based
on the weighted average number of shares outstanding. Due to the net loss in 2005, the
assumed conversion of preferred stock and exercise of stock options and warrants are
anti-dilutive and have not been considered in the calculation of per share amounts.K.
    
    Statements of Cash Flows  For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with maturity of three months
or less to be cash. No such investments were purchased.L.
    
    Concentrations of Credit Risk  The Companys cash balances, which are at times in
excess of federally insured levels, are maintained at a large regional bank and a global
investment banking group, and are continually monitored to minimize the risk of loss.
The Company grants credit to its customers, who are varied in terms of size, geographic
location and financial strength. Customer balances are continually monitored to minimize
the risk of loss.The Company had four major customers in 2006 and 2005, which accounted for
approximately $6,435,000 and $1,534,000, respectively, of the total revenue and
$352,000 of the trade accounts receivable at December 31, 2006. The largest
customer represented over 60% of total revenues in 2006. A portion of the revenue
was attributable to an increase in a commodity raw material which can fluctuate
significantly.M.
    
    Use of Estimates  The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (Continued)N.
    
    Fair Value  The estimated fair value of amounts reported in the financial
statements have been determined using available market information and valuation
methodologies, as applicable (see Note 12).O.
    
    Revenue Recognition  Revenue from product sales is recognized upon shipment to
customers. Provisions for discounts and rework costs for returns are established when
products are shipped based on historical experience. Deferred revenues represents cash
received in advance of the contract revenues earned. Revenue from contract research
provided for third parties is recognized on the percentage of completion method.P.
    
    Accounts Receivable  The Company extends unsecured credit to customers under normal
trade agreements, which require payment within 30 days. Accounts greater than 90 days
past due, which amounted to $0 and $17,665 of net receivables for the years ended December
31, 2006 and 2005, respectively are considered delinquent. The Company does not charge
interest on delinquent trade accounts receivable. Accounts greater than one year past
due, which amount to $0 of net receivables as of December 31, 2006 and 2005 are placed on
non-accrual status. Unless specified by the customer, payments are applied to the oldest
unpaid invoice. Accounts receivable are presented at the amount billed.Management estimates an allowance for doubtful accounts, which was $25,000 as of
December 31, 2006 and 2005. The estimate is based upon managements review of
delinquent accounts and an assessment of the Companys historical evidence of
collections. Bad debt expense of $0 and $2,337 was recognized for the years ended
December 31, 2006 and 2005, respectively as a result of this estimate. Specific
accounts are charged directly to the reserve when management obtains evidence of a
customers insolvency or otherwise determines that the account is uncollectible.
Charge-offs of specific accounts for the years ended December 31, 2006 and 2005
totaled $0 and $11,000 respectively.Q.
    
    Intangible Assets  The Company accounts for Intangible Assets in accordance with
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142 requires certain intangible assets to be tested for
impairment under certain circumstances, and written off when impaired, rather than being
amortized as previous standards required. There were no impairment adjustments for the
years ended December 31, 2006 and 2005.R.
    
    Recently Issued Accounting Standards Fair Value Measurements  In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (SFAS 157), Fair Value Measurements, effective for
the Company beginning on January 1, 2008. This Statement defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. This statement establishes a fair value hierarchy that
distinguishes between valuations obtained from sources independent of the entity and
those from the entitys own unobservable inputs that are not corroborated by
observable market data. SFAS 157 expands disclosures about the use of fair value to
measure assets and liabilities in interim and annual periods subsequent to initial
recognition. The disclosures focus on the inputs used to measure fair value and for
recurring fair value measurements using
 F-12




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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (Continued)significant unobservable inputs, the effect of the measurements on earnings or
changes in net assets for the period. The Company is currently assessing the impact
of this guidance on its financial statements.Accounting for Uncertainty in Income Taxes  In June 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 Accounting for Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in financial
statements and prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 becomes effective for the Company beginning in
2007. The Company is currently evaluating the impact of its adoption on its
financial position and results of operations.Fair Value Option for Financial Assets and Financial Liabilities  In February 2007,
the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial Liabilities, effective
for the Company beginning on January 1, 2008. This Statement provides entities with
an option to report selected financial assets and liabilities at fair value, with
the objective to reduce both the complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and liabilities
differently. The Company is currently assessing the impact of this guidance on its
financial statements.Note 3.
    
    InventoriesInventories consist of the following at December 31, 2006:
 Raw materials
    
    $
    365,335Work-in-process
    
    
    192,305Finished goods
    
    
    231,847789,487Less reserve for obsolete inventory
    
    
    75,862$
    713,625
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 4.
    
    Lease ObligationsOperatingThe Company leases its facilities and certain office equipment
under agreements classified as operating leases expiring through
2014. Rent expense which includes various monthly rentals for the
years ended December 31, 2006 and 2005, totaled $158,032 and
$151,920, respectively. Future minimum lease payments at December
31, 2006 are as follows:
 2007
    
    $
    101,8342008
    
    
    101,8342009
    
    
    113,5362010
    
    
    109,1042011
    
    
    109,1042012 and beyond
    
    
    285,227$
    820,639
 CapitalThe Company also leases certain equipment under capital leases. The future minimum
lease payments, by year, with the present value of such payments, as of December 31,
2006 is as follows:
 2007
    
    $
    91,9262008
    
    
    86,4092009
    
    
    79,1132010
    
    
    26,876Total minimum lease payments
    
    
    284,324Less amount representing interest
    
    
    67,832Present value of minimum lease payments
    
    
    216,492Less current portion
    
    
    70,799Long-term capital lease obligations
    
    $
    145,693
 The equipment under capital lease at December 31, 2006 is included in the
accompanying balance sheet under the following captions:
 Machinery and equipment
    
    $
    269,948Less accumulated depreciation
    
    
    39,488Net book value
    
    $
    230,460
 These assets are amortized over three to seven years using the straight-line method
and amortization is included in depreciation expense.Depreciation expense totaled $27,141 and $22,637 for the years ended December 31,
2006 and 2005, respectively.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 5.
    
    Related Party Notes PayableDuring 2005, the Company entered into an agreement with the Estates of Edward R.
Funk and Ingeborg V. Funk. The Company was indebted to the Estates in the amount of
$289,391.92. The Estate agreed to cancel $288,000 of the indebtedness in exchange
for 144,000 shares of common stock and warrants to purchase an additional 36,000
shares of common stock at $3.00 per share exercisable until October 2010. The
Company transferred to the Estates $1,391.92 in full satisfaction of the remaining
amount of the indebtedness.In November of 2004, a director agreed to loan the Company up to $200,000 for
working capital, to be drawn by the Company in increments of $50,000. The interest
rate was Huntington National Banks prime rate plus 2%, which accrued and compounded
monthly. The loan was secured by the Companys assets and perfected by the filing
of a UCC-1 financing statement. For each $50,000 increment drawn on the loan the
director received 5,000 warrants to purchase the Companys common stock, without par
value, at a purchase price of $2.50 per share and exercisable until November 1,
2009. The loan was drawn on the following schedule: November 3, 2004, $100,000;
January 7, 2005, $50,000; and April 1, 2005, $50,000. The loan balance (principal
and accrued interest) was repaid in October 2005 and the UCC-1 financing statement
was terminated.In April of 2005, the same director who agreed to provide a loan to the Company in
November 2004, agreed to provide an additional $200,000 convertible secured loan to
the Company for working capital. The interest rate of 10% accrued and compounded
monthly. The loan was drawn on the following schedule: April 14, 2005, $100,000;
and May 20, 2005, $100,000. Because the Company completed equity financing of at
least $500,000 during the fourth quarter of 2005, the principal and accrued interest
totaling $209,110 automatically converted on the same basis as the new financing to
104,555 shares of common stock ($2.00 per share) and warrants to purchase an
aggregate of 26,139 shares of the Companys common stock at a purchase price of
$3.00 per share exercisable until October 2010.Note 6.
    
    Common and Preferred StockCommon Stock7,000 stock options were exercised during 2006 resulting in proceeds of $12,000.
The exercise price for these options ranged from $1.00 to $2.00.In 2005, the Company, in a private placement to seven accredited investors sold
693,000 shares of its common stock, without par value, at a purchase price of $2.00
per share. As part of the private placement, the accredited investors also received
warrants to purchase 173,250 shares of the Companys common stock, without par
value, at a purchase price of $3.00 per share exercisable until October 2010. The
net proceeds received from the sale of common stock were $1,348,912. Of the net
proceeds, the warrants were valued at $304,484, which was recorded as additional
paid-in capital.In April of 2005, as mentioned in note 5, a director agreed to provide a $200,000
convertible secured loan to the Company for working capital. Because the Company
completed equity financing of at least $500,000 during 2005, the principal and
accrued interest totaling $209,110 automatically converted on the same basis as the
new financing
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 6.
    
    Common and Preferred Stock (continued)to 104,555 shares of common stock ($2.00 per share) and warrants to purchase 26,139
shares of the Companys common stock at a purchase price of $3.00 per share
exercisable until October 2010.During 2005, the Company entered into an agreement with the Estate of Edward R.
Funk. The Company was indebted to the Estate in the amount of $188,411.71. The
Estate agreed to cancel $188,000 of the indebtedness in exchange for 94,000 shares
of common stock and warrants to purchase an additional 23,500 shares of common stock
at $3.00 per share exercisable until October 2010. The Company transferred to the
Estate $411.71 in full satisfaction of the remaining amount of the indebtedness.Also, during 2005, the Company entered into an agreement with the Estate of Ingeborg
V. Funk. The Company was indebted to the Estate in the amount of $100,980.21. The
Estate agreed to cancel $100,000 of the indebtedness in exchange for 50,000 shares
of common stock and warrants to purchase an additional 12,500 shares of common stock
at $3.00 per share exercisable until October 2010. The Company transferred to the
Estate $980.21 in full satisfaction of the remaining amount of the indebtedness.In addition, during 2005, the Company entered into an agreement with Porter, Wright,
Morris & Arthur LLP (PWMA). The Company was indebted to PWMA for legal services
rendered to the Company. PWMA agreed to cancel $90,000 of the indebtedness in
exchange for 45,000 shares of common stock and warrants to purchase an additional
11,250 shares of common stock at $3.00 per share exercisable until October 2010.Preferred StockShares of preferred stock authorized and outstanding at December 31, 2006 are as
follows:
 Shares
    
    
    SharesAuthorized
    
    
    OutstandingCumulative Preferred Stock
    
    
    10,000
    
    
    
    Voting Preferred Stock
    
    
    125,000
    
    
    
    Non-Voting Preferred Stock
    
    
    125,000
    (a)
    
    
    25,185
    (b)
 
 (a)
    
    Includes 700 shares of Series A Preferred Stock and 100,000
shares of Series B Preferred Stock authorized for issuance.(b)
    
    Series B Preferred Stock outstanding at December 31, 2006 In June 1995, the Company completed an offering of 215 shares of $1,000 stated value
1995 Series A 10% non-voting convertible preferred stock. In January 1996, the
Company completed an offering of 70,000 shares of $10 stated value 1995 Series B 10%
non-voting convertible preferred stock. The Series A shares are convertible to
common shares at the rate of $6.00 per share and Series B shares at the rate of
$5.00 per share. At the Companys option, Series A and Series B shares are
redeemable at 103% of the stated value plus the amount of any accrued and unpaid
cash dividends.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 6.
    
    Common and Preferred Stock (Continued)The Company redeemed the Series A preferred stock in 2003. During 2006 and 2005, no
Series B cash dividends were paid. At December 31, 2006 the Company has accrued
dividends on Series B preferred stock of $100,740, which is included in convertible
preferred stock, Series B on the balance sheet at December 31, 2006.Earnings Per ShareBasic income (loss) per share is calculated as income available to common
stockholders divided by the weighted average of common shares outstanding. Diluted
earnings per share is calculated as diluted income (loss) 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 December 31, 2005 all outstanding common stock equivalents which include
preferred stock, Series B, employee and director stock options and warrants were
antidilutive due to the net loss.
 December 31,
    
    
    December 31,2006
    
    
    2005Options
    
    
    590,750
    
    
    
    590,250Warrants
    
    
    651,987
    
    
    
    651,987Preferred Series B
    
    
    50,370
    
    
    
    50,3701,293,107
    
    
    
    1,292,607
 The following is provided to reconcile the earnings per share calculations:
 2006
    
    
    2005Income (loss) applicable to common shares
    
    $
    277,083
    
    
    $
    (358,405
    )Weighted average common shares outstanding  basic
    
    
    3,427,236
    
    
    
    2,665,078Effect of dilutions  stock options and warrants
    
    
    555,669
    
    
    
    Weighted average shares outstanding  diluted
    
    
    3,982,905
    
    
    
    2,665,078
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 7.
    
    Stock Option PlansOn June 9, 2006, shareholders approved the Superconductive Components, Inc. 2006
Stock Incentive Plan (the 2006 Plan), which replaced the 1995 Stock Option Plan
(the 1995 Plan). The Company adopted the 2006 Plan as incentive to key employees,
directors and consultants under which options to purchase up to 600,000 shares of
the Companys common stock may be granted, subject to the execution of stock option
agreements. Incentive stock options may be granted to key employees of the Company
and non-statutory options may be granted to directors who are not employees and to
consultants and advisors who render services to the Company. Options may be
exercised for periods up to 10 years from the date of grant at prices not less than
100% of fair market value on the date of grant. As of December 31, 2006 there were
42,500 stock options outstanding from the 2006 Plan. On September 29, 1995, the
Company adopted the 1995 Stock Option Plan (the 1995 Plan) as incentive to key
employees, directors and consultants. As of December 31, 2006 there were 548,250
stock options outstanding from the 1995 Plan. The Company adopted the 1995 Plan as
incentive to key employees, directors and consultants under which options to
purchase up to 900,000 shares of the Companys common stock may be granted, subject
to the execution of stock option agreements.In 2005, the Company elected to accelerate the vesting of incentive stock options on
149,500 shares of its common stock. The decision to accelerate vesting of these
stock options was made primarily to allow the Company to avoid recognizing non-cash
compensation cost on future financial statements, as required by a new accounting
rule. Because these options had exercise prices below the market value at the time
of acceleration the Company recognized non-cash compensation expense of $27,215 in
2005.The cumulative status at December 31, 2006 and 2005 of options granted and
outstanding, as well as options which became exercisable in connection with the
Stock Option Plans is summarized as follows:Employee Stock Options
 WeightedAverageStock Options
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    311,250
    
    
    $
    1.89Granted
    
    
    40,000
    
    
    
    2.40Expired
    
    
    (23,000
    )
    
    
    2.00Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2005
    
    
    328,250
    
    
    $
    1.95Granted
    
    
    42,500
    
    
    
    3.25Exercised
    
    
    (7,000
    )
    
    
    1.71Forfeited
    
    
    (20,000
    )
    
    
    2.13Outstanding at December 31, 2006
    
    
    343,750
    
    
    $
    2.11Shares exercisable at December 31, 2005
    
    
    328,250
    
    
    $
    1.95Shares exercisable at December 31, 2006
    
    
    301,250
    
    
    $
    1.94
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 7.
    
    Stock Option Plans (continued)Non-Employee Director Stock Options
 WeightedAverageStock Options
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    164,000
    
    
    $
    2.01Granted
    
    
    100,000
    
    
    
    3.20Exercised
    
    
    
    
    
    
    Expired
    
    
    (17,000
    )
    
    
    2.11Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2005
    
    
    247,000
    
    
    
    2.48Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    247,000
    
    
    $
    2.48Shares exercisable at December 31, 2005
    
    
    247,000
    
    
    $
    2.48Shares exercisable at December 31, 2006
    
    
    247,000
    
    
    $
    2.48
 Exercise prices for options range from $1.00 to $4.00 for options at December 31,
2006. The weighted average option price for all options outstanding is $2.25 with a
weighted average remaining contractual life of 6.4 years.The weighted average fair values at date of grant for options granted during 2006
and 2005 were $3.03 and $2.75, respectively, and were estimated using the
Black-Scholes option valuation model with the following weighted average
assumptions:
 2006
    
    
    2005Expected life in years
    
    
    7.0
    
    
    
    7.0Interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    107.55
    %
    
    
    110.77
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 Note 8.
    
    Purchase CommitmentsEquipment purchases commitments approximate $636,000 at December 31, 2006.The Company was approved for a loan from the Ohio Department of Developments
Innovation Ohio Loan Fund in the fourth quarter of 2006. This loan, in the amount
of $631,687 at an interest rate of 7.5% plus certain fees over 7 years, will be used
for the purchase of production equipment. The equipment is expected to be in
service during the second half of 2007.In addition, estimated purchase commitments for inventories approximate $149,000
(see Note 2A) at December 31, 2006.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 9.
    
    Warrants Issued and VestedThe cumulative status at December 31, 2006 of warrants issued and vested is
summarized as follows:
 Issue
    
    Expiration
    
    WarrantIssued
    
    
    Vested
    
    
    Consideration
    
    Date
    
    Date
    
    Price150,000
    
    
    
    150,000
    
    
    Subordinated Notes Payable
    
    Jan-00
    
    Jan-10
    
    $2.50(c)148,302
    (a)
    
    
    84,930
    
    
    Convertible Promissory Note
    
    Jun-03
    
    Jun-08
    
    $1.00(d)10,000
    (b)
    
    
    10,000
    
    
    Lease Guarantee
    
    Jun-03
    
    Jun-08
    
    $1.00(d)122,918
    
    
    
    122,918
    
    
    Private Equity Offering
    
    May-04
    
    May-09
    
    $2.88(d)17,500
    
    
    
    17,500
    
    
    Consulting Services
    
    May-04
    
    May-09
    
    $2.88(d)20,000
    
    
    
    20,000
    
    
    Revolving Promissory Note
    
    Nov-04
    
    Nov-09
    
    $2.50(d)246,639
    
    
    
    246,639
    
    
    Private Equity Offering
    
    Oct-05
    
    Oct-10
    
    $3.00(d)
 
 (a)
    
     The Company issued 148,302 warrants to purchase common stock
of the Company subject to vesting. As a result of the conversion of the
promissory notes on May 13, 2004, no additional vesting accrued and the number
of shares of common stock issuable under the warrants is fixed at 84,930.(b)
    
     The Company issued 10,000 warrants to purchase common stock
of the Company subject to vesting. The warrants vested according to the
following schedule: (i) 4,600 on the date of grant; and (ii) 5,400 vested at a
rate of 150 per month for 36 months.(c)
    
     At fair market value.(d)
    
     Above fair market value. Note 10.
    
    Income TaxesDeferred tax assets and liabilities result from temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
Significant components of the Companys deferred tax assets and liabilities are as
follows at December 31, 2006.
 Deferred tax assetsNOL Carryforward
    
    $
    2,242,000UNICAP
    
    
    13,000Allowance for doubtful accounts
    
    
    10,000Reserve for obsolete inventory
    
    
    29,000Property and equipment
    
    
    (42,000
    )2,252,000Valuation allowance
    
    
    2,252,000Net
    
    $
    
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 10.
    
    Income Taxes (continued)A valuation allowance has been recorded against the realizability of the net
deferred tax asset, such that no value is recorded for the asset in the accompanying
financial statements. The valuation allowance totaled $2,252,000 and $2,517,000 at
December 31, 2006 and 2005, respectively.The Company has net operating loss carryovers available for federal and state tax
purposes of approximately $5,898,000, which expire in varying amounts through 2026.For the years ended December 31, 2006 and 2005, a reconciliation of the statutory
rate and effective rate for the provisions for income taxes consists of the
following:
 Percentage2006
    
    
    2005Federal statutory rate
    
    
    34.0
    
    
    
    34.0Valuation allowance
    
    
    (34.0
    )
    
    
    (34.0
    )Effective rate
    
    
    
    %
    
    
    
    %
 The expense (benefit) for income taxes consists of the following:
 2006
    
    
    2005Current expense
    
    $
    
    
    
    $
    Deferred expense:NOL (utilization) accumulation
    
    
    (223,000
    )
    
    
    142,000Other temporary differences
    
    
    (42,000
    )
    
    
    (7,000
    )Change in valuation allowance
    
    
    265,000
    
    
    
    (135,000
    )Total
    
    $
    
    
    
    $
    
 Note 11.
    
    Related Party TransactionsThe Company had trade payables, shareholders of $7,920 at December 31, 2004,
pertaining to reimbursement for purchase of goods and services obtained for Company
purposes. In 2005 the Estate of the shareholder agreed to cancel the indebtedness
in exchange for 3,960 shares of common stock and warrants to purchase an additional
990 shares of common stock at $3.00 per share exercisable until October 2010.
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 NOTES TO FINANCIAL STATEMENTS
 Note 11.
    
    Related Party Transactions (continued)Interest expense, shareholders was $0 and $70,684 for the years ended December 31,
2006 and 2005, respectively.For additional information regarding related party transactions, see Notes 5, 6 and
9.Note 12.
    
    Fair Value of Financial InstrumentsThe fair value of financial instruments represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts.The following methods and assumptions were used by the Company in estimating fair
value disclosures for financial instruments:
 
    
    Cash and cash equivalents, short-term debt and current maturities of
long-term debt: Amounts reported in the balance sheet approximate fair market
value due to the short maturity of these instruments.
    
    Long-term capital lease obligations: Amounts reported in the balance sheet
approximate fair value as the interest rates on these obligations range from
7.8% to 18.5%.
 Note 13.
    
    Asset Retirement ObligationIncluded in machinery and equipment is various production equipment, which per the
Companys building lease, is required to be removed upon termination of the lease.
Included in accrued expenses in the accompanying balance sheet is the asset
retirement obligation that represents the expected present value of the liability to
remove this equipment. There are no assets that are legally restricted for purposes
of settling this asset retirement obligation.Following is a reconciliation of the aggregate retirement liability associated with
the Companys obligation to dismantle and remove the machinery and equipment
associated with its lease of its previous facility and the current facility. The
Company moved to its current facility in first quarter 2004.
 Balance at December 31, 2005
    
    $
    2,410Increase in present value of the obligation
(accretion expense in the corresponding amount
charged against earnings)
    
    
    3,312Balance at December 31, 2006
    
    $
    5,722
 F-22