##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended June 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For
the transition period from  to
 Commission file number: 0-31641
 SUPERCONDUCTIVE COMPONENTS, INC.
  Ohio
    
    31-1210318(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 2839 Charter Street, Columbus, Ohio 43228
 (614) 486-0261
 Not Applicable
 þ o
  o o o
 o þ
  o þ




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##### 



FORM 10-QSB
 SUPERCONDUCTIVE COMPONENTS, INC.
 Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    
    3Statements of Operations For the Three Months and Six Months Ended June 30, 2006 and 2005 (unaudited)
    
    
    5Statements of Cash Flows For the Three Months and Six Months Ended June 30, 2006 and 2005 (unaudited)
    
    
    6Notes to Financial Statements (unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    N/AItem 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    N/AItem 3. Defaults Upon Senior Securities
    
    
    N/AItem 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    N/AItem 6. Exhibits
    
    
    22Signatures
    
    
    22EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 SUPERCONDUCTIVE COMPONENTS, INC.
 
 BALANCE SHEETS
 ASSETS
 June 30,
    
    
    December 31,2006
    
    
    2005(UNAUDITED)CURRENT ASSETSCash
    
    $
    850,216
    
    
    
    1,161,369Accounts receivableTrade, less allowance for doubtful accounts of $25,000
    
    
    300,521
    
    
    
    243,130Contract
    
    
    48,099
    
    
    
    50,710Other
    
    
    2,277
    
    
    
    13,749Inventories
    
    
    549,328
    
    
    
    584,140Prepaid expenses
    
    
    50,710
    
    
    
    11,748Total current assets
    
    
    1,801,151
    
    
    
    2,064,846PROPERTY AND EQUIPMENT,
AT COSTMachinery and equipment
    
    
    2,508,871
    
    
    
    2,221,298Furniture and fixtures
    
    
    23,643
    
    
    
    23,643Leasehold improvements
    
    
    290,979
    
    
    
    284,072Construction in progress
    
    
    58,262
    
    
    
    101,0752,881,755
    
    
    
    2,630,088Less accumulated depreciation
    
    
    (1,905,009
    )
    
    
    (1,814,959
    )976,746
    
    
    
    815,129OTHER ASSETSDeposits
    
    
    15,031
    
    
    
    10,765Intangibles
    
    
    32,438
    
    
    
    33,982Total other assets
    
    
    47,469
    
    
    
    44,747TOTAL ASSETS
    
    $
    2,825,366
    
    
    
    2,924,722
  3




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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 BALANCE SHEETS
 LIABILITIES AND SHAREHOLDERS EQUITY
 June 30,
    
    
    December 31,2006
    
    
    2005(UNAUDITED)CURRENT LIABILITIESCapital lease obligation, current portion
    
    $
    64,921
    
    
    $
    39,949Accounts payable
    
    
    150,479
    
    
    
    295,640Accrued contract expenses
    
    
    122,627
    
    
    
    145,104Accrued personal property taxes
    
    
    27,215
    
    
    
    35,000Deferred revenue
    
    
    94,854
    
    
    
    Accrued expenses
    
    
    119,717
    
    
    
    105,773Total current liabilities
    
    
    579,813
    
    
    
    621,466CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION
    
    
    151,349
    
    
    
    71,381COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITYConvertible preferred stock, Series B, 10% cumulative,
nonvoting, no par value, $10 stated value, optional
redemption at 103%; 25,185 issued and outstanding
    
    
    347,554
    
    
    
    334,961Common stock, no par value, authorized 15,000,000 shares;
3,425,915 shares issued and outstanding
    
    
    8,997,624
    
    
    
    9,047,550Additional paid-in capital
    
    
    999,562
    
    
    
    1,010,719Accumulated deficit
    
    
    (8,250,536
    )
    
    
    (8,161,355
    )2,094,204
    
    
    
    2,231,875TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,825,366
    
    
    $
    2,924,722
  4




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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 
 STATEMENTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2006 AND 2005 AND
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
 THREE MONTHS ENDED
    
    
    SIX MONTHS ENDED2006
    
    
    2005
    
    
    2006
    
    
    2005SALES REVENUE
    
    $
    1,158,434
    
    
    $
    624,002
    
    
    $
    2,316,965
    
    
    $
    1,110,628CONTRACT RESEARCH REVENUE
    
    
    
    
    
    
    89,533
    
    
    
    42,092
    
    
    
    177,9661,158,434
    
    
    
    713,535
    
    
    
    2,359,057
    
    
    
    1,288,594COST OF SALES REVENUE
    
    
    877,894
    
    
    
    469,946
    
    
    
    1,788,137
    
    
    
    850,416COST OF CONTRACT RESEARCH
    
    
    
    
    
    
    36,355
    
    
    
    17,407
    
    
    
    74,090877,894
    
    
    
    506,301
    
    
    
    1,805,544
    
    
    
    924,506GROSS MARGIN
    
    
    280,540
    
    
    
    207,234
    
    
    
    553,513
    
    
    
    364,088GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    232,524
    
    
    
    189,725
    
    
    
    445,254
    
    
    
    375,744RESEARCH AND DEVELOPMENT EXPENSES
    
    
    39,216
    
    
    
    58,268
    
    
    
    86,392
    
    
    
    100,336SALES AND PROMOTIONAL EXPENSES
    
    
    65,993
    
    
    
    58,412
    
    
    
    134,096
    
    
    
    110,934LOSS FROM OPERATIONS
    
    
    (57,193
    )
    
    
    (99,171
    )
    
    
    (112,229
    )
    
    
    (222,926
    )OTHER INCOME (EXPENSE)Interest income
    
    
    10,258
    
    
    
    326
    
    
    
    21,053
    
    
    
    670Interest expense
    
    
    (3,482
    )
    
    
    (24,687
    )
    
    
    (5,506
    )
    
    
    (40,209
    )Gain (loss) on disposal of equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Miscellaneous, net
    
    
    8,213
    
    
    
    (234
    )
    
    
    7,501
    
    
    
    (468
    )14,989
    
    
    
    (24,595
    )
    
    
    23,048
    
    
    
    (39,757
    )LOSS BEFORE PROVISION FOR INCOME TAX
    
    
    (42,204
    )
    
    
    (123,766
    )
    
    
    (89,181
    )
    
    
    (262,683
    )INCOME TAX EXPENSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    
    (42,204
    )
    
    
    (123,766
    )
    
    
    (89,181
    )
    
    
    (262,683
    )DIVIDENDS ON PREFERRED STOCK
    
    
    (6,296
    )
    
    
    (6,296
    )
    
    
    (12,592
    )
    
    
    (12,592
    )LOSS APPLICABLE TO COMMON SHARES
    
    $
    (48,500
    )
    
    $
    (130,062
    )
    
    $
    (101,773
    )
    
    $
    (275,275
    )EARNINGS PER SHARE  BASIC AND DILUTED(Note 5)NET LOSS PER COMMON SHARE BEFORE
DIVIDENDS ON PREFERRED STOCKBasic
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )NET LOSS PER COMMON SHARE AFTER
DIVIDENDS ON PREFERRED STOCKBasic
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )WEIGHTED AVERAGE SHARES OUTSTANDINGBasic
    
    
    3,425,915
    
    
    
    2,439,360
    
    
    
    3,425,915
    
    
    
    2,439,360Diluted
    
    
    3,425,915
    
    
    
    2,439,360
    
    
    
    3,425,915
    
    
    
    2,439,360
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SUPERCONDUCTIVE COMPONENTS, INC.
 
 STATEMENTS OF CASH FLOWS
 SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 (UNAUDITED)
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (89,181
    )
    
    $
    (262,683
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and accretion
    
    
    105,706
    
    
    
    106,153Amortization
    
    
    1,544
    
    
    
    1,544Stock based compensation expense
    
    
    1,436
    
    
    
    Gain on disposal of equipment
    
    
    
    
    
    
    (250
    )Inventory reserve
    
    
    (185
    )
    
    
    (9,968
    )Provision for doubtful accounts
    
    
    
    
    
    
    10,513Changes in operating assets and liabilities:(Increase) decrease in assets:Accounts receivable
    
    
    (43,308
    )
    
    
    (78,075
    )Inventories
    
    
    34,997
    
    
    
    (44,751
    )Prepaid expenses
    
    
    (38,962
    )
    
    
    (17,665
    )Other assets
    
    
    (4,266
    )
    
    
    Increase (decrease) in liabilities:Accounts payable
    
    
    (145,161
    )
    
    
    141,809Accrued expenses and deferred revenue
    
    
    76,880
    
    
    
    (122,186
    )Total adjustments
    
    
    (11,319
    )
    
    
    (12,876
    )Net cash used by operating activities
    
    
    (100,500
    )
    
    
    (275,559
    )CASH FLOWS FROM INVESTING ACTIVITIESProceeds on sale of equipment
    
    
    
    
    
    
    250Purchases of property and equipment
    
    
    (131,399
    )
    
    
    (25,356
    )Net cash used in investing activities
    
    
    (131,399
    )
    
    
    (25,106
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from note payable
    
    
    
    
    
    
    300,000Payments related to registration of common stock
    
    
    (49,926
    )
    
    
    Principal payments on capital lease obligations
    
    
    (29,328
    )
    
    
    (16,538
    )Net cash (used in) provided by financing activities
    
    
    (79,254
    )
    
    
    283,462
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SUPERCONDUCTIVE COMPONENTS, INC.
 STATEMENTS OF CASH FLOWS (CONTINUED)
 SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 2006
    
    
    2005NET DECREASE IN CASH
    
    $
    (311,153
    )
    
    $
    (17,203
    )CASH Beginning of period
    
    
    1,161,369
    
    
    
    190,063CASH End of period
    
    $
    850,216
    
    
    $
    172,860SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATIONCash paid during the years for:Interest, net
    
    $
    5,506
    
    
    $
    2,204Income taxes
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIESProperty and equipment purchased by capital lease
    
    $
    134,268
    
    
    $
    
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 Note 1.
    
    Business Organization and PurposeSuperconductive Components, Inc. (the Company) is an Ohio corporation that was
incorporated in May 1987. The Company was formed to develop, manufacture and sell materials
using superconductive principles. Operations have since been expanded to include the
manufacture and sale of non-superconductive materials. The Companys domestic and
international customer base is primarily in the thin film battery, high temperature
superconductor, photonics and optical coatings industries.Note 2.
    
    Summary of Significant Accounting PoliciesThe 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-QSB 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, 2005. 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.Equipment purchased with grant fundingIn 2004, the Company received funds of $517,935 from the Ohio Department of Developments
Third Frontier Action Fund (TFAF) for the purpose of purchasing equipment related to the
grants purpose. The Company elected to record the funds received as a liability; therefore,
the equipment is not reflected in the Companys financial statements. As equipment was
purchased, the liability initially created when the cash was received was reduced with no
revenue recognized or equipment recorded on the balance sheet. In 2005 the Company
purchased equipment in the amount of $25,945 that was reimbursed by TFAF in the first
quarter of 2006. As of June 30, 2006, the Company had disbursed the entire amount received.
The grant provides that as long as the Company performs in compliance with the grant, the
Company retains the rights to the equipment. Management anticipates that the Company will
be in compliance with the requirements and, therefore, expects to retain the equipment at
the end of the grant in 2006.ReclassificationCertain amounts in the prior year financial statements pertaining to research and
development have been reclassified to conform to the current year presentation.
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (continued)Stock Based CompensationDuring 2005 the Company accounted for stock based compensation using the intrinsic value
method prescribed in APB Opinion #25, Accounting for Stock Issued to Employees. The
Financial Accounting Standards Board issued Statement of Financial Accounting Standard #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 stock based compensation to
non-employees, the Company utilizes the fair value method as provided for in SFAS #123.The Companys pro forma information for the six months ended June 30, 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.
 For the six months ended June 30,2006
    
    
    2005Net loss applicable to
common shares:As reported
    
    $
    (101,773
    )
    
    $
    (275,275
    )Deduct: total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax benefits
    
    
    
    
    
    
    (6,342
    )Pro forma net loss under SFAS #123
    
    $
    (101,773
    )
    
    $
    (281,617
    )Basic and diluted loss per share:As reported
    
    $
    (0.03
    )
    
    $
    (0.11
    )Pro forma under SFAS #123
    
    $
    (0.03
    )
    
    $
    (0.12
    )
 For the six months ended June 30, 2005, there was no stock based employee compensation
cost included in the determination of net loss as reported.Recently Issued Accounting Standards  In December 2004, the FASB issued SFAS #123
(Revised), Shared Based Payment (SFAS #123R). SFAS #123R replaced SFAS #123, and
superseded APB Opinion #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
the first six months of 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 #123(R). Stock
based compensation expense recognized for the six months ended June 30, 2006 was $1,436,
which is included in the operating expenses in the accompanying statements of operations.
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
 Note 2.
    
    Summary of Significant Accounting Policies (continued)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 123(R).Note 3.
    
    Common Stock and Stock OptionsThe following stock options were granted under the 2006 Stock Option Plan during the six
months ended June 30, 2006:
 Grant Date
    
    # Options Granted
    
    Option PriceJune 19, 2006
    
    
    42,500
    
    
    $
    3.25
  Employee Stock Options
 AverageStock Options
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    311,250
    
    
    $
    1.89Granted
    
    
    40,000
    
    
    
    2.40Forfeited
    
    
    (23,000
    )
    
    
    2.00Outstanding at June 30, 2005
    
    
    328,250
    
    
    $
    1.95Outstanding at December 31, 2005
    
    
    328,250
    
    
    $
    1.95Granted
    
    
    42,500
    
    
    
    3.25Forfeited
    
    
    (15,000
    )
    
    
    2.13Outstanding at June 30, 2006
    
    
    355,750
    
    
    $
    2.10
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
 Note 3.
    
    Common Stock and Stock Options (continued)
 Non-Employee Director Stock Options
 AverageStock Options
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    164,000
    
    
    $
    2.01Granted
    
    
    50,000
    
    
    
    2.40Expired
    
    
    (17,000
    )
    
    
    2.11Outstanding at June 30, 2005
    
    
    197,000
    
    
    
    2.10Outstanding at December 31, 2005
    
    
    247,000
    
    
    
    2.48Outstanding at June 30, 2006
    
    
    247,000
    
    
    $
    2.48
 Exercise prices for options range from $1.00 to $4.00 at June 30, 2006. The
weighted average option price for all options outstanding is $2.26 with a weighted
average remaining contractual life of 6.9 years.The weighted average fair values at date of grant for options granted during 2006
and 2005 were $3.03 and $2.28, respectively, and were estimated using the
Black-Scholes option valuation model with the following weighted average
assumptions:
 2006
    
    2005Expected life in years
    
    
    10.0
    
    
    
    10.0Interest rate
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    110.76
    %
    
    
    116.63
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 Due to minimal historical exercise data, the Company used the option contract term
as the expected life. The approximate interest rate was based on the implied yield
available on U.S. Treasury bills. The Company used the historical price volatility of the
Companys stock price beginning in 2000 for purposes of determining the expected
volatility factor. The Company does not expect to pay dividends on its common
stock; therefore, a dividend yield of zero was used in the model.
 Note 4.
    
    Inventory
 Inventory is comprised of the following:
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Raw materials
    
    $
    291,568
    
    
    $
    286,089Work-in-progress
    
    
    183,036
    
    
    
    201,441Finished goods
    
    
    163,800
    
    
    
    185,871Inventory reserve
    
    
    (89,076
    )
    
    
    (89,261
    )$
    549,328
    
    
    $
    584,140
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SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
 Note 5.
    
    Earnings Per Share
 Basic 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 June 30, 2006 and 2005, all Common
Stock options and warrants are anti-dilutive due to the net loss.
The following is provided to reconcile the earnings per share
calculations:
 Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Loss applicable
to common shares
    
    $
    (48,500
    )
    
    $
    (130,062
    )
    
    $
    (101,773
    )
    
    $
    (275,275
    )Weighted average
common shares
outstanding  basic
    
    
    3,425,915
    
    
    
    2,439,360
    
    
    
    3,425,915
    
    
    
    2,439,360Effect of dilutions 
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average
shares outstanding 
diluted
    
    
    3,425,915
    
    
    
    2,439,360
    
    
    
    3,425,915
    
    
    
    2,439,360
 Note 6.
    
    Capital RequirementsThe Companys accumulated deficit since inception was $8,250,536 (unaudited) at June 30,
2006. The losses have been financed primarily from additional investments and loans by
major shareholders and private offerings of common stock and warrants to purchase common
stock. The Company cannot assure that it will be able to raise additional capital in the
future to fund its operations.As of June 30, 2006, cash on-hand was $850,216. Management believes, based on forecasted
sales and expenses, that funding will be adequate to sustain operations at least through
June 30, 2007. During 2005 the Company raised additional funds through offerings of debt
and equity. The Company received debt financing of $300,000 in 2005. Of this $300,000
received, $100,000 was repaid to the lender and $200,000 was converted into shares of the
Companys common stock.
 12




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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
 Note 6.
    
    Capital Requirements (continued)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.In the fourth quarter of 2005, the Company completed a private placement to accredited
investors. The investors purchased 986,555 shares of common stock at a price of $2.00 per
share and warrants to purchase an additional 246,639 shares of common stock at $3.00 per
share until October 14, 2010. The Company received $1,386,000 in cash from certain investors
for 693,000 shares of common stock and warrants to purchase 173,250 shares of Common Stock.
Four other investors cancelled indebtedness owed by the Company in the aggregate amount of
$587,110 in exchange for 293,555 shares of common stock and warrants to purchase 73,389
shares of common stock. The indebtedness cancelled was as follows: (i) the Estate of Edward
R. Funk cancelled indebtedness of $188,411.71 in exchange for 94,000 shares of common stock,
warrants to purchase 23,500 shares of common stock at $3.00 per share exercisable until
October 2010, and payment of $411.71; (ii) the Estate of Ingeborg V. Funk cancelled
$100,980.21 of indebtedness in exchange for 50,000 shares of common stock, warrants to
purchase 12,500 shares of common stock at $3.00 per share exercisable until October 2010,
and payment of $980.21; (iii) Porter, Wright, Morris & Arthur LLP (PWMA) cancelled $90,000
of indebtedness for legal fees 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; and (iv) a director cancelled $209,110 of a secured loan in exchange for
104,555 shares of common stock and warrants to purchase an additional 26,139 shares of
common stock at $3.00 per share exercisable until October 2010 (as described in preceding
paragraph).
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##### Table of Contents



SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
 Note 6.
    
    Capital Requirements (continued)The Company has incurred substantial operating losses through June 30, 2006, and numerous
factors may make it necessary for the Company to seek additional capital. In order to
support the initiatives envisioned in its business plan, it may need to raise additional
funds through public or private financing, collaborative relationships or other
arrangements. Its ability to raise additional financing depends on many factors beyond its
control, including the state of capital markets, the market price of its common stock and
the development or prospects for development of competitive products by others. Because the
common stock is not listed on a major stock exchange, many investors may not be willing or
allowed to purchase it or may demand steep discounts. The necessary additional financing
may not be available or may be available only on terms that would result in further dilution
to the current owners of the common stock.
 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.The following section contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Any statements that express, or involve
discussions as to expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as will likely
result, are expected to, will continue, is anticipated, estimated, projection, outlook) are
not statements of historical fact and may be forward looking. Forward-looking statements involve estimates, assumptions and
uncertainties that could cause actual results to differ materially from those expressed in
the forward-looking statements. These forward-looking statements are based largely on the
Companys expectations and are subject to a number of risks and uncertainties, including but
not limited to economic, competitive, regulatory, growth strategies, available financing and
other factors discussed elsewhere in this report and in other documents filed by the Company
with the Securities and Exchange Commission. Many of these factors are beyond the Companys
control. Actual results could differ materially from the forward-looking statements made.
In light of these risks and uncertainties, there can be no assurance that the results
anticipated in the forward-looking information contained in this report will, in fact,
occur.Any forward-looking statement speaks only as of the date on which such statement is made,
and the Company undertakes 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 management to predict all factors, nor can it assess the impact of each such
factor on the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-looking
statements.
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 OverviewSuperconductive Components, Inc. (SCI or the Company), an Ohio corporation, was
incorporated in 1987, to develop, manufacture and market products based on or incorporating
high temperature superconductive (HTS) materials. The Company presents itself to the
market as SCI Engineered Materials, an operating unit of Superconductive Components, Inc.
The Company views its business as supplying ceramic and metal materials to a variety of
industrial applications including: HTS, Photonics/Optical, and Thin Film Batteries. 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.
Photonics/Optical currently represents the Companys largest market for its materials. Thin
Film Battery materials is a developing market where manufacturers of batteries use these
materials to produce very small power supplies, with small quantities of stored energy.Executive SummaryFor the three months ended June 30, 2006, the Company had revenues of $1,158,434. This
represented the fourth consecutive quarter of revenues that exceeded $1,000,000. This was
an increase of $444,899, or 62.4%, over the three months ended June 30, 2005. For the six
months ended June 30, 2006, the Company had revenues of $2,359,057. This was an increase of
$1,070,463, or 83.1%, over the same period in 2005. Revenues for the twelve-month period
ending June 30, 2006 were $4,527,645. For the three months ended June 30, 2006, the Company
incurred a net loss applicable to common shares of $48,500, compared to a loss of $130,062
for the same period in 2005. For the six months ended June 30, 2006, the Company incurred a
net loss applicable to common shares of $101,773 compared to a net loss of $275,275 for the same
period in 2005. The Company adopted SFAS #123R effective January 1, 2006. SFAS #123R
requires compensation costs related to share based payment transactions to be recognized in
the financial statements. Included in expense in 2006 is non-cash compensation expense to
employees related to the granting of stock options. This expense totaled $1,436 through
June 30, 2006. The net loss applicable to common shares would have been $100,337 through
June 30, 2006 without this expense. EBITDA (Earnings Before Interest, Taxes, Deprecation and
Amortization) was ($5,894) during the six months ending June 30, 2006 versus ($115,229)
during the same period last year.Orders received in the second quarter of 2006 were $2,444,000, which was $1,694,000, or
225.9% more than the second quarter of 2005. Orders received in the first half of 2006
totaled $3,719,000, which was $2,239,000, or 151.3%, higher than the same period in 2005.
The orders received through June 2006 exceeded the amount of orders received for all of
2005, which was $3,459,000. Orders received for the twelve-month period ending June 30,
2006 were $5,699,000. Much of the improvement can be traced to ISO 9001:2000 certification
received during the second quarter of 2005. This immediately resulted in the return of a
major customer and helped expand the Companys customer base.
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 RESULTS OF OPERATIONSCritical Accounting PoliciesThe preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make
judgments, assumptions and estimates that affect the amounts reported in the Financial
Statements and accompanying notes.Note 2 to the Financial Statements in the Annual Report
on Form 10-KSB for the year ended December 31, 2005 describes the significant accounting policies and methods
used in the preparation of the Financial Statements. Estimates are used for, but not
limited to, accounting for the allowance for doubtful accounts, inventory allowances,
property and equipment depreciable lives, patents and licenses useful lives, and assessing
changes in which impairment of certain long-lived assets may occur. Actual results could
differ from these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of the
Financial Statements. The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts receivable. If
there is a deterioration of a major customers credit worthiness or actual defaults are
higher than our historical experience, our estimates of the recoverability of amounts due us
could be adversely affected. Inventory purchases and commitments are based upon future
demand forecasts. If there is a sudden and significant decrease in demand for our products
or there is a higher risk of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our inventory
allowances and our gross margin could be adversely affected. Depreciable and useful lives
estimated for property and equipment, licenses and patents are based on initial expectations
of the period of time these assets and intangibles will provide benefit to our Company.
Changes in circumstances related to a change in our business, change in technology or other
factors could result in these assets becoming impaired, which could adversely affect the
value of these assets.Six months ended June 30, 2006 (unaudited) compared to six months ended June 30, 2005
(unaudited):RevenuesRevenues for the six months ended June 30, 2006 were $2,359,057 compared to $1,288,594, for
the same period last year, an increase of $1,070,463 or 83.1%.Product revenues increased to $2,316,965 in 2006 from $1,110,628 in 2005, or an increase of
108.6%. The increase in revenues for the first six months of 2006 was due to the return of
a major customer and the addition of another major customer following the second quarter
2005 ISO 9001:2000 certification. Also, the addition of other new customers throughout the
past twelve months helped to increase revenues.Contract research revenues were $42,092 in 2006 as compared to $177,966 in 2005. The
decrease was due to the completion of work performed on a Phase II Small Business Innovation
Research grant for $523,612 from the Department of Energy that was awarded in 2003. This
award was to develop an advanced method to manufacture continuous reacted lengths of High Tc
Superconductor: Bismuth Strontium Calcium Copper Oxide  2212 Wire. The work on this
contract was completed in 2005. Revenues of $0 and $177,966 from this grant were included
in the first half of 2006 and 2005, respectively.
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations (continued)
 The Company received notification in 2005 from the Department of Energy of a Notice of
Financial Assistance Award in the amount of $99,793. This award provided support for Phase
I of an SBIR entitled Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires,
for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin. The work on the contract has
been completed. Revenues for this award of $42,092 were recognized during the first six
months of 2006 and $57,701 in revenues were recognized in the second half of 2005.Gross MarginTotal gross margin in 2006 was $553,513 or 23.5% of total revenue compared to $364,088 or
28.3% in 2005. Gross margin on product revenue was 22.8% in 2006 versus 23.4% in 2005. The
slight decrease was due to product mix of higher value product with lower gross margins.
Gross margin on contract research revenue was 58.6% and 58.4% for the six months ended June
30, 2006 and 2005, respectively.Selling ExpenseSelling expense in 2006 increased to $134,096 from $110,934 in 2005, an increase of 20.9%.
The increase was due to the implementation of an incentive compensation program.General and Administrative ExpenseGeneral and administrative expense in 2006 increased to $445,254 from $375,744 in 2005, or
18.5%. The increase was due to increased wages, higher public relations and legal expenses
and implementation of an incentive compensation program.Research and Development ExpenseResearch and development costs are expensed as incurred. Research and development costs for
2006 were $86,392 compared to $100,336 in 2005, a decrease of 13.9%. The decrease was due
to a change in focus from R&D to manufacturing of Photonics product and a reclass of labor
to cost of goods sold.Interest ExpenseInterest expense was $5,506 and $40,209 for the six months ended June 30, 2006 and 2005,
respectively. Interest expense to related parties was $0 and $38,006 for the six months
ended June 30, 2006, and 2005, respectively. The decrease was due to the elimination of
interest expense to related parties on a note that was repaid and another note that
converted to equity in October of 2005.LOSS APPLICABLE TO COMMON SHARESLoss applicable to common shares was $101,773 and $275,275 for the six months ended June 30,
2006 and 2005, respectively. Net loss per common share based on the loss applicable to
common shares for the six months ended June 30, 2006 and 2005 was $0.03 and $0.11,
respectively. The loss applicable to common shares includes the net loss from operations
and the accretion of Series B preferred stock dividends. The net loss per common share
before dividends on preferred stock
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 was $0.03 and $0.11 for the six months ended June 30, 2006 and 2005, respectively. All
outstanding common stock equivalents are anti-dilutive due to the net loss.Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares.
Accrued dividends on the Series B preferred stock totaled $12,592 for the six months ended
June 30, 2006 and 2005.The following schedule represents the potential for the outstanding common shares of the
Company during the period of 2006 through 2016. This schedule assumes 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 the Companys common shares by
1,269,737 (37.1%) to 4,695,652 by December 31, 2016. Exercise prices for options and
warrants range from $1.00 to $4.00 at June 30, 2006. Assuming all such options and warrants
are exercised in the year of expiration, the effect on shares outstanding is illustrated as
follows:
 Options and
    
    PotentialWarrants due
    
    Sharesto expire
    
    Outstanding2006
    
    
    
    
    
    
    3,425,9152007
    
    
    
    
    
    
    3,425,9152008
    
    
    94,930
    
    
    
    3,520,8452009
    
    
    160,418
    
    
    
    3,681,2632010
    
    
    459,389
    
    
    
    4,140,6522011
    
    
    80,000
    
    
    
    4,220,6522012
    
    
    170,000
    
    
    
    4,390,6522013
    
    
    32,500
    
    
    
    4,423,1522014
    
    
    90,000
    
    
    
    4,513,1522015
    
    
    140,000
    
    
    
    4,653,1522016
    
    
    42,500
    
    
    
    4,695,652
 LIQUIDITY AND WORKING CAPITALAt June 30, 2006, working capital was $1,221,338 compared to $(460,173) at June 30, 2005.
The increase was due to an increase in cash from the private placement in the fourth quarter
of 2005 as well as the elimination of obligations due to a note payable-shareholder. The
Company used cash from operations of approximately $100,000 for the six months ended June
30, 2006. The Company used cash from operations of approximately $276,000 for the six
months ended June 30, 2005. Significant non-cash items including depreciation, accretion
and amortization, stock based compensation expense, inventory reserve on excess and obsolete
inventory, and allowance for doubtful accounts were approximately $109,000 and $108,000, for the six months ended June 30, 2006 and 2005, respectively. Accounts
receivable, inventory, prepaid expenses and other assets increased approximately $52,000 for
the six months ended June 30, 2006 as compared to approximately $140,000 for the same period
in 2005. Accounts payable and accrued expenses and deferred revenue decreased approximately $68,000
for the six months ended June 30, 2006 versus an increase of approximately $20,000 for the
first six months of 2005.
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 The Company used cash of approximately $131,000 and $25,000 for
investing activities for the six months ended June 30, 2006 and
2005, respectively. The amounts invested were used to purchase
machinery and equipment for increased production capacity, new
product lines and for leasehold improvements for the new facility.
Proceeds on sale of equipment totaled $0 and $250 for the six
months ended June 30, 2006 and 2005, respectively.The Company used cash of approximately $79,000 for financing activities during the six
months ended June 30, 2006. Cash payments to third parties for capital lease obligations
approximated $29,000. Cash payments for services provided for the registration of common
stock were $49,926. The Company incurred new leases of $134,268 for a forklift and
production equipment.The Company provided cash of approximately $283,000 for financing activities for the six
months ended June 30, 2005. Cash payments to third parties for capital lease obligations
approximated $17,000. Proceeds from notes payable totaled $300,000.While certain major shareholders of the Company have advanced funds in the form of secured
debt, subordinated debt, accounts payable and guaranteeing bank debt in the past, there is
no commitment by these individuals to continue funding the Company or guaranteeing bank debt
in the future. The Company will continue to seek new debt or equity financing arrangements.
However, the Company cannot be certain that it will be successful in efforts to raise
additional funds.In November 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%, accruing and compounding monthly. The loan was secured
by a first lien on substantially all of the Companys assets. For each $50,000 increment
drawn on the loan, the director received 5,000 warrants to purchase the Companys common
stock at a purchase price of $2.50 per share exercisable until November 1, 2009. The loan
was drawn based on the following schedule: November 3, 2004, $100,000, January 7, 2005, $50,000; and April 1,
2005, $50,000. The entire loan balance (principal and accrued interest) was repaid in
October 2005.In April 2005, the same director who agreed to provide a secured loan for $200,000 to the
Company in November 2004, agreed to provide an additional $200,000 secured loan to the
Company for working capital. The interest rate was 10%, accruing and compounding monthly.
On April 14, 2005, $100,000 was drawn on this loan. $100,000 was also drawn on the loan on
May 20, 2005. By the terms of the loan, because the Company completed an equity financing
of at least $500,000 during 2005, the principal and accrued interest on this loan 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.In the fourth quarter of 2005, the Company completed a private placement to accredited
investors. The investors purchased 986,555 shares of common stock at a price of $2.00 per
share and warrants to purchase an additional 246,639 shares of common stock at $3.00 per
share until October 14, 2010. The Company received $1,386,000 in cash from certain investors
for 693,000 shares of common stock and warrants to purchase 173,250 shares of Common Stock.
Four other
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 investors cancelled indebtedness owed by the Company in the aggregate amount of $587,110 in
exchange for 293,555 shares of common stock and warrants to purchase 73,389 shares of common
stock. The indebtedness cancelled was as follows: (i) the Estate of Edward R. Funk
cancelled indebtedness of $188,411.71 in exchange for 94,000 shares of common stock,
warrants to purchase 23,500 shares of common stock at $3.00 per share exercisable until
October 2010, and payment of $411.71; (ii) the Estate of Ingeborg V. Funk cancelled
$100,980.21 of indebtedness in exchange for 50,000 shares of common stock, warrants to
purchase 12,500 shares of common stock at $3.00 per share exercisable until October 2010,
and payment of $980.21; (iii) Porter, Wright, Morris & Arthur LLP (PWMA) cancelled $90,000
of indebtedness for legal fees 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; and (iv) a director cancelled $209,110 of a secured loan in exchange for
104,555 shares of common stock and warrants to purchase an additional 26,139 shares of
common stock at $3.00 per share exercisable until October 2010 (as described in preceding
paragraph).Risk FactorsThe Company desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The following factors, as well as the factors
listed under the caption Risk Factors in the Companys Form 10-KSB filed with the
Securities and Exchange Commission on March 27, 2006, have affected or could affect the
Companys actual results and could cause such results to differ materially from those
expressed in any forward-looking statements made by the Company. Investors should consider
carefully these risks and speculative factors inherent in and affecting the business of the
Company and an investment in the Companys common stock.We have experienced significant operating losses in the past and may continue to do so in
the future.We commenced business in May of 1987. Our accumulated deficit since inception was
$8,250,536 (unaudited) at June 30, 2006.We have financed the losses primarily from additional investments and loans by our major
shareholders and private offerings of common stock and warrants to purchase common stock in
2004 and 2005. We cannot assure you, however, that we will be able to raise additional
capital in the future to fund our operations.Off Balance Sheet ArrangementsThe Company has no off balance sheet arrangements including special purpose
entities.
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##### Table of Contents



Item 3. Controls and Procedures
 As of the end of the period covered by this report, the Companys Chief Executive Officer
and Chief Financial Officer evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934). Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls
and procedures were effective as of the period covered by this report in ensuring that
information required to be disclosed by the Company in the reports that it files or submits
under the Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time period specified by the Securities and Exchange
Commissions rules and forms.Additionally, there were no changes in the Companys internal controls that could materially
affect the Companys disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any material deficiencies or material weaknesses in the Companys
internal controls. As a result, no corrective actions were required or undertaken.
 
 Part II. Other Information
 
 Item 4. Submission of Matters to a Vote of Security Holders.
 (a)  The Company held its Annual Meeting of Shareholders on June 9, 2006, for
the following purposes:
 (i)
    
    To elect five directors, each to serve for terms expiring at
the next Annual meeting of Shareholders;(ii)
    
    To approve and adopt the Companys 2006 Stock Incentive Plan;
and(iii)
    
    To ratify the selection of the independent registered public
accounting firm for the year ending December 31, 2006.
 (c)  The following tables show the voting tabulations for the matters voted upon at
the Annual Meeting of Shareholders.
 (i) Elect directors
    
    FOR
    
    WITHHELDRobert J. Baker, Jr.
    
    
    3,160,301
    
    
    
    5,800Walter J. Doyle
    
    
    3,160,401
    
    
    
    5,700Robert H. Peitz
    
    
    3,160,301
    
    
    
    5,800Daniel Rooney
    
    
    3,157,176
    
    
    
    8,925Edward W. Ungar
    
    
    3,160,301
    
    
    
    5,800
 FOR
    
    AGAINST
    
    ABSTAIN(ii) Incentive Plan
    
    
    2,437,296
    
    
    
    270,002
    
    
    
    800(iii) Ratify Accounting firm
    
    
    3,162,651
    
    
    
    3,300
    
    
    
    150
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##### Table of Contents



Item 6. Exhibits.
 10.1
    
    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).
 10.2
    
    Superconductive Components, Inc. 2006 Stock Incentive Plan
(Incorporated by reference to Appendix A to the Companys Definitive Proxy
Statement for the 2006 Annual Meeting of Shareholders held on June 9, 2006,
filed May 1, 2006).
 10.3
    
    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).
 10.4
    
    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).31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer. *31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer. *32.1
    
    Section 1350 Certification of Principal Executive Officer. *32.2
    
    Section 1350 Certification of Principal Financial Officer. *99.1
    
    Press Release dated August 1, 2006, entitled Superconductive
Components, Inc. Reports Second Quarter Results. *
 
 *
    
    Filed with this report 
 Signatures
  SUPERCONDUCTIVE COMPONENTS, INC.Date: August 1, 2006
    /s/ Daniel RooneyDaniel Rooney, President and Chief Executive Officer(Principal Executive Officer)/s/ Gerald S. BlaskieGerald S. Blaskie, Vice President
and Chief  Financial Officer(Principal Financial Officer) 22