10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2016

or

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

For the transition period from                           to  ___________

Commission file number:  0-31641

SCI ENGINEERED MATERIALS, INC.

(Exact name of registrant as specified in its charter)

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

2839 Charter Street, Columbus, Ohio 43228

(Address of principal executive offices) (Zip Code)

(614) 486-0261

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes xNo  ¨

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

Large accelerated filer ¨ Accelerated filer  ¨  Non-accelerated filer ¨ Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No x

4,054,618 shares of Common Stock, without par value, were outstanding at July 22, 2016.

FORM 10-Q

SCI ENGINEERED MATERIALS, INC.

Table of Contents

	Page No.
PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements
Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	3
Statements of Operations for the Three and Six Months  Ended June 30, 2016 and 2015 (unaudited)	5
Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	6
Notes to Financial Statements (unaudited)	7
Item 2.   Management's Discussion and Analysis of Financial Condition and  Results of Operations	13
Item 3.   Quantitative and Qualitative Disclosures About Market Risk	N/A
Item 4.   Controls and Procedures	19
PART II.   OTHER INFORMATION
Item 1.   Legal Proceedings	N/A
Item 1A. Risk Factors	N/A
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	N/A
Item 3.   Defaults Upon Senior Securities	N/A
Item 4.   Mine Safety Disclosures	N/A
Item 5.   Other Information	N/A
Item 6.   Exhibits	22
Signatures	24

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

	June 30,			December 31,
	2016			2015
	(UNAUDITED)
ASSETS
Current Assets
Cash	$	887,583		$	997,170
Accounts receivable, less allowance for doubtful accounts of $26,000		287,353			302,512
Inventories		1,001,165			573,114
Prepaid expenses		62,026			61,301
Total current assets		2,238,127			1,934,097
Property and Equipment, at cost
Machinery and equipment		7,505,437			7,506,574
Furniture and fixtures		154,246			154,245
Leasehold improvements		329,904			329,904
Construction in progress		200,026			-
		8,189,613			7,990,723
Less accumulated depreciation		(5,858,601	)		(5,642,619	)
		2,331,012			2,348,104
Other Assets
Deposits		19,215			16,487
Intangibles		34,935			34,935
Total other assets		54,150			51,422
TOTAL ASSETS	$	4,623,289		$	4,333,623

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

3

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

	June 30,			December 31,
	2016			2015
	(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Capital lease obligations, current portion	$	127,490		$	123,960
Notes payable, current portion		169,706			197,328
Accounts payable		172,998			191,475
Customer deposits		851,575			155,800
Accrued compensation		74,467			114,900
Accrued expenses and other		131,964			140,117
Total current liabilities		1,528,200			923,580
Capital lease obligations, net of current portion		284,686			215,231
Notes payable, net of current portion		307,990			393,513
Total liabilities		2,120,876			1,532,324
Commitments and contingencies
Shareholders' Equity
Convertible preferred stock, Series B, 10% cumulative, nonvoting, no par value, $10 stated value, optional redemption at 103%; optional shareholder conversion 2 shares for 1; 24,152 shares issued and outstanding		478,210			466,134
Common stock, no par value, authorized 15,000,000 shares; 4,053,190 and 4,016,508 shares issued and outstanding, respectively		10,021,586			9,993,027
Additional paid-in capital		2,166,268			2,097,599
Accumulated deficit		(10,163,651	)		(9,755,461	)
		2,502,413			2,801,299
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	4,623,289		$	4,333,623

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

4

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF OPERATIONS

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(UNAUDITED)

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2016			2015		2016			2015
Revenue	$	1,206,484		$	2,228,686	$	2,581,296		$	4,956,493
Cost of revenue		886,138			1,591,999		1,965,508			3,650,401
Gross profit		320,346			636,687		615,788			1,306,092
General and administrative expense		307,199			316,739		632,759			659,732
Research and development expense		74,417			91,221		154,493			188,864
Marketing and sales expense		104,832			125,972		213,842			236,276
(Loss) income from operations		(166,102	)		102,755		(385,306	)		221,220
Interest		11,156			14,630		22,841			30,579
(Loss) income before provision for income taxes		(177,258	)		88,125		(408,147	)		190,641
Income tax expense		43			1,037		43			1,037
Net (loss) income		(177,301	)		87,088		(408,190	)		189,604
Dividends on preferred stock		6,038			6,038		12,076			12,076
(LOSS) INCOME APPLICABLE TO COMMON SHARES	$	(183,339	)	$	81,050	$	(420,266	)	$	177,528
Earnings per share - basic and diluted (Note 6)
(Loss) income per common share
Basic	$	(0.05	)	$	0.02	$	(0.10	)	$	0.04
Diluted	$	(0.05	)	$	0.02	$	(0.10	)	$	0.04
Weighted average shares outstanding
Basic		4,042,722			3,978,728		4,033,488			3,959,601
Diluted		4,042,722			4,030,435		4,033,488			3,987,178

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

5

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(UNAUDITED)

	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(408,190	)	$	189,604
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and accretion		221,537			225,932
Amortization		4,719			915
Stock based compensation		105,103			105,123
Net loss on disposal of equipment		(750	)		494
Inventory reserve		10,509			(153,157	)
Change in allowance for doubtful accounts		-			11,318
Changes in operating assets and liabilities:
Accounts receivable		15,159			7,975
Inventories		(438,560	)		1,041,030
Prepaid expenses		(725	)		(66,462	)
Other assets		(2,728	)		6,634
Accounts payable		(18,477	)		48,496
Accrued expenses and customer deposits		647,191			(747,096	)
Net cash provided by operating activities		134,788			670,806
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment		750			-
Purchases of property and equipment		(59,368	)		(28,788	)
Net cash used in investing activities		(58,618	)		(28,788	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options		4,200			-
Principal payments on capital lease obligations and notes payable		(189,957	)		(219,701	)
Payment of cumulative dividends on preferred stock		-			(24,152	)
Net cash used in financing activities		(185,757	)		(243,853	)
NET (DECREASE) INCREASE IN CASH		(109,587	)		398,165
CASH - Beginning of period		997,170			1,011,956
CASH - End of period	$	887,583		$	1,410,121
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	23,159		$	31,471
Income taxes		43			1,037
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased by capital lease		145,077			-
Provisional patent acquired by common stock exchange		-			30,540
Increase in asset retirement obligation		-			5,100

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

6

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 1. Business Organization and Purpose

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

Note 2. Summary of Significant Accounting Policies

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for fair presentation of the results of operations for the periods presented have been included.  The financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015.  Interim results are not necessarily indicative of results for the full year.

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

Note 3. Common Stock and Stock Options

Stock Based Compensation - Compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period.  Non cash stock based compensation expense was $51,532 and $52,972 for the three months ended June 30, 2016 and 2015, respectively.  Non cash stock based compensation expense was $105,103 and $105,123 for the six months ended June 30, 2016 and 2015, respectively.  Unrecognized compensation expense was $269,659 as of June 30, 2016 and will be recognized through 2019.  There was no tax benefit recorded for this compensation cost as the expense primarily relates to incentive stock options that do not qualify for a tax deduction until, and only if, a qualifying disposition occurs.    

The non-employee board members received compensation of 31,682 and 21,347 aggregate shares of common stock of the Company during the six months ended June 30, 2016 and 2015, respectively.  The stock had an aggregate value of $24,358 and $24,378 for the six months ended June 30, 2016 and 2015, respectively, and was recorded as non-cash stock compensation expense in the financial statements.

During the second quarter of 2016, proceeds of $4,200 were received from the exercise of 5,000 stock options.

7

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 3. Common Stock and Stock Options (continued)

The cumulative status of options granted and outstanding at June 30, 2016, and December 31, 2015, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

				Weighted
				Average
	Stock Options			Exercise Price
Outstanding at January 1, 2015		603,857		$	4.18
Expired		(30,000	)		2.40
Forfeited		(1,000	)		3.10
Outstanding at December 31, 2015		572,857		$	4.27
Exercised		(5,000	)		0.84
Expired		(31,000	)		3.25
Outstanding at June 30, 2016		536,857		$	4.36
Options exercisable at December 31, 2015		325,621		$	5.15
Options exercisable at June 30, 2016		326,071		$	5.49

Non-Employee Director Stock Options

				Weighted
				Average
	Stock Options			Exercise Price
Outstanding at January 1, 2015		100,000		$	3.20
Expired		(100,000	)		3.20
Outstanding at December 31, 2015		-		$	-
Outstanding at June 30, 2016		-		$	-

Exercise prices for options ranged from $0.84 to $6.00 at June 30, 2016.  The weighted average option price for all options outstanding was $4.36 with a weighted average remaining contractual life of 4.3 years.

Note 4. Preferred Stock

Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares.  Dividends on the Series B preferred stock were $6,038 for the three months ended June 30, 2016 and 2015 and $12,076 for the six months ended June 30, 2016 and 2015.  The Company had accrued dividends on Series B preferred stock of $229,444 at June 30, 2016, and $217,368 at December 31, 2015.  These amounts are included in Convertible preferred stock, Series B on the balance sheet at June 30, 2016 and December 31, 2015.  

8

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 5. Inventories

Inventories consisted of the following:	June 30,			December 31,
	2016			2015
	(unaudited)
Raw materials	$	568,181		$	202,617
Work-in-process		466,552			366,114
Finished goods		32,211			59,653
Inventory reserve		(65,779	)		(55,270	)
	$	1,001,165		$	573,114

The inventory increase of 75% was due to orders received during the first half of 2016 that are expected to ship in the second half of 2016.  

Note 6. Earnings Per Share

Basic income per share is calculated as income applicable to common shareholders divided by the weighted average of common shares outstanding.  Diluted earnings per share is calculated as diluted income applicable to common shareholders divided by the diluted weighted average number of common shares.  Diluted weighted average number of common shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method.  Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive.  For the three and six months ended June 30, 2016 and 2015, all convertible preferred stock and common stock options listed in Note 3 that were out-of-the-money or anti-dilutive were excluded from diluted earnings per share. The following is provided to reconcile the earnings per share calculations:

	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016			2015
(Loss) income applicable to common shares	$	(183,339	)	$	81,050	$	(420,266	)	$	177,528
Weighted average common shares outstanding - basic		4,042,722			3,978,728		4,033,488			3,959,601
Effect of dilution		-			51,707		-			27,577
Weighted average shares outstanding - diluted		4,042,722			4,030,435		4,033,488			3,987,178

9

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 7. Notes Payable

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

The Note was collateralized by a blanket lien on all of the Company’s assets including, without limitation, inventory, equipment and accounts receivable.   Among other items, the Note provided for the following:

- Interest subject to change from time to time based on changes in LIBOR.  The interest rate applied to the unpaid principal balance was at a rate of 4 percentage points over LIBOR.  Under no circumstance was the interest rate to be less than 5% per annum or more than the maximum rate allowed by applicable law.

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

The interest rate on the Note was 5% at December 31, 2015.  The remaining outstanding balance of $19,047 was paid during April 2016.

During 2010, the Company applied and was approved for a 166 Direct Loan to borrow up to $744,250 with the Ohio Department of Development (ODOD), now known as the Ohio Development Services Agency (ODSA).  This loan was finalized in February 2011. The term of the loan is 84 months at a fixed interest rate of 3%.  There is also a 0.25% annual servicing fee charged monthly on the outstanding principal balance.  On August 13, 2013, ODSA and the Company agreed to a modification to the payment schedule.  Interest and servicing payments of $1,656 were paid monthly from August 2013 through January 2014.  Beginning in February 2014, monthly payments of approximately $10,500, including principal, interest and servicing fee are due through October 2018.  A final payment of approximately $71,900 is due November 2018.  The loan is collateralized by the related project equipment.  As of June 30, 2016 there was an outstanding balance of $346,496 on this loan.  Debt issuance costs of $6,068 are netted against this amount for presentation in the financial statements.  This loan is also subject to certain covenants, including job creation and retention.  On July 21, 2014, the Company and ODSA signed a second amendment relating to the job creation and retention.  The Company expects to maintain compliance with all covenants of this loan through at least June 30, 2017.

During 2010, the Company also applied and was approved for a 166 Direct Loan through the Advanced Energy Program with the Ohio Air Quality Development Authority (OAQDA) to borrow up to approximately $1.4 million (this maximum commitment by the OAQDA was subsequently reduced to $368,906 on March 20, 2012).  On December 20, 2013, OAQDA and the Company signed a Fourth Amendment to the Loan Documents and agreed to a modification to the payment schedule.  Interest and servicing payments of $2,121 were payable quarterly from October 2013 through March 2014.  Beginning in June 2014, quarterly payments of approximately $17,300, including principal, interest at 3% and servicing fees are due through December 2017.  A final payment of approximately $50,400 is due February 2018.  This loan is also subject to certain covenants, including job creation.  Included in the above amendment is a waiver for the job creation commitment, due to market conditions, for the duration of the term of the Loan Agreement.  On July 21, 2016, OAQDA and the Company signed a Fifth Amendment to the Loan Documents and agreed to the elimination of a financial covenant.  The loan is collateralized by the related project equipment.  As of June 30, 2016 there was an outstanding balance of $146,145 on this loan.  Debt issuance costs of $8,877 are netted against this amount for presentation in the financial statements.  

10

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 7. Notes Payable (continued)

The Company expects to maintain compliance with all covenants of this loan through at least June 30, 2017.

An Intercreditor Agreement exists as part of the above mentioned loans with agencies of the State of Ohio.  The OAQDA and ODSA agree to shared lien and security interest through mutual covenants.  These covenants include, but are not limited to, the creation of an agreed upon number of jobs, filing of quarterly and annual reports and various financial covenants.  

During 2015, the Company made a final payment and paid a 166 Direct Loan in full.  During 2006, the Company was approved for this 166 Direct Loan from the Ohio Department of Development, now known as the ODSA, in the amount of $400,000.  These funds were received in July of 2008 and were used for the purchase of production equipment and to reduce the Company’s capital lease obligations on certain equipment.  The term of the loan was 84 months at a fixed interest rate of 3%.  There was also a 0.25% annual servicing fee charged monthly on the outstanding principal balance.  The loan was collateralized by the related project equipment.  On August 8, 2013, ODSA and the Company agreed to a modification to the payment schedule.  Interest and servicing payments of approximately $400 were paid monthly from August 2013 through January 2014.  Beginning in February 2014, monthly payments of approximately $6,100, including principal, interest and servicing fee were paid through July 2015.  A final payment of approximately $42,200 was paid in August 2015.  

The Company was in compliance with all covenants of these loans at June 30, 2016.  It is possible that the Company may not be in compliance with all covenants in future periods.  In the past the lenders have granted the Company a waiver or amendment when relief was sought.  If non-compliance is possible the Company will seek a waiver or amendment.

Note 8. Income Taxes

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

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Federal - deferred	$	-	$	-	$	-	$	-
State and local		43		1,037		43		1,037
	$	43	$	1,037	$	43	$	1,037

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. A full valuation allowance has been recorded against the realizability of the net deferred tax assets at June 30, 2016 and December 31, 2015.  The Company has net operating loss carryforwards available for federal and state tax purposes of approximately $4,700,000 which expire in varying amounts through 2035.

11

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 9. Liquidity

Management has forecasted revenues and related costs as well as investing plans and financing needs to determine liquidity to meet cash flow requirements and believes the Company will have sufficient liquidity at least through June 30, 2017.  This forecast was based on current cash levels and debt obligations, and the best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the markets in which the Company operates.  The Company’s ability to maintain current operations is dependent upon its ability to achieve these forecasted results, which the Company believes will occur.  

12

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

The following discussion should be read in conjunction with the Financial Statements and Notes contained herein and with those in our Form 10-K for the year ended December 31, 2015.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby.  Those statements include, but may not be limited to, all statements regarding our intent, belief, and expectations, such as statements concerning our future profitability and operating and growth strategy.  Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements.  Investors are cautioned that all forward-looking statements contained in this Quarterly Report on Form 10-Q and in other statements we make involve risks and uncertainties including, without limitation, the factors set forth under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission.  One or more of these factors have affected, and in the future could affect our business and financial condition and could cause actual results to differ materially from plans and projections.  Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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

Overview

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

13

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

Executive Summary

For the six months ended June 30, 2016, we had total revenue of $2,581,296.  This was a decrease of $2,375,197, or 47.9%, compared to the six months ended June 30, 2015.  Revenue decreased primarily due to reductions on price and volume of a low margin commodity.  Also, volume was lower in our thin film solar market as orders continue to be cyclical.  We anticipate revenue to increase during the second half of 2016 as solar revenue is expected to improve compared to the first half of 2016.  Through the first six months of 2016 we have received more than $800,000 in new orders from customers for Transparent Conductive Oxide (TCO) materials.  This amount is similar to the entire year of 2015.  These targets are expected to begin shipping during the second half of 2016.

Late in 2014 we received new orders from Asia for approximately $400,000 of TCO materials.  The revenue was recognized during the first quarter of 2015.  Subsequently, early in 2015, follow-on orders were received for more than $500,000 of the same materials.  The revenue was recognized during the second and third quarters of 2015.    

We are encouraged by the resumption of global growth in the thin film solar market, especially increased production of copper indium gallium selenide-based products. These represent substantial growth opportunities for us as we continue to implement our thin film solar strategy. In addition, we are pursuing several opportunities in our traditional business, including new applications which we anticipate customer approval.

Gross profit was $615,788 for the six months ended June 30, 2016 compared to $1,306,092 for the same six months in 2016.  This was a decrease of $690,304, or 52.9%.   Gross profit as a percentage of revenue was 23.9% for the first six months of 2016 compared to 26.4% for the same period in 2015.  

Operating expenses were $1,001,094 and $1,084,872 for the six months ended June 30, 2016 and 2015, respectively.  This was a decrease of $83,778 or 7.7%.  We continue to invest in developing new products for all of our markets including transparent conductive oxide systems for the thin film solar and transparent electronics markets.  We also have ongoing development efforts with our thin film battery materials and transparent electronic products.  These efforts include accelerating time to market for those products and involve research and development expense.

RESULTS OF OPERATIONS

Three and six months ended June 30, 2016 (unaudited) compared to three and six months ended June 30, 2015 (unaudited):

Revenue

For the three months ended June 30, 2016, we had total revenue of $1,206,484.  This was a decrease of $1,022,202, or 45.9%, compared to the three months ended June 30, 2015.  For the six months ended June 30, 2016, we had total revenue of $2,581,296.  This was a decrease of $2,375,197, or 47.9%, compared to the six months ended June 30, 2015.  Revenue decreased primarily due to reductions on price and volume of a low margin commodity.  The cost of this raw material was lower by approximately 39% during the first half of 2016 compared to the first half of 2015.  Pricing of this material has fluctuated widely during the past several years but we expect this pricing to remain stable during the second half of 2016.  Additionally, a major customer increased their inventory levels during the first half of 2015 and began reducing their inventory levels in the first quarter of 2016 and continued into the second quarter of 2016.  We expect their order pattern to stabilize later this year.  Also, volume was lower in our thin film solar market during the first half of 2016 versus the first half of 2015.  Based on indications from customers and orders placed through the end of June 2016, we expect revenue to increase in this market during the second half of 2016.  

14

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

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

Gross Profit

Gross profit was $320,346 for the three months ended June 30, 2016 compared to $636,687 for the same three months in 2015.  This was a decrease of $316,341, or 49.7%.  Gross profit was $615,788 for the six months ended June 30, 2016 compared to $1,306,092 for the same six months in 2015.  This was a decrease of $690,304, or 52.9%.  The decrease in gross profit was attributed to lower revenue.  Gross profit as a percentage of revenue (gross margin) was 26.6% for the second quarter of 2016 compared to 28.6% for the second quarter of 2015.   Gross margin was 23.9% for the first six months of 2016 compared to 26.4% for the same period in 2015.        

General and Administrative Expense

General and administrative expense for the three months ended June 30, 2016 decreased to $307,199 from $316,739 for the three months ended June 30, 2015, or 3.0%.  The second quarter of 2016 included lower bad debt expense of approximately $11,000.    

General and administrative expense for the six months ended June 30, 2016 decreased to $632,759 from $659,732 for the six months ended June 30, 2015, or 4.1%.  The first half of 2016 included lower travel expense of approximately $17,000, bad debt expense of approximately $11,000 and professional fees of approximately $12,000 while compensation increased approximately $16,000.    

Professional Fees

Included in general and administrative expense was $43,491 and $47,686 for professional fees for the three months ended June 30, 2016 and 2015, respectively and $104,528 and $116,378 for professional fees for the six months ended June 30, 2016 and 2015, respectively.  These continued expenses are primarily related to SEC compliance costs for legal, accounting and stockholder relations fees.

Research and Development Expense

Research and development expense for the three months ended June 30, 2016 was $74,417 compared to $91,221 for the same period in 2015, a decrease of 18.4%.  Research and development expense for the six months ended June 30, 2016 was $154,493 compared to $188,864 for the same period in 2015, a decrease of 18.2%.  The decrease was primarily due to sponsored research which began in 2014 and concluded early in the first quarter of 2016.  We had a collaborative program with a university to evaluate our TCO materials in liquid crystal display applications.  We continue to invest in developing new products for all of our markets including transparent conductive oxide systems for applications in display and thin film solar markets.  We also have ongoing development efforts with our thin film battery materials and transparent electronic products.  These efforts include accelerating time to market for those products and involve ongoing research and development expense.  

15

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

Marketing and Sales Expense  

Marketing and sales expense was $104,832 and $125,972 for the three months ended June 30, 2016 and 2015, respectively.  The decrease was approximately 16.8% and primarily related to lower compensation, commission and travel expenses.

Marketing and sales expense was $213,842 and $236,276 for the six months ended June 30, 2016 and 2015, respectively.  The decrease was approximately 9.5% and primarily related to lower compensation, commission and travel expense.

Stock Compensation Expense

Included in operating expenses were non-cash stock based compensation costs of $51,049 and $52,489 for the three months ended June 30, 2016 and 2015, respectively and $104,138 and $104,158 for the six months ended June 30, 2016 and 2015, respectively. Compensation cost for all stock-based awards is based on the grant date fair value and recognized over the required service (vesting) period.  Unrecognized non-cash stock based compensation expense related to operating expense was $263,222 as of June 30, 2016 and will be recognized through 2019.    

Interest

Interest was $11,156 and $14,630 for the three months ended June 30, 2016 and 2015, respectively.  Interest was $22,841 and $30,579 for the six months ended June 30, 2016 and 2015, respectively.  The decrease was due to lower principal balances.  

Loss/Income Applicable to Common Stock

Loss applicable to common stock for the three months ended June 30, 2016 was $183,339 compared to income applicable to common stock of $81,050 for the three months ended June 30, 2015.  Loss applicable to common stock for the six months ended June 30, 2016 was $420,266 compared to income applicable to common stock of $177,528 for the six months ended June 30, 2015.  The change was due to lower revenue and gross profit.  

Common Stock

The following schedule represents our outstanding common stock during the period of 2016 through 2024 assuming all outstanding stock options are exercised during the year of expiration.  Based on outstanding shares at June 30, 2016, if each shareholder exercises his or her options, it would increase our common shares by 536,857 to 4,590,047 by December 31, 2024.  Assuming all such options are exercised in the year of expiration, the effect on shares outstanding is illustrated as follows:

	Options due to expire		Potential shares outstanding		Weighted average exercise  price
2018		5,000		4,058,190	$	3.10
2019		364,500		4,422,690	$	6.00
2024		167,357		4,590,047	$	0.84

16

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

Liquidity and Capital Resources

Cash

As of June 30, 2016 cash on hand was $887,583. Cash on-hand was $997,170 at December 31, 2015. We believe, based on forecasted sales and expenses that cash flow from operations will be adequate to sustain operations at least through June 30, 2017.

Working Capital

At June 30, 2016 working capital was $709,926 compared to $1,010,517 at December 31, 2015, a decrease of $300,591 or 29.7%. As discussed below, cash decreased approximately $110,000. Inventories increased approximately $428,000 and customer deposits increased approximately $696,000 due to orders received during the first half of 2016 and expected to ship during the second half of 2016. Current debt obligations decreased approximately $24,000.

Cash from Operations

Net cash provided by operating activities was approximately $135,000 for the six months ended June 30, 2016 and approximately $671,000 for the six months ended June 30, 2015. Included in expenses were non cash stock based compensation costs of approximately $105,000 for the six months ended June 30, 2016 and 2015.

Cash from Investing Activities

Cash of approximately $59,000 was used in investing activities during the six months ended June 30, 2016, compared to approximately $29,000 during the six months ended June 30, 2015.

Cash from Financing Activities

Cash of approximately $190,000 and $220,000 was used in financing activities for principal payments to third parties for capital lease obligations and notes payable during the six months ended June 30, 2016 and 2015, respectively. During the second quarter of 2016, proceeds of $4,200 were received from the exercise of stock options. We paid $24,152 for cumulative dividends on preferred stock during the first half of 2015.

Debt Outstanding

Total debt outstanding decreased from approximately $930,000 at December 31, 2015, to approximately $890,000 at June 30, 2016, or 4.3%. Debt issuance costs of $19,665 at December 31, 2015, and $14,945 at June 30, 2016 are netted for financial statement presentation. During the second quarter of 2016 we closed on a new capital lease obligation of approximately $145,000. During the third quarter of 2016 we expect to close on a new capital lease obligation of approximately $104,000 upon receipt and installation of equipment.

17

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

Liquidity

We have forecasted revenues and related costs as well as investing plans and financing needs to determine liquidity to meet cash flow requirements and believe we will have sufficient liquidity at least through June 30, 2017.  This forecast was based on current cash levels and debt obligations, and the best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the markets in which we operate.  Our ability to maintain current operations is dependent upon our ability to achieve these forecasted results, which we believe will occur. 

Off Balance Sheet Arrangements

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

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Financial Statements and accompanying notes. Note 2 to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015, describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, revenue recognition, tax valuation allowance, stock based compensation and assessing changes in which impairment of certain long-lived assets may occur. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products orthere is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. Depreciable and useful lives estimated for property and equipment, licenses and patents are based on initial expectations of the period of time these assets and intangibles will benefit us. Changes in circumstances related to a change in our business, change in technology or other factors could result in these assets becoming impaired, which could adversely affect the value of these assets.

18

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Due to a segregation of duties material weakness described below, and based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2016, the Company’s disclosure controls and procedures were not effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely discussions regarding required disclosure. Until we are able to hire additional employees, we will continue to report to the Audit Committee and the Board of Directors at least monthly (and more often as necessary). We believe this will continue to mitigate this weakness. This reporting includes balance sheets, statements of operations, statements of cash flows, and other detail supporting these statements. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operation, changes in shareholder’s equity and cash flows for all periods presented.

19

Item 4. Controls and Procedures (continued)

Inherent Limitations over Internal Controls

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management previously disclosed a material weakness in internal control over financial reporting in its annual report on Form 10-K, filed on February 19, 2016, for the year ended December 31, 2015, relating to insufficient segregation of duties consistent with control objectives. Management is aware of the risks associated with the lack of segregation of duties due to the small number of employees currently working with general administrative and financial matters. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions shall be performed by separate individuals. In order to remediate this weakness, we will need to hire additional employees. Although we will periodically reevaluate this situation, at this point we consider that the risks associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. Until we are able to hire additional employees, we will continue to report to the Audit Committee and the Board of Directors at least monthly (and more often as necessary). We believe this will continue to mitigate this weakness. This reporting includes balance sheets, statements of operations, statements of cash flows, and other detail supporting these statements.

20

Item 4. Controls and Procedures (continued)

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting for the three months ended June 30, 2016, that materially affected or were reasonably likely to materially affect our disclosure controls and procedures. Additionally, there were no changes in our internal controls that could materially affect our disclosure controls and procedures subsequent to the date of their evaluation.

21

Part II. Other Information

Item 6. Exhibits

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

22

Item 6. Exhibits (continued)

10.1	Description of amendment to the Loan Agreement between the Company and The Ohio Air Quality Development Authority (Incorporated by reference to the Company’s Current Report on Form 8-K, filed March 26, 2012).
10.2	Description of amendment to the Loan Agreement between the Company and the Ohio Department of Development (Incorporated by reference to the Company’s Current Report on Form 8-K, filed April 9, 2012).
10.3	Description of amendment to the Loan Agreement between the Company and The Ohio Air Quality Development Authority (Incorporated by reference to the Company’s Current Report on Form 8-K, filed July 10, 2012).
10.4	Description of amendment to the Loan Agreement between the Company and The Ohio Air Quality Development Authority (Incorporated by reference to the Company’s Current Report on Form 8-K, filed October 19, 2012).
10.5	Description of amendment to the Loan Agreement between the Company and the Ohio Development Services Agency, formerly known as the Ohio Department of Development (Incorporated by reference to the Company’s Current Report on Form 8-K, dated March 19, 2013).
10.6	Description of modification to payment schedules between the Company and the Ohio Development Services Agency, formerly known as the Ohio Department of Development and Description of Business Loan Agreement between the Company and The Huntington National Bank dated as of October 8, 2013 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated August 12, 2013).
10.7	Description of amendment to Loan Documents between the Company and the Ohio Air Quality Development Authority dated as of December 20, 2013 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated December 26, 2013).
10.8	Description of amendment to the Loan Agreement between the Company and the Ohio Development Services Agency, formerly known as the Ohio Department of Development (Incorporated by reference to the Company’s Current Report on Form 8-K, dated July 24, 2014).
10.9	Description of amendment to Loan Documents between the Company and the Ohio Air Quality Development Authority dated as of July 21, 2016 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated July 22, 2016).
22.1	Description of matters submitted to vote of security holders (Incorporated by reference to the Company’s Current Report on Form 8-K, dated June 10, 2016).
31.1	Rule 13a-14(a) Certification of Principal Executive Officer.*
31.2	Rule 13a-14(a) Certification of Principal Financial Officer.*
32.1	Section 1350 Certification of Principal Executive Officer and Certification of Principal Financial Officer and Principal Accounting Officer.*
99.1	Press Release dated July 28, 2016, entitled “SCI Engineered Materials, Inc. Reports Second Quarter 2016 Results.”

23

Item 6. Exhibits (continued)

101

The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015, (iv) Notes to Financial Statements.*

* Filed with this report

Signatures

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

	SCI ENGINEERED MATERIALS, INC.
Date:  July 28, 2016	/s/ Daniel Rooney
	Daniel Rooney, Chairman of the Board of Directors, President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ Gerald S. Blaskie
	Gerald S. Blaskie, Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

24

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

I, Daniel Rooney, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of SCI Engineered Materials, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2016	/s/ Daniel Rooney
	Daniel Rooney
	Chairman of the Board of Directors,
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

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

I, Gerald S. Blaskie, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of SCI Engineered Materials, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2016	/s/ Gerald S. Blaskie
	Gerald S. Blaskie
	Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

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

In connection with the Quarterly Report of SCI Engineered Materials, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel Rooney, Chairman of the Board of Directors, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Daniel Rooney

Daniel Rooney

Chairman of the Board of Directors,

President and Chief Executive Officer of

SCI Engineered Materials, Inc.

(Principal Executive Officer)

July 28, 2016

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

In connection with the Quarterly Report of SCI Engineered Materials, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerald S. Blaskie, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)          The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)          The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Gerald S. Blaskie

Gerald S. Blaskie

Vice President and Chief Financial Officer of

SCI Engineered Materials, Inc. (Principal Financial Officer and Principal Accounting Officer)

July 28, 2016

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2016	Jul. 22, 2016
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
Entity Registrant Name	SCI Engineered Materials, Inc.
Entity Central Index Key	0000830616
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	SCIA
Entity Common Stock, Shares Outstanding		4,054,618

XML

BALANCE SHEETS - USD ($)	Jun. 30, 2016	Dec. 31, 2015
Current Assets
Cash	$ 887,583	$ 997,170
Accounts receivable, less allowance for doubtful accounts of $26,000	287,353	302,512
Inventories	1,001,165	573,114
Prepaid expenses	62,026	61,301
Total current assets	2,238,127	1,934,097
Property and Equipment, at cost
Machinery and equipment	7,505,437	7,506,574
Furniture and fixtures	154,246	154,245
Leasehold improvements	329,904	329,904
Construction in progress	200,026	0
Property, Plant and Equipment, Gross	8,189,613	7,990,723
Less accumulated depreciation	(5,858,601)	(5,642,619)
Property, Plant and Equipment, Net	2,331,012	2,348,104
Other Assets
Deposits	19,215	16,487
Intangibles	34,935	34,935
Total other assets	54,150	51,422
TOTAL ASSETS	4,623,289	4,333,623
Current Liabilities
Capital lease obligations, current portion	127,490	123,960
Notes payable, current portion	169,706	197,328
Accounts payable	172,998	191,475
Customer deposits	851,575	155,800
Accrued compensation	74,467	114,900
Accrued expenses and other	131,964	140,117
Total current liabilities	1,528,200	923,580
Capital lease obligations, net of current portion	284,686	215,231
Notes payable, net of current portion	307,990	393,513
Total liabilities	2,120,876	1,532,324
Commitments and contingencies
Shareholders' Equity
Convertible preferred stock, Series B, 10% cumulative, nonvoting, no par value, $10 stated value, optional redemption at 103%; optional shareholder conversion 2 shares for 1; 24,152 shares issued and outstanding	478,210	466,134
Common stock, no par value, authorized 15,000,000 shares; 4,053,190 and 4,016,508 shares issued and outstanding, respectively	10,021,586	9,993,027
Additional paid-in capital	2,166,268	2,097,599
Accumulated deficit	(10,163,651)	(9,755,461)
Total shareholders' equity	2,502,413	2,801,299
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 4,623,289	$ 4,333,623

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BALANCE SHEETS [Parenthetical] - USD ($)	6 Months Ended	12 Months Ended
	Jun. 30, 2016	Dec. 31, 2015
Allowance for doubtful accounts (in dollars)	$ 26,000	$ 26,000
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	4,053,190	4,016,508
Common stock, shares outstanding	4,053,190	4,016,508
Convertible Preferred Stock Series B [Member]
Convertible preferred stock, series B, cumulative percentage of interest	10.00%	10.00%
Convertible preferred stock, stated value (in dollars per share)	$ 10	$ 10
Convertible preferred stock, optional redemption	103.00%	103.00%
Convertible preferred stock, optional shareholder conversion	2:1	2:1
Convertible preferred stock, shares issued	24,152	24,152
Convertible preferred stock, shares outstanding	24,152	24,152

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STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Revenue	$ 1,206,484	$ 2,228,686	$ 2,581,296	$ 4,956,493
Cost of revenue	886,138	1,591,999	1,965,508	3,650,401
Gross profit	320,346	636,687	615,788	1,306,092
General and administrative expense	307,199	316,739	632,759	659,732
Research and development expense	74,417	91,221	154,493	188,864
Marketing and sales expense	104,832	125,972	213,842	236,276
(Loss) income from operations	(166,102)	102,755	(385,306)	221,220
Interest	11,156	14,630	22,841	30,579
(Loss) income before provision for income taxes	(177,258)	88,125	(408,147)	190,641
Income tax expense	43	1,037	43	1,037
Net (loss) income	(177,301)	87,088	(408,190)	189,604
Dividends on preferred stock	6,038	6,038	12,076	12,076
(LOSS) INCOME APPLICABLE TO COMMON SHARES	$ (183,339)	$ 81,050	$ (420,266)	$ 177,528
Earnings per share - basic and diluted (Note 6)
Basic (in dollars per share)	$ (0.05)	$ 0.02	$ (0.10)	$ 0.04
Diluted (in dollars per share)	$ (0.05)	$ 0.02	$ (0.10)	$ 0.04
Weighted average shares outstanding
Basic (in shares)	4,042,722	3,978,728	4,033,488	3,959,601
Diluted (in shares)	4,042,722	4,030,435	4,033,488	3,987,178

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STATEMENTS OF CASH FLOWS - USD ($)	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$ (408,190)	$ 189,604
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and accretion	221,537	225,932
Amortization	4,719	915
Stock based compensation	105,103	105,123
Net loss on disposal of equipment	(750)	494
Inventory reserve	10,509	(153,157)
Change in allowance for doubtful accounts	0	11,318
Changes in operating assets and liabilities:
Accounts receivable	15,159	7,975
Inventories	(438,560)	1,041,030
Prepaid expenses	(725)	(66,462)
Other assets	(2,728)	6,634
Accounts payable	(18,477)	48,496
Accrued expenses and customer deposits	647,191	(747,096)
Net cash provided by operating activities	134,788	670,806
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment	750	0
Purchases of property and equipment	(59,368)	(28,788)
Net cash used in investing activities	(58,618)	(28,788)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options	4,200	0
Principal payments on capital lease obligations and notes payable	(189,957)	(219,701)
Payment of cumulative dividends on preferred stock	0	(24,152)
Net cash used in financing activities	(185,757)	(243,853)
NET (DECREASE) INCREASE IN CASH	(109,587)	398,165
CASH - Beginning of period	997,170	1,011,956
CASH - End of period	887,583	1,410,121
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest	23,159	31,471
Income taxes	43	1,037
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased by capital lease	145,077	0
Provisional patent acquired by common stock exchange	0	30,540
Increase in asset retirement obligation	$ 0	$ 5,100

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Business Organization and Purpose

6 Months Ended

Jun. 30, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 1. Business Organization and Purpose

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

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2016

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

Note 2. Summary of Significant Accounting Policies

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for fair presentation of the results of operations for the periods presented have been included.  The financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015.  Interim results are not necessarily indicative of results for the full year.

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

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Common Stock and Stock Options

6 Months Ended

Jun. 30, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 3. Common Stock and Stock Options

Stock Based Compensation - Compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period.  Non cash stock based compensation expense was $51,532 and $52,972 for the three months ended June 30, 2016 and 2015, respectively.  Non cash stock based compensation expense was $105,103 and $105,123 for the six months ended June 30, 2016 and 2015, respectively.  Unrecognized compensation expense was $269,659 as of June 30, 2016 and will be recognized through 2019.  There was no tax benefit recorded for this compensation cost as the expense primarily relates to incentive stock options that do not qualify for a tax deduction until, and only if, a qualifying disposition occurs.

The non-employee board members received compensation of 31,682 and 21,347 aggregate shares of common stock of the Company during the six months ended June 30, 2016 and 2015, respectively.  The stock had an aggregate value of $24,358 and $24,378 for the six months ended June 30, 2016 and 2015, respectively, and was recorded as non-cash stock compensation expense in the financial statements.

During the second quarter of 2016, proceeds of $4,200 were received from the exercise of 5,000 stock options.

The cumulative status of options granted and outstanding at June 30, 2016, and December 31, 2015, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

			Weighted
			Average
	Stock Options		Exercise Price
Outstanding at January 1, 2015		603,857	$	4.18
Expired		(30,000)		2.40
Forfeited		(1,000)		3.10
Outstanding at December 31, 2015		572,857	$	4.27
Exercised		(5,000)		0.84
Expired		(31,000)		3.25
Outstanding at June 30, 2016		536,857	$	4.36
Options exercisable at December 31, 2015		325,621	$	5.15
Options exercisable at June 30, 2016		326,071	$	5.49

Non-Employee Director Stock Options

			Weighted
			Average
	Stock Options		Exercise Price
Outstanding at January 1, 2015		100,000	$	3.20
Expired		(100,000)		3.20
Outstanding at December 31, 2015		-	$	-
Outstanding at June 30, 2016		-	$	-

Exercise prices for options ranged from $0.84 to $6.00 at June 30, 2016.  The weighted average option price for all options outstanding was $4.36 with a weighted average remaining contractual life of 4.3 years.

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Preferred Stock

6 Months Ended

Jun. 30, 2016

Equity [Abstract]

Preferred Stock [Text Block]

Note 4. Preferred Stock

Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares.  Dividends on the Series B preferred stock were $6,038 for the three months ended June 30, 2016 and 2015 and $12,076 for the six months ended June 30, 2016 and 2015.  The Company had accrued dividends on Series B preferred stock of $229,444 at June 30, 2016, and $217,368 at December 31, 2015.  These amounts are included in Convertible preferred stock, Series B on the balance sheet at June 30, 2016 and December 31, 2015. 

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Inventories

6 Months Ended

Jun. 30, 2016

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

Note 5. Inventories

Inventories consisted of the following:	June 30,		December 31,
	2016		2015
	(unaudited)
Raw materials	$	568,181	$	202,617
Work-in-process		466,552		366,114
Finished goods		32,211		59,653
Inventory reserve		(65,779)		(55,270)
	$	1,001,165	$	573,114

The inventory increase of 75% was due to orders received during the first half of 2016 that are expected to ship in the second half of 2016.

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Earnings Per Share

6 Months Ended

Jun. 30, 2016

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 6. Earnings Per Share

Basic income per share is calculated as income applicable to common shareholders divided by the weighted average of common shares outstanding.  Diluted earnings per share is calculated as diluted income applicable to common shareholders divided by the diluted weighted average number of common shares.  Diluted weighted average number of common shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method.  Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive.  For the three and six months ended June 30, 2016 and 2015, all convertible preferred stock and common stock options listed in Note 3 that were out-of-the-money or anti-dilutive were excluded from diluted earnings per share. The following is provided to reconcile the earnings per share calculations:

	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
(Loss) income applicable to common shares	$	(183,339)	$	81,050	$	(420,266)	$	177,528
Weighted average common shares outstanding - basic		4,042,722		3,978,728		4,033,488		3,959,601
Effect of dilution		-		51,707		-		27,577
Weighted average shares outstanding - diluted		4,042,722		4,030,435		4,033,488		3,987,178

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Notes Payable

6 Months Ended

Jun. 30, 2016

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 7. Notes Payable

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

The Note was collateralized by a blanket lien on all of the Company’s assets including, without limitation, inventory, equipment and accounts receivable.   Among other items, the Note provided for the following:

- Interest subject to change from time to time based on changes in LIBOR.  The interest rate applied to the unpaid principal balance was at a rate of 4 percentage points over LIBOR.  Under no circumstance was the interest rate to be less than 5% per annum or more than the maximum rate allowed by applicable law.

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

The interest rate on the Note was 5% at December 31, 2015.  The remaining outstanding balance of $19,047 was paid during April 2016.

During 2010, the Company applied and was approved for a 166 Direct Loan to borrow up to $744,250 with the Ohio Department of Development (ODOD), now known as the Ohio Development Services Agency (ODSA).  This loan was finalized in February 2011. The term of the loan is 84 months at a fixed interest rate of 3%.  There is also a 0.25% annual servicing fee charged monthly on the outstanding principal balance.  On August 13, 2013, ODSA and the Company agreed to a modification to the payment schedule.  Interest and servicing payments of $1,656 were paid monthly from August 2013 through January 2014.  Beginning in February 2014, monthly payments of approximately $10,500, including principal, interest and servicing fee are due through October 2018.  A final payment of approximately $71,900 is due November 2018.  The loan is collateralized by the related project equipment.  As of June 30, 2016 there was an outstanding balance of $346,496 on this loan.  Debt issuance costs of $6,068 are netted against this amount for presentation in the financial statements.  This loan is also subject to certain covenants, including job creation and retention.  On July 21, 2014, the Company and ODSA signed a second amendment relating to the job creation and retention.  The Company expects to maintain compliance with all covenants of this loan through at least June 30, 2017.

During 2010, the Company also applied and was approved for a 166 Direct Loan through the Advanced Energy Program with the Ohio Air Quality Development Authority (OAQDA) to borrow up to approximately $1.4 million (this maximum commitment by the OAQDA was subsequently reduced to $368,906 on March 20, 2012).  On December 20, 2013, OAQDA and the Company signed a Fourth Amendment to the Loan Documents and agreed to a modification to the payment schedule.  Interest and servicing payments of $2,121 were payable quarterly from October 2013 through March 2014.  Beginning in June 2014, quarterly payments of approximately $17,300, including principal, interest at 3% and servicing fees are due through December 2017.  A final payment of approximately $50,400 is due February 2018.  This loan is also subject to certain covenants, including job creation.  Included in the above amendment is a waiver for the job creation commitment, due to market conditions, for the duration of the term of the Loan Agreement.  On July 21, 2016, OAQDA and the Company signed a Fifth Amendment to the Loan Documents and agreed to the elimination of a financial covenant.  The loan is collateralized by the related project equipment.  As of June 30, 2016 there was an outstanding balance of $146,145 on this loan.  Debt issuance costs of $8,877 are netted against this amount for presentation in the financial statements. The Company expects to maintain compliance with all covenants of this loan through at least June 30, 2017.

An Intercreditor Agreement exists as part of the above mentioned loans with agencies of the State of Ohio.  The OAQDA and ODSA agree to shared lien and security interest through mutual covenants.  These covenants include, but are not limited to, the creation of an agreed upon number of jobs, filing of quarterly and annual reports and various financial covenants.  

During 2015, the Company made a final payment and paid a 166 Direct Loan in full.  During 2006, the Company was approved for this 166 Direct Loan from the Ohio Department of Development, now known as the ODSA, in the amount of $400,000.  These funds were received in July of 2008 and were used for the purchase of production equipment and to reduce the Company’s capital lease obligations on certain equipment.  The term of the loan was 84 months at a fixed interest rate of 3%.  There was also a 0.25% annual servicing fee charged monthly on the outstanding principal balance.  The loan was collateralized by the related project equipment.  On August 8, 2013, ODSA and the Company agreed to a modification to the payment schedule.  Interest and servicing payments of approximately $400 were paid monthly from August 2013 through January 2014.  Beginning in February 2014, monthly payments of approximately $6,100, including principal, interest and servicing fee were paid through July 2015.  A final payment of approximately $42,200 was paid in August 2015.  

The Company was in compliance with all covenants of these loans at June 30, 2016.  It is possible that the Company may not be in compliance with all covenants in future periods.  In the past the lenders have granted the Company a waiver or amendment when relief was sought.  If non-compliance is possible the Company will seek a waiver or amendment.

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Income Taxes

6 Months Ended

Jun. 30, 2016

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 8. Income Taxes

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

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Federal - deferred	$	-	$	-	$	-	$	-
State and local		43		1,037		43		1,037
	$	43	$	1,037	$	43	$	1,037

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. A full valuation allowance has been recorded against the realizability of the net deferred tax assets at June 30, 2016 and December 31, 2015.  The Company has net operating loss carryforwards available for federal and state tax purposes of approximately $4,700,000 which expire in varying amounts through 2035.

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Liquidity

6 Months Ended

Jun. 30, 2016

Liquidity Disclosures [Abstract]

Liquidity Disclosures [Text Block]

Note 9. Liquidity

Management has forecasted revenues and related costs as well as investing plans and financing needs to determine liquidity to meet cash flow requirements and believes the Company will have sufficient liquidity at least through June 30, 2017.  This forecast was based on current cash levels and debt obligations, and the best estimates of revenues primarily from existing customers and gave consideration to the continued and possible increased levels of uncertainty in demand in the markets in which the Company operates.  The Company’s ability to maintain current operations is dependent upon its ability to achieve these forecasted results, which the Company believes will occur. 

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Common Stock and Stock Options (Tables)

6 Months Ended

Jun. 30, 2016

Employee Stock Option [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

Employee Stock Options

			Weighted
			Average
	Stock Options		Exercise Price
Outstanding at January 1, 2015		603,857	$	4.18
Expired		(30,000)		2.40
Forfeited		(1,000)		3.10
Outstanding at December 31, 2015		572,857	$	4.27
Exercised		(5,000)		0.84
Expired		(31,000)		3.25
Outstanding at June 30, 2016		536,857	$	4.36
Options exercisable at December 31, 2015		325,621	$	5.15
Options exercisable at June 30, 2016		326,071	$	5.49

Non Employee Director Stock Options [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

Non-Employee Director Stock Options

			Weighted
			Average
	Stock Options		Exercise Price
Outstanding at January 1, 2015		100,000	$	3.20
Expired		(100,000)		3.20
Outstanding at December 31, 2015		-	$	-
Outstanding at June 30, 2016		-	$	-

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Inventories (Tables)

6 Months Ended

Jun. 30, 2016

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

Inventories consisted of the following:	June 30,		December 31,
	2016		2015
	(unaudited)
Raw materials	$	568,181	$	202,617
Work-in-process		466,552		366,114
Finished goods		32,211		59,653
Inventory reserve		(65,779)		(55,270)
	$	1,001,165	$	573,114

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2016

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

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

	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
(Loss) income applicable to common shares	$	(183,339)	$	81,050	$	(420,266)	$	177,528
Weighted average common shares outstanding - basic		4,042,722		3,978,728		4,033,488		3,959,601
Effect of dilution		-		51,707		-		27,577
Weighted average shares outstanding - diluted		4,042,722		4,030,435		4,033,488		3,987,178

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2016

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

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

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Federal - deferred	$	-	$	-	$	-	$	-
State and local		43		1,037		43		1,037
	$	43	$	1,037	$	43	$	1,037

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Common Stock and Stock Options (Details) - $ / shares	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2016	Jun. 30, 2016	Dec. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Options, Exercised	(5,000)
Employee Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Options, Outstanding, Beginning Balance		572,857	603,857
Stock Options, Expired		(31,000)	(30,000)
Stock Options, Forfeited			(1,000)
Stock Options, Exercised		(5,000)
Stock Options, Outstanding, Ending Balance	536,857	536,857	572,857
Stock Options, Options exercisable	326,071	326,071	325,621
Weighted Average Exercise Price, Outstanding, Beginning Balance		$ 4.27	$ 4.18
Weighted Average Exercise Price, Expired		3.25	2.4
Weighted Average Exercise Price, Forfeited		0.84	3.1
Weighted Average Exercise Price, Outstanding, Ending Balance	$ 4.36	4.36	4.27
Weighted Average Exercise Price, Options exercisable	$ 5.49	$ 5.49	$ 5.15

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Common Stock and Stock Options (Details 1) - Non Employee Director Stock Options [Member] - $ / shares	6 Months Ended	12 Months Ended
	Jun. 30, 2016	Dec. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Options, Outstanding, Beginning Balance	0	100,000
Stock Options, Expired		(100,000)
Stock Options, Outstanding, Ending Balance	0	0
Weighted Average Exercise Price, Outstanding, Beginning Balance	$ 0	$ 3.2
Weighted Average Exercise Price, Expired		3.2
Weighted Average Exercise Price, Outstanding, Ending Balance	$ 0	$ 0

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Common Stock and Stock Options (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit (in dollars per share)			$ 0.84
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit (in dollars per share)			$ 6.00
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term			4 years 3 months 18 days
Share-based Compensation, Total	$ 51,532	$ 52,972	$ 105,103	$ 105,123
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 269,659		$ 269,659
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Outstanding Options, Weighted Average Exercise Price	$ 4.36		$ 4.36
Proceeds from Stock Options Exercised	$ 4,200		$ 4,200	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	5,000
Common Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Issued During Period, Shares, New Issues (in shares)			31,682	21,347
Stock Issued During Period, Value, New Issues			$ 24,358	$ 24,378

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Preferred Stock (Details Textual) - USD ($)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015	Dec. 31, 2015
Preferred Stock Dividends, Income Statement Impact	$ 6,038	$ 6,038	$ 12,076	$ 12,076
Series B Preferred Stock [Member]
Preferred Stock, Dividend Rate, Percentage			10.00%
Dividends			$ 229,444		$ 217,368

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Inventories (Details) - USD ($)	Jun. 30, 2016	Dec. 31, 2015
Inventory [Line Items]
Raw materials	$ 568,181	$ 202,617
Work-in-process	466,552	366,114
Finished goods	32,211	59,653
Inventory reserve	(65,779)	(55,270)
Inventory, Net	$ 1,001,165	$ 573,114

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Inventories (Details Textual)	6 Months Ended
	Jun. 30, 2016
Inventory [Line Items]
Percentage Of Increase In Inventories	75.00%

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Earnings Per Share (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
(Loss) income applicable to common shares	$ (183,339)	$ 81,050	$ (420,266)	$ 177,528
Weighted average common shares outstanding - basic	4,042,722	3,978,728	4,033,488	3,959,601
Effect of dilution	0	51,707	0	27,577
Weighted average shares outstanding - diluted	4,042,722	4,030,435	4,033,488	3,987,178

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Notes Payable (Details Textual) - USD ($)		1 Months Ended		6 Months Ended
	Aug. 08, 2013	Aug. 31, 2015	Jul. 31, 2015	Jun. 30, 2016	Mar. 31, 2014	Jan. 31, 2014	Apr. 30, 2016	Dec. 31, 2015	Mar. 20, 2012	Dec. 31, 2010	Dec. 31, 2006
Promissory Note [Member]
Debt Conversion [Line Items]
Debt Instrument, Basis Spread on Variable Rate	4.00%
Debt Instrument, Maturity Date	Aug. 05, 2016
Notes Payable to Bank	$ 128,257
Line of Credit Facility, Amount Outstanding							$ 19,047
Debt Instrument, Interest Rate, Effective Percentage								5.00%
Line of Credit Facility, Periodic Payment	$ 3,800
Ohio Development Services Agency [Member]
Debt Conversion [Line Items]
Line of Credit Facility, Frequency of Payment and Payment Terms				84 months
Line of Credit Facility, Interest Rate During Period				3.00%
Line of Credit Facility, Amount Outstanding				$ 346,496
Servicing Fee Annual Percent Fee				0.25%
Line of Credit Facility, Periodic Payment				$ 10,500
Line of Credit Facility, Maximum Borrowing Capacity										$ 744,250
Line Of Credit Facility Interest And Servicing Payments						$ 1,656
Debt Issuances Cost				6,068
Ohio Development Services Agency [Member] | Line of Credit [Member]
Debt Conversion [Line Items]
Line of Credit Facility, Final Periodic Payment				$ 71,900
Ohio Air Quality Development Authority [Member]
Debt Conversion [Line Items]
Line of Credit Facility, Capacity Available for Specific Purpose Other than for Trade Purchases									$ 368,906	$ 1,400,000
Line of Credit Facility, Interest Rate During Period				3.00%
Line of Credit Facility, Amount Outstanding				$ 146,145
Line of Credit Facility, Periodic Payment				17,300
Line Of Credit Facility Interest And Servicing Payments					$ 2,121
Debt Issuances Cost				8,877
Ohio Air Quality Development Authority [Member] | Line of Credit [Member]
Debt Conversion [Line Items]
Line of Credit Facility, Final Periodic Payment				$ 50,400
Ohio Department Of Development [Member]
Debt Conversion [Line Items]
Line of Credit Facility, Capacity Available for Specific Purpose Other than for Trade Purchases											$ 400,000
Line of Credit Facility, Frequency of Payment and Payment Terms		84 months
Line of Credit Facility, Interest Rate During Period		3.00%
Servicing Fee Annual Percent Fee		0.25%
Line of Credit Facility, Periodic Payment			$ 6,100
Line Of Credit Facility Interest And Servicing Payments						$ 400
Ohio Department Of Development [Member] | Line of Credit [Member]
Debt Conversion [Line Items]
Line of Credit Facility, Final Periodic Payment		$ 42,200

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Income Taxes (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Income Tax Contingency [Line Items]
Federal - deferred	$ 0	$ 0	$ 0	$ 0
State and local	43	1,037	43	1,037
Income Tax Expense (Benefit)	$ 43	$ 1,037	$ 43	$ 1,037

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Income Taxes (Details Textual)	6 Months Ended
	Jun. 30, 2016 USD ($)
Income Tax Contingency [Line Items]
Deferred Tax Assets, Operating Loss Carryforwards, State and Local	$ 4,700,000
Operating Loss Carry forward Expiration Year	2035