10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, without par value	SCIA	OTCQB

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes ☒ No ☐

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

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

4,530,207 shares of Common Stock, without par value, were outstanding at April 27, 2023.

FORM 10-Q

SCI ENGINEERED MATERIALS, INC.

Table of Contents

		Page No.
PART I.          FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022	3
	Statements of Income for the Three Months Ended March 31, 2023 and 2022 (unaudited)	5
	Statements of Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)	6
	Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)	7
	Notes to Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	N/A
Item 4.	Controls and Procedures	18
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	19
Signatures		20

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

ASSETS

	March 31,		December 31,
	2023		2022
	(UNAUDITED)
Current Assets
Cash	$	4,495,169	$	3,947,966
Investments - marketable securities, short term		989,265		989,265
Accounts receivable
Trade, less allowance for doubtful accounts of $15,000		816,745		842,647
Tax - Employee Retention Credit		40,539		40,539
Other		31,333		12,653
Inventories, net		2,619,131		2,177,917
Prepaid expenses		336,227		136,134
Total current assets		9,328,409		8,147,121
Property and Equipment, at cost
Machinery and equipment		8,672,588		8,584,871
Furniture and fixtures		142,471		142,471
Leasehold improvements		607,156		607,156
Construction in progress		94,425		28,708
		9,516,640		9,363,206
Less accumulated depreciation and amortization		(7,210,906)		(7,101,573)
		2,305,734		2,261,633
Other Assets
Investments, net - marketable securities, long term		995,000		1,000,000
Right of use asset, net		161,794		185,072
Deferred tax asset		34,231		151,164
Other assets		84,035		85,138
Total other assets		1,275,060		1,421,374
TOTAL ASSETS	$	12,909,203	$	11,830,128

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

3

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

	March 31,		December 31,
	2023		2022
	(UNAUDITED)
Current Liabilities
Finance lease obligations, current portion	$	92,966	$	97,367
Operating lease obligations, current portion		107,932		105,789
Accounts payable		316,510		514,512
Customer deposits		2,649,090		1,825,595
Accrued compensation		157,799		270,168
Accrued expenses and other		160,534		122,065
Total current liabilities		3,484,831		2,935,496
Finance lease obligations, net of current portion		28,710		49,149
Operating lease obligations, net of current portion		71,903		99,834
Total liabilities		3,585,444		3,084,479
Shareholders' Equity
Common stock, no par value, authorized 15,000,000 shares; 4,530,207 and 4,519,524 shares issued and outstanding, respectively		10,662,343		10,618,435
Additional paid-in capital		2,232,989		2,231,807
Accumulated deficit		(3,571,573)		(4,104,593)
Total shareholders' equity		9,323,759		8,745,649
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	12,909,203	$	11,830,128

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

4

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(UNAUDITED)

	2023		2022
Revenue	$	5,797,147	$	5,326,432
Cost of revenue		4,472,550		4,332,331
Gross profit		1,324,597		994,101
General and administrative expense		432,413		373,188
Research and development expense		135,360		87,031
Marketing and sales expense		109,571		82,188
Income from operations		647,253		451,694
Interest (income) expense, net		(48,977)		6,493
Income before provision for income taxes		696,230		445,201
Income tax expense		158,210		60,800
NET INCOME	$	538,020	$	384,401
Earnings per share - basic and diluted (Note 7)
Income per common share
Basic	$	0.12	$	0.09
Diluted	$	0.12	$	0.08
Weighted average shares outstanding
Basic		4,525,103		4,510,276
Diluted		4,555,409		4,538,165

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

5

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(UNAUDITED)

			Additional
	Common		Paid-In		Accumulated
	Stock		Capital		Deficit		Total
Balance 12/31/2022	$	10,618,435	$	2,231,807	$	(4,104,593)	$	8,745,649
Adoption of ASU 2016-13 (Note 3)		—		—		(5,000)		(5,000)
Stock based compensation expense (Note 5)		—		1,182		—		1,182
Common stock issued (Note 5)		43,908		—		—		43,908
Net income		—		—		538,020		538,020
Balance 3/31/2023	$	10,662,343	$	2,232,989	$	(3,571,573)	$	9,323,759
Balance 12/31/2021	$	10,573,843	$	2,227,078	$	(6,061,617)	$	6,739,304
Stock based compensation expense (Note 5)		—		1,183		—		1,183
Common stock issued (Note 5)		22,116		—		—		22,116
Net income		—		—		384,401		384,401
Balance 3/31/2022	$	10,595,959	$	2,228,261	$	(5,677,216)	$	7,147,004

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

6

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(UNAUDITED)

	THREE MONTHS ENDED MARCH 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	538,020	$	384,401
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and accretion		114,487		101,246
Amortization of patents		1,104		1,104
Stock based compensation		45,090		23,299
Gain on disposal of equipment		(9,142)		(5,166)
Deferred tax asset		116,933		56,000
Inventory reserve		954		1,500
Changes in operating assets and liabilities:
Accounts receivable		7,222		(232,092)
Inventories		(442,168)		(192,002)
Prepaid expenses		(200,093)		476,202
Other assets		—		(1)
Accounts payable		(198,002)		94,916
Operating lease assets and liabilities, net		(2,510)		(1,948)
Accrued expenses and customer deposits		747,869		(103,467)
Net cash provided by operating activities		719,764		603,992
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment		16,000		5,166
Purchases of property and equipment		(163,721)		(79,842)
Net cash used in investing activities		(147,721)		(74,676)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on finance lease obligations and notes payable		(24,840)		(23,783)
Net cash used in financing activities		(24,840)		(23,783)
NET INCREASE IN CASH	$	547,203	$	505,533
CASH - Beginning of year		3,947,966		4,140,942
CASH - End of period	$	4,495,169	$	4,646,475
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	1,486	$	2,543
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in asset retirement obligation		1,725		1,725

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

7

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 1.  Business Organization and Purpose

SCI Engineered Materials, Inc. (“SCI,” or the “Company”), 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 markets within the photonics industry including Aerospace, Automotive, Defense, Glass, Optical Coatings and Solar. Substantially all revenues are generated from customers with multi-national operations. The Company develops innovative customized solutions enabling commercial success through collaboration with end users and Original Equipment Manufacturers.

Note 2.  Summary of Significant Accounting Policies

Basis of Presentation - 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, 2022. Interim results are not necessarily indicative of results for the full year.

Use of Estimates - 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.

Revenue Recognition - The Company enters into contracts with its customers that generally represent purchase orders specifying general terms and conditions, order quantities and per unit product prices. The Company has determined that each unit of product purchased represents a separate performance obligation. The Company satisfies its performance obligations and recognizes revenue at a point in time when control of a unit of product is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. For the majority of product sales, transfer of control occurs when the products are shipped from the Company’s manufacturing facility to the customer. The cost of delivering products to the Company’s customers is recorded as a component of cost of products sold. Those costs may include the amounts paid to a third party to deliver the products. Any freight costs billed to and paid by a customer are included in revenue.  

The Company considers collectability of amounts due under a contract to be probable upon inception of a sale based on an evaluation of the creditworthiness of each customer. The Company sells its products typically under agreements with payment terms of 30-60 days. The Company does not normally include extended payment terms or significant financing components in contracts with customers. The majority of the Company’s contracts have an obligation to transfer products within one year. Thus, the Company elects to use the practical expedient where incremental cost of obtaining a contract, such as commissions, is expensed when incurred because the amortization period for those costs is one year or less. The Company treats shipping and handling activities that occur after control of the product transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation. Customer deposits are funds received in advance from customers and are recognized as revenue when the Company has transferred control of product to the customer. Product revenues are recognized upon shipment of goods as the customer has assumed the significant risks and rewards of ownership and the Company is entitled to payment at this point. Service revenues are recognized upon completion as the customer cannot realize the benefit of the service until fully completed.

All revenue was from the photonics industry during the three months ended March 31, 2023 and 2022. The top two customers represented approximately 86% and 89% of total revenue for the three months ended March 31, 2023 and 2022, respectively. International shipments were 1% of total revenue for the first three months of 2023 and 2022.

8

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 2.  Summary of Significant Accounting Policies (continued)

Employee Retention Credit (ERC) - The Company qualified for federal government assistance through Employee Retention Credit provisions of the Consolidated Appropriations Act of 2021 during 2021 and 2020. The purpose of the Employee Retention Credit was to encourage employers to keep employees on the payroll, even if they were not working during the covered period because of the coronavirus outbreak. These funds were recorded in the Statements of Income as an offset to payroll costs in their respective expense lines and as a tax receivable on the balance sheets.  A balance of $40,539 appears as a tax receivable on the balance sheets at March 31, 2023 and December 31, 2022.

Note 3.  Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 significantly changes how entities measure credit losses for most financial assets, including accounts receivable and held-to-maturity marketable securities, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 became effective for us in the first quarter of 2023. The adoption of ASU No. 2016-13 resulted in a cumulative effect of $5,000 and is reflected in the accompanying Statement of Shareholders’ Equity.

Note 4.   Investments

As of March 31, 2023 and December 31, 2022, the Company held investments in corporate and U.S. government bonds that are required to be measured for disclosure purposes at fair value on a recurring basis. The bonds are considered held-to-maturity and are recorded at amortized cost on the balance sheet. These investments are considered level 2 as detailed in the table below. The Company considers investments which will mature in the next twelve months and interest receivable on the long-term bonds as current assets. The remaining investments are considered non-current assets including the investment in marketable securities which the Company intends to hold longer than twelve months. The fair value of these investments was estimated using recently executed transactions and market price quotations. At March 31, 2023, the length of time until maturity of the bonds currently owned ranged from 2 months to 20 months. The amortized cost, allowance for credit losses, fair value, and the related unrecognized gains and losses of these investments, were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
March 31, 2023
Corporate bonds	$	1,500,000	$	—	$	(9,116)	$	1,490,884
U.S. government treasuries		489,265		8,280		—		497,545
Total investments	$	1,989,265	$	8,280	$	(9,116)	$	1,988,429
Allowance for credit losses		(5,000)
Total investments, net	$	1,984,265
December 31, 2022
Corporate bonds	$	1,500,000	$	—	$	(1,924)	$	1,498,076
U.S. government treasuries		489,265		2,665		—		491,930
Total investments	$	1,989,265	$	2,665	$	(1,924)	$	1,990,006

The Company uses an “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period as necessary for changes in expected lifetime credit losses. The credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as the current portfolio. An adjustment factor is applied to these credit loss calculations based upon management’s assessment of the expected impact from current economic conditions on our investments. The Company monitors the credit quality of debt securities classified as held-to-maturity through the use of their respective credit ratings and update them on a quarterly basis with the latest assessment completed on March 31, 2023. Our allowance for credit losses was $5,000 at March 31, 2023.

9

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 5.  Common Stock and Stock Options

Stock based compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period. Noncash stock-based compensation expense was $45,090 and $23,299 for the three months ended March 31, 2023, and 2022, respectively.

Unrecognized compensation expense was $394 as of March 31, 2023 and will be recognized through April of 2023. There was no tax benefit recorded for this compensation cost as the expense relates to incentive stock options that do not qualify for a tax deduction until, and only if, a qualifying disposition occurs.

Employees received compensation of 10,683 and 4,500 aggregate shares of common stock of the Company during the three months ended March 31, 2023 and 2022, respectively. These shares had an aggregate value of $43,908 and $14,625, respectively, and were recorded as non-cash stock compensation expense in the financial statements.

The non-employee Board members received compensation of 2,305 aggregate shares of common stock of the Company with an aggregate value of $7,491 during the three months ended March 31, 2022 and was recorded as non-cash stock compensation expense in the financial statements.

The cumulative status of options granted and outstanding at March 31, 2023, and December 31, 2022, as well as any options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

		Weighted
		Average
	Stock	Exercise
	Options	Price
Outstanding at January 1, 2022	41,304	$	1.05
Outstanding at December 31, 2022	41,304	$	1.05
Outstanding at March 31, 2023	41,304	$	1.05
Options exercisable at December 31, 2022	34,361	$	1.01
Options exercisable at March 31, 2023	34,361	$	1.01

Exercise prices for options ranged from $0.84 to $1.25 at March 31, 2023. The weighted average option price for all options outstanding at March 31, 2023, was $1.05 with a weighted average remaining contractual life of 3.4 years.

Note 6.  Inventories

Inventories consisted of the following:

	March 31,		December 31,
	2023		2022
Raw materials	$	416,367	$	1,375,669
Work-in-process		2,095,341		528,631
Finished goods		118,808		284,048
		2,630,516		2,188,348
Inventory reserve		(11,385)		(10,431)
	$	2,619,131	$	2,177,917

10

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 7.  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. All common stock options listed in Note 5 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 March 31,
	2023		2022
Net income	$	538,020	$	384,401
Weighted average common shares outstanding - basic		4,525,103		4,510,276
Effect of dilution - stock options		30,306		27,889
Weighted average shares outstanding - diluted		4,555,409		4,538,165

Note 8.  Note Payable

The Company renewed its line of credit with Fifth Third Bank for $1 million during 2022. The line of credit bears interest equal to the rate of interest per annum established by Fifth Third Bank as its Prime Rate. This line of credit has a maturity date of August 29, 2023. No amounts were drawn on this line of credit as of March 31, 2023.

Note 9.  Income Taxes

The provision for income taxes for the three months ended March 31, 2023 and 2022 is based on our projected annual effective tax rate for fiscal year 2023, adjusted for permanent differences and specific items that are required to be recognized in the period in which they are incurred.

Following is the income tax expense for the three months ended March 31:

	Three months ended March 31,
	2023		2022
Federal	$	146,374	$	56,000
State and local		11,836		4,800
	$	158,210	$	60,800

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The Company had net operating loss carryforwards available for federal and state tax purposes of approximately $42,000 at December 31, 2022, which expires in 2038.

As of December 31, 2022, management determined that there was sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $151,164 were realizable principally because we achieved six consecutive years of pretax income, expect profits to continue for the foreseeable future and implemented new efficiencies in the Company’s manufacturing process. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Accordingly, management determined that no valuation allowance was necessary, and the deferred tax asset was $34,231 at March 31, 2023.

11

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 10. Operating Lease

The Company entered into an operating lease with a third party on March 18, 2014 for its headquarters in Columbus, Ohio. The terms of the lease include monthly payments ranging from $9,200 to $9,700 with a maturity date of November 30, 2024. The Company has the option to extend the lease period for an additional five years beyond the original expiration date. There are no restrictions or covenants associated with the lease. The lease costs were approximately $28,600 and $28,100 during the three months ended March 31, 2023 and 2022, respectively. The variable lease costs were approximately $23,200 and $13,500 during the three months ended March 31, 2023 and 2022, respectively.

The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operating lease liabilities as of March 31, 2023:

		2023
2023	$	86,212
2024		102,550
Total minimum lease payments		188,762
Less debt discount		8,927
Total operating lease obligations	$	179,835

		2023			2022
Operating cash outflows from operating lease - year-to-date	$	25,788		$	23,675
Weighted average remaining lease term – operating lease		1.7	years		2.7	years
Weighted average discount rate – operating lease		5.5	%		5.5	%

Note 11. Finance Leases

The Company leases certain equipment under finance leases. Future minimum lease payments, by year, with the present value of such payments, as of March 31, 2023, are shown in the following table.

2023	$	75,349
2024		49,859
Total minimum lease payments		125,208
Less amount representing interest		3,532
Present value of minimum lease payments		121,676
Less current portion		92,966
Finance lease obligations, net of current portion	$	28,710
Weighted average remaining lease term – finance leases		1.2	years
Weighted average discount rate – finance leases		4.29	%

The equipment under finance lease at March 31, 2023, and December 31, 2022, is included in the accompanying balance sheets as follows:

	March 31, 2023		Dec. 31, 2022
Machinery and equipment	$	385,923	$	385,923
Less accumulated depreciation and amortization		114,024		104,376
Net book value	$	271,899	$	281,547

12

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 11. Finance Leases (continued)

These assets are amortized over a period of ten years using the straight-line method and amortization is included in depreciation expense. Finance lease costs totaled $24,840 and $23,783 for the three months ended March 31, 2023 and 2022, respectively.

The finance leases are structured such that ownership of the leased asset reverts to the Company at the end of the lease term. Accordingly, leased assets are depreciated using the Company’s normal depreciation methods and lives. Ownership of certain assets was transferred to the Company in accordance with the terms of the leases and these assets have been excluded from the leased asset disclosure above.

13

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, 2022.

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, 2022, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our business and financial condition and could cause actual results to differ materially from plans and projections. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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

Executive Summary

For the three months ended March 31, 2023, we had total revenue of $5,797,147 compared to $5,326,432 for the three months ended March 31, 2022. Higher volume was the key factor that contributed to the increase, despite lower raw material costs compared to the same period last year.

Gross profit was $1,324,597 for the three months ended March 31, 2023 compared to $994,101 for the same three months in 2022. The increase was due to higher revenue and favorable product mix.  

Operating expenses were $677,344, and $542,407 for the three months ended March 31, 2023 and 2022, respectively.

Income from operations was $647,253 and $451,694 for the three months ended March 31, 2023 and 2022, respectively.

Consistent with our growth strategy, we have identified niche markets that can benefit from our expertise in custom powder solutions, such as near-infrared doped phosphors and short-wave infrared applications. These applications enable extended life of phosphors for specific nighttime identification needs of defense personnel and first responders.

New initiatives are also being pursued that utilize our vacuum hot presses, cold isostatic press, and kilns for increased production and development projects, including diffusion bonding. We recently manufactured and sold conductive metal oxides for direct current sputtering of Tungsten Oxide and Molybdenum Oxide materials. We continue to invest in developing new products for all our markets including specialty bonding processes for Aerospace customers. Those products involve research and development expense to accelerate time to market.

14

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

Several issues continue to affect national and global market conditions. First, inflation remains at historically high levels, impacting labor, raw material costs and transportation expenses. We have generally been able to pass on these increases to customers but are unable to predict how future or sustained inflationary pressure may impact our results. Second, supply chain disruptions are adversely impacting customers in certain markets. Thus far, we have not experienced material adverse effects regarding product shipments; however, timely deliveries and sourcing of certain materials is of increased concern. Third, published articles and corporate announcements continue to address the global semiconductor chip shortage, which is anticipated to continue in 2023. This shortage is affecting some of our customers which could impact the Company’s revenue, volume, and profitability. Fourth, there are increased political uncertainties affecting global markets. Although we currently have no customers or vendors in Russia or Ukraine, we continue to monitor the situation as some raw material comes from Russia for the PVD industry. We continue to actively monitor these developments, including ongoing contact with our suppliers and customers, including identifying additional suppliers and adapting to our customers’ specific circumstances and forecasts.

RESULTS OF OPERATIONS

Three months ended March 31, 2023 (unaudited) compared to three months ended March 31, 2022 (unaudited):

Revenue

For the three months ended March 31, 2023, we had revenue of $5,797,147. This was an increase of $470,715, compared to the three months ended March 31, 2022. Higher volume was the key factor that contributed to the increase, despite lower raw material costs compared to the same period last year.

Gross profit

Gross profit was $1,324,597 for the three months ended March 31, 2023, compared to $994,101 for the same three months in 2022, an increase of $330,496. The increase was due to higher revenue and favorable product mix. Gross profit as a percentage of revenue (gross margin) was 22.8% for the first quarter of 2023 compared to 18.7% for the first quarter of 2022. The improved gross margin in 2023 was due to product mix and lower raw material costs.  

General and administrative expense

General and administrative expense for the three months ended March 31, 2023 and 2022, was $432,413, and $373,188, respectively, an increase of 15.9%. This increase was attributed to higher compensation of $42,119, an increase in business liability insurance (due to higher revenue) of $12,938, and professional fees, primarily related to SEC compliance costs for legal, accounting and stockholder relations fees, of $7,328.  

Research and development expense

Research and development expense for the three months ended March 31, 2023, was $135,360 compared to $87,031 for the same period in 2022, an increase of 55.5%. This increase was attributed to higher compensation of $19,121, outside consulting of $16,789 and materials and supplies of $12,614. Specialty materials are being researched for use in niche markets which include custom applications and additive manufacturing. Our development efforts utilize a disciplined innovation approach focused on accelerating time to market for these applications 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 $109,571 and $82,188 for the three months ended March 31, 2023, and 2022, respectively. This was an increase of 33.3%. Compensation expense and travel expense increased $17,525 and $9,225 during the three months ended March 31, 2023, and 2022, respectively. We exhibited at a major international photonics trade show for the first time during the first quarter of 2023.

Stock compensation expense

Included in total expenses were noncash stock-based compensation costs of $45,090 and $23,299 for the three months ended March 31, 2023 and 2022, respectively. Compensation expense 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 was $394 as of March 31, 2023 and will be recognized through April of 2023.

Interest

Interest income was $48,977, for the three months ended March 31, 2023. Interest expense was $6,493 for the three months ended March 31, 2022. The improvement was due to our approximately $2.0 million investment in marketable securities and the overall increase in interest rates. Interest expense has decreased as we continue to reduce our debt outstanding.

Income taxes

Income tax expense was $158,210, and $60,800 for the three months ended March 31, 2023, and 2022, respectively. At December 31, 2022, the deferred tax asset was $151,164. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Accordingly, management determined that no valuation allowance was necessary, and the deferred tax asset was $34,231 at March 31, 2023.

Net income

Net income for the three months ended March 31, 2023, and 2022, was $538,020, and $384,401, respectively. The increase was primarily the result of higher revenue, gross profit and interest income partially offset by higher operating and income tax expenses.  

Liquidity and Capital Resources

Cash

As of March 31, 2023, cash on hand was $4,495,169 compared to $3,947,966 at December 31, 2022 due to net cash provided by operating activities in conjunction with investment in our manufacturing footprint and acquisition of production equipment.  

Working capital

At March 31, 2023, working capital was $5,843,578 compared to $5,211,625 at December 31, 2022, an increase of $631,953 or 12.1%. Cash increased $547,203, inventories increased $441,214, prepaid expenses increased $200,093 and customer deposits increased $823,495 while accounts payable decreased $198,002.

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

Cash from operations

Net cash provided by operating activities during the three months ended March 31, 2023, was $719,764 and $603,992 for the three months ended March 31, 2022. In addition to the net income generated, this included depreciation and amortization of $115,591 and $102,350, and noncash stock-based compensation costs of $45,090 and $23,299 for the three months ended March 31, 2023, and 2022, respectively. The increases in inventories, prepaid expenses, and customer deposits compared to December 31, 2022, were related to the increase in orders received during the first quarter. Customer orders remain strong, and customers continue to monitor inventory closely with continued emphasis on intra-quarter shipments.

Cash from investing activities

Cash of $147,721 was used in investing activities during the three months ended March 31, 2023, which included the initial stages of the enclosure of our ceramic machining area in addition to the acquisition of production equipment. Cash of $74,676 was used in investing activities during the three months ended March 31, 2022, for the purchase of production equipment.      

Cash from financing activities

Cash of $24,840 and $23,783 was used in financing activities for principal payments to third parties for finance lease obligations during the three months ended March 31, 2023, and 2022, respectively.  

Debt outstanding

Total debt outstanding, related to finance lease obligations, was $121,676 at March 31, 2023, compared to $146,516 at December 31, 2022, a decrease of 17.0%. As previously mentioned, cash of $24,840 was used for principal payments for finance lease obligations during 2023.

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, 2022, 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 and current expected credit losses, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, revenue recognition, income tax expense, deferred tax assets and liabilities, realization of deferred tax assets, 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 creditworthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. The tax valuation allowance is based on our consideration of new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets. If we were to determine we would not be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset would be necessary which would reduce our net income for that period. 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.

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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 implemented, can only provide reasonable assurance of achieving the desired control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure 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 Financial Officer, to allow timely discussions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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 is responsible for the consistency, integrity, and presentation of information. We fulfill our responsibility by maintaining systems of internal control designed to provide reasonable assurance that assets are safeguarded, and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable assurance.

The Board of Directors exercises its oversight role with respect to our systems of internal control primarily through its Audit Committee, which is comprised of independent directors. The Committee oversees our financial reporting, quarterly reviews, and audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders’ investments.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting for the three months ended March 31, 2023, 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.

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PART II. OTHER INFORMATION

Item 6. Exhibits

3(a)		Certificate of Second Amended and Restated Articles of Incorporation of Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(a) to the Company’s initial Form 10-SB, filed on September 28, 2000)
3(b)		Restated Code of Regulations of Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(b) to the Company’s initial Form 10-SB, filed on September 28, 2000)
3(c)		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(a)		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(b)		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).
14(a)		SCI Engineered Materials Code of Ethics for the Chief Executive Officer and Chief Financial Officer (Incorporated by reference to the Company’s Current Report via the Company’s website at www.sciengineeredmaterials.com).
31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.
32.1	*	Section 1350 Certification of Principal Executive Officer.
32.2	*	Section 1350 Certification of Principal Financial Officer.
99.1	*	Press Release dated May 1, 2023 , entitled “SCI Engineered Materials, Inc., Reports 2023 First  Quarter  Results.”
101		The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Balance Sheets at  March 31, 2023 and December 31, 2022, (ii) Statements of Income for the three  months ended March 31, 2023 and 2022, (iii)  Statement of Changes in Equity for the three months ended  March 31, 2023 and 2022, (iv) Statements of Cash Flows for the three months ended March 31, 2023 and 2022, and (v) Notes to Financial Statements.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*  Filed herewith

19

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: May 1, 2023	/s/ Jeremiah R. Young
	Jeremiah R. Young, 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)

20

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

I, Jeremiah R. Young, 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, which involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 1, 2023	/s/ Jeremiah R. Young
	Jeremiah R. Young
	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, which involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 1, 2023	/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 March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeremiah R. Young,  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/ Jeremiah R. Young

Jeremiah R. Young

President and Chief Executive Officer of

SCI Engineered Materials, Inc.

(Principal Executive Officer)

May 1, 2023

EX-32.2

Exhibit 32.2

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 March 31, 2023 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)

May 1, 2023

EX-99.1

Exhibit 99.1

Contact: Robert Lentz

(614) 439-6006

SCI Engineered Materials, Inc. Reports

2023 First Quarter Results

COLUMBUS, Ohio (May 1, 2023) SCI Engineered Materials, Inc. (“SCI”) (SCIA: OTCQB), today reported financial results for the three months ended March 31, 2023. SCI is a global supplier and manufacturer of advanced materials for physical vapor deposition thin film applications who works closely with end users and OEMs to develop innovative, customized solutions.

Jeremy Young, President, and Chief Executive Officer, said, “We are encouraged by our solid start in 2023 and first quarter financial results. The increase in total revenue was due to strong volume throughout the quarter. We continue to benefit from recent customer additions, especially for a growing number of toll services utilizing SCI’s vacuum hot presses. Our marketing plans for 2023 include exhibiting at additional industry trade shows which have a specific market focus and increasing our sales team staff.”

Revenue

Total revenue for the first three months of 2023 increased 9% to $5,797,147 from $5,326,432 for the same period a year ago. Higher volume was the key factor that contributed to the year-over-year increase, despite lower raw material costs.

Order backlog was approximately $5.1 million on March 31, 2023, versus $4.1 million at 2022 year-end and $3.0 million on the same date last year.

Gross profit

Gross profit was $1,324,597 for the 2023 first quarter versus $994,101 the prior year. The increase was attributable to higher revenue and to a lesser extent favorable product mix.

Operating expenses

Operating expenses (general and administrative, research and development (R&D), and marketing and sales) were $677,344 for the three months ended March 31, 2023, compared to $542,407 the prior year. The largest increase was in general and administrative expenses, followed by research and development and marketing and sales expenses to support the Company’s growth. Higher research and development expenses included initiatives focused on custom specialty materials and additive manufacturing applications. During the first quarter of 2023 the Company exhibited for the first time at an international photonics trade show and launched targeted online corporate visibility and product campaigns.

Interest (income)/expense, net

Interest income was $48,977 for the 2023 first quarter compared to interest expense of $6,493 for the same period a year ago. Interest income in the first quarter of 2023 increased due to the approximately $2.0 million investment in marketable securities during the fourth quarter of 2022 and the overall increase in interest rates. Interest expense continues to decline as the Company reduces outstanding balances for equipment leases.

Income taxes

Income tax expense for the first three months of 2023 was $158,210 versus $60,800 for the same period a year ago. The effective tax rate for the first quarter of 2023 was 22.7% compared to the tax rate for calendar year 2022 of 21.7%.

1

Net income

Net income increased 40% to $538,020 from $384,401 for the same period last year. The increase was due to higher revenue, gross profit and interest income, partially offset by higher operating and income tax expenses.

Cash and investments

Cash on hand was $4,495,169 on March 31, 2023, compared to $3,947,966 on December 31, 2022, benefiting from net cash provided by operating activities during the first three months of 2023. There were also approximately $2.0 million of investments in marketable securities at the end of the 2023 first quarter and 2022 year-end.

Debt outstanding

Debt outstanding was $121,676 on March 31, 2023, compared to $146,516 on December 31, 2022. The Company made principal payments of $24,840 during the first three months of 2023 related to finance lease obligations.

About SCI Engineered Materials, Inc.

SCI Engineered Materials is a global supplier and manufacturer of advanced materials for PVD thin film applications who works closely with end users and OEMs to develop innovative, customized solutions. Additional information is available at  www.sciengineeredmaterials.com or follow SCI Engineered Materials, Inc. at:

https://www.linkedin.com/company/sci-engineered-materials.-inc

https://www.facebook.com/sciengineeredmaterials/

https://www.twitter.com/SciMaterials

This press release contains 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 are not limited to, all statements regarding intent, beliefs, expectations, projections, customer guidance, forecasts, plans of the Company and its management. These forward-looking statements involve numerous risks and uncertainties, including without limitation, other risks and uncertainties detailed from time to time in the Company’s Securities and Exchange Commission filings, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. One or more of these factors have affected and could affect the Company’s projections in the future. Therefore, there can be no assurances that the forward-looking statements included in this press release will prove to be accurate. Due to the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other persons, that the objectives and plans of the company will be achieved. All forward-looking statements made in this press release are based on information presently available to the management of the Company. The Company assumes no obligation to update any forward-looking statements.

2

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

	March 31,		December 31,
	2023		2022
ASSETS	(UNAUDITED)
Current Assets
Cash	$	4,495,169	$	3,947,966
Investments - marketable securities, short term		989,265		989,265
Accounts receivable, less allowance for doubtful accounts		888,617		895,839
Inventories		2,619,131		2,177,917
Prepaid expenses		336,227		136,134
Total current assets		9,328,409		8,147,121
Property and Equipment, at cost		9,516,640		9,363,206
Less accumulated depreciation		(7,210,906)		(7,101,573)
Property and Equipment, net		2,305,734		2,261,633
Investments, net - marketable securities, long term		995,000		1,000,000
Right of use asset, net		161,794		185,072
Deferred tax asset		34,231		151,164
Other assets		84,035		85,138
Total other assets		1,275,060		1,421,374
TOTAL ASSETS	$	12,909,203	$	11,830,128
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short term debt	$	92,966	$	97,367
Operating lease, short term		107,932		105,789
Accounts payable		316,510		514,512
Customer deposits		2,649,090		1,825,595
Accrued expenses		318,333		392,233
Total current liabilities		3,484,831		2,935,496
Long term debt		28,710		49,149
Operating lease, long term		71,903		99,834
Total liabilities		3,585,444		3,084,479
Total Shareholders’ Equity		9,323,759		8,745,649
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	12,909,203	$	11,830,128

3

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(UNAUDITED)

	2023		2022
Revenue	$	5,797,147	$	5,326,432
Cost of revenue		4,472,550		4,332,331
Gross profit		1,324,597		994,101
General and administrative expense		432,413		373,188
Research and development expense		135,360		87,031
Marketing and sales expense		109,571		82,188
Income from operations		647,253		451,694
Interest (income) expense, net		(48,977)		6,493
Income before provision for income taxes		696,230		445,201
Income tax expense		158,210		60,800
NET INCOME	$	538,020	$	384,401
Earnings per share - basic and diluted
Income per common share
Basic	$	0.12	$	0.09
Diluted	$	0.12	$	0.08
Weighted average shares outstanding
Basic		4,525,103		4,510,276
Diluted		4,555,409		4,538,165

4

SCI ENGINEERED MATERIALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(UNAUDITED)

	2023		2022
CASH PROVIDED BY (USED IN):
Operating activities	$	719,764	$	603,992
Investing activities		(147,721)		(74,676)
Financing activities		(24,840)		(23,783)
NET INCREASE IN CASH		547,203		505,533
CASH - Beginning of period		3,947,966		4,140,942
CASH - End of period	$	4,495,169	$	4,646,475

5

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2023	Apr. 27, 2023
Document And Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Mar. 31, 2023
Entity File Number	0-31641
Entity Registrant Name	SCI ENGINEERED MATERIALS, INC.
Entity Incorporation, State or Country Code	OH
Entity Tax Identification Number	31-1210318
Entity Address, Address Line One	2839 Charter Street
Entity Address, City or Town	Columbus
Entity Address, State or Province	OH
Entity Address, Postal Zip Code	43228
City Area Code	614
Local Phone Number	486-0261
Title of 12(b) Security	Common stock, without par value
Trading Symbol	SCIA
Security Exchange Name	NONE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		4,530,207
Entity Central Index Key	0000830616
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

BALANCE SHEETS - USD ($)	Mar. 31, 2023	Dec. 31, 2022
Current Assets
Cash	$ 4,495,169	$ 3,947,966
Investments - marketable securities, short term	989,265	989,265
Accounts receivable Trade, less allowance for doubtful accounts of $15,000	816,745	842,647
Accounts receivable Tax - Employee Retention Credit	40,539	40,539
Other	31,333	12,653
Inventories, net	2,619,131	2,177,917
Prepaid expenses	336,227	136,134
Total current assets	9,328,409	8,147,121
Property and Equipment, at cost
Machinery and equipment	8,672,588	8,584,871
Furniture and fixtures	142,471	142,471
Leasehold improvements	607,156	607,156
Construction in progress	94,425	28,708
Property, Plant and Equipment, Gross	9,516,640	9,363,206
Less accumulated depreciation and amortization	(7,210,906)	(7,101,573)
Property, Plant and Equipment, Net	2,305,734	2,261,633
Investments, net - marketable securities, long term	995,000	1,000,000
Right of use asset, net	161,794	185,072
Deferred tax asset	34,231	151,164
Other assets	84,035	85,138
Total other assets	1,275,060	1,421,374
TOTAL ASSETS	12,909,203	11,830,128
Current Liabilities
Finance lease obligations, current portion	92,966	97,367
Operating lease obligations, current portion	107,932	105,789
Accounts payable	316,510	514,512
Customer deposits	2,649,090	1,825,595
Accrued compensation	157,799	270,168
Accrued expenses and other	160,534	122,065
Total current liabilities	3,484,831	2,935,496
Finance lease obligations, net of current portion	28,710	49,149
Operating lease obligations, net of current portion	71,903	99,834
Total liabilities	3,585,444	3,084,479
Shareholders' Equity
Common stock, no par value, authorized 15,000,000 shares; 4,530,207 and 4,519,524 shares issued and outstanding, respectively	10,662,343	10,618,435
Additional paid-in capital	2,232,989	2,231,807
Accumulated deficit	(3,571,573)	(4,104,593)
Total shareholders' equity	9,323,759	8,745,649
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 12,909,203	$ 11,830,128

XML

BALANCE SHEETS (Parenthetical) - USD ($)	Mar. 31, 2023	Dec. 31, 2022
BALANCE SHEETS
Allowance for doubtful accounts (in dollars)	$ 15,000	$ 15,000
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	4,530,207	4,519,524
Common stock, shares outstanding	4,530,207	4,519,524

XML

STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
STATEMENTS OF OPERATIONS
Revenue	$ 5,797,147	$ 5,326,432
Revenue, Product and Service [Extensible Enumeration]	us-gaap:ProductMember	us-gaap:ProductMember
Cost of revenue	$ 4,472,550	$ 4,332,331
Cost, Product and Service [Extensible Enumeration]	us-gaap:ProductMember	us-gaap:ProductMember
Gross profit	$ 1,324,597	$ 994,101
General and administrative expense	432,413	373,188
Research and development expense	135,360	87,031
Marketing and sales expense	109,571	82,188
Income from operations	647,253	451,694
Interest (income) expense	(48,977)	6,493
Income before provision for income taxes	696,230	445,201
Income tax expense	158,210	60,800
Net income	538,020	384,401
NET INCOME	$ 538,020	$ 384,401
Income per common share
Basic (In dollars per share)	$ 0.12	$ 0.09
Diluted (In dollars per share)	$ 0.12	$ 0.08
Weighted average shares outstanding
Basic (In shares)	4,525,103	4,510,276
Diluted (In shares)	4,555,409	4,538,165

XML

STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)	Common Stock	Additional Paid-In Capital	Accumulated Deficit Period of Adoption, Adjustment	Accumulated Deficit	Period of Adoption, Adjustment	Total
Balance at Dec. 31, 2021	$ 10,573,843	$ 2,227,078		$ (6,061,617)		$ 6,739,304
Stock based compensation expense (Note 2J)		1,183				1,183
Common stock issued (Note 8)	22,116					22,116
Net income				384,401		384,401
Balance at Mar. 31, 2022	10,595,959	2,228,261		(5,677,216)		7,147,004
Balance at Dec. 31, 2022	10,618,435	2,231,807	$ (5,000)	(4,104,593)	$ (5,000)	8,745,649
Stock based compensation expense (Note 2J)		1,182				1,182
Common stock issued (Note 8)	43,908					43,908
Net income				538,020		538,020
Balance at Mar. 31, 2023	$ 10,662,343	$ 2,232,989		$ (3,571,573)		$ 9,323,759

XML

STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 538,020	$ 384,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and accretion	114,487	101,246
Amortization of patents	1,104	1,104
Stock based compensation	45,090	23,299
Gain on disposal of equipment	9,142	5,166
Deferred tax asset	116,933	56,000
Inventory reserve	954	1,500
Changes in operating assets and liabilities:
Accounts receivable	7,222	(232,092)
Inventories	(442,168)	(192,002)
Prepaid expenses	(200,093)	476,202
Other assets		(1)
Accounts payable	(198,002)	94,916
Operating lease assets and liabilities, net	(2,510)	(1,948)
Accrued expenses and customer deposits	747,869	(103,467)
Net cash provided by operating activities	719,764	603,992
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment	16,000	5,166
Purchases of property and equipment	(163,721)	(79,842)
Net cash used in investing activities	(147,721)	(74,676)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on finance lease obligations and notes payable	(24,840)	(23,783)
Net cash used in financing activities	(24,840)	(23,783)
NET INCREASE IN CASH	547,203	505,533
CASH - Beginning of year	3,947,966	4,140,942
CASH - End of period	4,495,169	4,646,475
Cash paid during the period for:
Interest	1,486	2,543
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in asset retirement obligation	$ 1,725	$ 1,725

XML

Business Organization and Purpose

3 Months Ended

Mar. 31, 2023

Business Organization and Purpose

Business Organization and Purpose

Note 1.  Business Organization and Purpose

SCI Engineered Materials, Inc. (“SCI,” or the “Company”), 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 markets within the photonics industry including Aerospace, Automotive, Defense, Glass, Optical Coatings and Solar. Substantially all revenues are generated from customers with multi-national operations. The Company develops innovative customized solutions enabling commercial success through collaboration with end users and Original Equipment Manufacturers.

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2023

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 2.  Summary of Significant Accounting Policies

Basis of Presentation - 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, 2022. Interim results are not necessarily indicative of results for the full year.

Use of Estimates - 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.

Revenue Recognition - The Company enters into contracts with its customers that generally represent purchase orders specifying general terms and conditions, order quantities and per unit product prices. The Company has determined that each unit of product purchased represents a separate performance obligation. The Company satisfies its performance obligations and recognizes revenue at a point in time when control of a unit of product is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. For the majority of product sales, transfer of control occurs when the products are shipped from the Company’s manufacturing facility to the customer. The cost of delivering products to the Company’s customers is recorded as a component of cost of products sold. Those costs may include the amounts paid to a third party to deliver the products. Any freight costs billed to and paid by a customer are included in revenue.  

The Company considers collectability of amounts due under a contract to be probable upon inception of a sale based on an evaluation of the creditworthiness of each customer. The Company sells its products typically under agreements with payment terms of 30-60 days. The Company does not normally include extended payment terms or significant financing components in contracts with customers. The majority of the Company’s contracts have an obligation to transfer products within one year. Thus, the Company elects to use the practical expedient where incremental cost of obtaining a contract, such as commissions, is expensed when incurred because the amortization period for those costs is one year or less. The Company treats shipping and handling activities that occur after control of the product transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation. Customer deposits are funds received in advance from customers and are recognized as revenue when the Company has transferred control of product to the customer. Product revenues are recognized upon shipment of goods as the customer has assumed the significant risks and rewards of ownership and the Company is entitled to payment at this point. Service revenues are recognized upon completion as the customer cannot realize the benefit of the service until fully completed.

All revenue was from the photonics industry during the three months ended March 31, 2023 and 2022. The top two customers represented approximately 86% and 89% of total revenue for the three months ended March 31, 2023 and 2022, respectively. International shipments were 1% of total revenue for the first three months of 2023 and 2022.

Note 2.  Summary of Significant Accounting Policies (continued)

Employee Retention Credit (ERC) - The Company qualified for federal government assistance through Employee Retention Credit provisions of the Consolidated Appropriations Act of 2021 during 2021 and 2020. The purpose of the Employee Retention Credit was to encourage employers to keep employees on the payroll, even if they were not working during the covered period because of the coronavirus outbreak. These funds were recorded in the Statements of Income as an offset to payroll costs in their respective expense lines and as a tax receivable on the balance sheets.  A balance of $40,539 appears as a tax receivable on the balance sheets at March 31, 2023 and December 31, 2022.

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2023

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Note 3.  Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 significantly changes how entities measure credit losses for most financial assets, including accounts receivable and held-to-maturity marketable securities, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 became effective for us in the first quarter of 2023. The adoption of ASU No. 2016-13 resulted in a cumulative effect of $5,000 and is reflected in the accompanying Statement of Shareholders’ Equity.

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Investments

3 Months Ended

Mar. 31, 2023

Investments

Investments

Note 4.   Investments

As of March 31, 2023 and December 31, 2022, the Company held investments in corporate and U.S. government bonds that are required to be measured for disclosure purposes at fair value on a recurring basis. The bonds are considered held-to-maturity and are recorded at amortized cost on the balance sheet. These investments are considered level 2 as detailed in the table below. The Company considers investments which will mature in the next twelve months and interest receivable on the long-term bonds as current assets. The remaining investments are considered non-current assets including the investment in marketable securities which the Company intends to hold longer than twelve months. The fair value of these investments was estimated using recently executed transactions and market price quotations. At March 31, 2023, the length of time until maturity of the bonds currently owned ranged from 2 months to 20 months. The amortized cost, allowance for credit losses, fair value, and the related unrecognized gains and losses of these investments, were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
March 31, 2023
Corporate bonds	$	1,500,000	$	—	$	(9,116)	$	1,490,884
U.S. government treasuries		489,265		8,280		—		497,545
Total investments	$	1,989,265	$	8,280	$	(9,116)	$	1,988,429
Allowance for credit losses		(5,000)
Total investments, net	$	1,984,265
December 31, 2022
Corporate bonds	$	1,500,000	$	—	$	(1,924)	$	1,498,076
U.S. government treasuries		489,265		2,665		—		491,930
Total investments	$	1,989,265	$	2,665	$	(1,924)	$	1,990,006

The Company uses an “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period as necessary for changes in expected lifetime credit losses. The credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as the current portfolio. An adjustment factor is applied to these credit loss calculations based upon management’s assessment of the expected impact from current economic conditions on our investments. The Company monitors the credit quality of debt securities classified as held-to-maturity through the use of their respective credit ratings and update them on a quarterly basis with the latest assessment completed on March 31, 2023. Our allowance for credit losses was $5,000 at March 31, 2023.

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Common Stock and Stock Options

3 Months Ended

Mar. 31, 2023

Common Stock and Stock Options

Common Stock and Stock Options

Note 5.  Common Stock and Stock Options

Stock based compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period. Noncash stock-based compensation expense was $45,090 and $23,299 for the three months ended March 31, 2023, and 2022, respectively.

Unrecognized compensation expense was $394 as of March 31, 2023 and will be recognized through April of 2023. There was no tax benefit recorded for this compensation cost as the expense relates to incentive stock options that do not qualify for a tax deduction until, and only if, a qualifying disposition occurs.

Employees received compensation of 10,683 and 4,500 aggregate shares of common stock of the Company during the three months ended March 31, 2023 and 2022, respectively. These shares had an aggregate value of $43,908 and $14,625, respectively, and were recorded as non-cash stock compensation expense in the financial statements.

The non-employee Board members received compensation of 2,305 aggregate shares of common stock of the Company with an aggregate value of $7,491 during the three months ended March 31, 2022 and was recorded as non-cash stock compensation expense in the financial statements.

The cumulative status of options granted and outstanding at March 31, 2023, and December 31, 2022, as well as any options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

		Weighted
		Average
	Stock	Exercise
	Options	Price
Outstanding at January 1, 2022	41,304	$	1.05
Outstanding at December 31, 2022	41,304	$	1.05
Outstanding at March 31, 2023	41,304	$	1.05
Options exercisable at December 31, 2022	34,361	$	1.01
Options exercisable at March 31, 2023	34,361	$	1.01

Exercise prices for options ranged from $0.84 to $1.25 at March 31, 2023. The weighted average option price for all options outstanding at March 31, 2023, was $1.05 with a weighted average remaining contractual life of 3.4 years.

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Inventories

3 Months Ended

Mar. 31, 2023

Inventories

Inventories

Note 6.  Inventories

Inventories consisted of the following:

	March 31,		December 31,
	2023		2022
Raw materials	$	416,367	$	1,375,669
Work-in-process		2,095,341		528,631
Finished goods		118,808		284,048
		2,630,516		2,188,348
Inventory reserve		(11,385)		(10,431)
	$	2,619,131	$	2,177,917

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Earnings Per Share

3 Months Ended

Mar. 31, 2023

Earnings Per Share

Earnings Per Share

Note 7.  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. All common stock options listed in Note 5 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 March 31,
	2023		2022
Net income	$	538,020	$	384,401
Weighted average common shares outstanding - basic		4,525,103		4,510,276
Effect of dilution - stock options		30,306		27,889
Weighted average shares outstanding - diluted		4,555,409		4,538,165

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Notes Payable

3 Months Ended

Mar. 31, 2023

Notes Payable

Notes Payable

Note 8.  Note Payable

The Company renewed its line of credit with Fifth Third Bank for $1 million during 2022. The line of credit bears interest equal to the rate of interest per annum established by Fifth Third Bank as its Prime Rate. This line of credit has a maturity date of August 29, 2023. No amounts were drawn on this line of credit as of March 31, 2023.

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Income Taxes

3 Months Ended

Mar. 31, 2023

Income Taxes

Income Taxes

Note 9.  Income Taxes

The provision for income taxes for the three months ended March 31, 2023 and 2022 is based on our projected annual effective tax rate for fiscal year 2023, adjusted for permanent differences and specific items that are required to be recognized in the period in which they are incurred.

Following is the income tax expense for the three months ended March 31:

	Three months ended March 31,
	2023		2022
Federal	$	146,374	$	56,000
State and local		11,836		4,800
	$	158,210	$	60,800

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The Company had net operating loss carryforwards available for federal and state tax purposes of approximately $42,000 at December 31, 2022, which expires in 2038.

As of December 31, 2022, management determined that there was sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $151,164 were realizable principally because we achieved six consecutive years of pretax income, expect profits to continue for the foreseeable future and implemented new efficiencies in the Company’s manufacturing process. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Accordingly, management determined that no valuation allowance was necessary, and the deferred tax asset was $34,231 at March 31, 2023.

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Operating Lease

3 Months Ended

Mar. 31, 2023

Operating Lease

Operating Lease

Note 10. Operating Lease

The Company entered into an operating lease with a third party on March 18, 2014 for its headquarters in Columbus, Ohio. The terms of the lease include monthly payments ranging from $9,200 to $9,700 with a maturity date of November 30, 2024. The Company has the option to extend the lease period for an additional five years beyond the original expiration date. There are no restrictions or covenants associated with the lease. The lease costs were approximately $28,600 and $28,100 during the three months ended March 31, 2023 and 2022, respectively. The variable lease costs were approximately $23,200 and $13,500 during the three months ended March 31, 2023 and 2022, respectively.

The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operating lease liabilities as of March 31, 2023:

		2023
2023	$	86,212
2024		102,550
Total minimum lease payments		188,762
Less debt discount		8,927
Total operating lease obligations	$	179,835

		2023			2022
Operating cash outflows from operating lease - year-to-date	$	25,788		$	23,675
Weighted average remaining lease term – operating lease		1.7	years		2.7	years
Weighted average discount rate – operating lease		5.5	%		5.5	%

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Finance Leases

3 Months Ended

Mar. 31, 2023

Finance Leases

Finance Leases

Note 11. Finance Leases

The Company leases certain equipment under finance leases. Future minimum lease payments, by year, with the present value of such payments, as of March 31, 2023, are shown in the following table.

2023	$	75,349
2024		49,859
Total minimum lease payments		125,208
Less amount representing interest		3,532
Present value of minimum lease payments		121,676
Less current portion		92,966
Finance lease obligations, net of current portion	$	28,710
Weighted average remaining lease term – finance leases		1.2	years
Weighted average discount rate – finance leases		4.29	%

The equipment under finance lease at March 31, 2023, and December 31, 2022, is included in the accompanying balance sheets as follows:

	March 31, 2023		Dec. 31, 2022
Machinery and equipment	$	385,923	$	385,923
Less accumulated depreciation and amortization		114,024		104,376
Net book value	$	271,899	$	281,547

Note 11. Finance Leases (continued)

These assets are amortized over a period of ten years using the straight-line method and amortization is included in depreciation expense. Finance lease costs totaled $24,840 and $23,783 for the three months ended March 31, 2023 and 2022, respectively.

The finance leases are structured such that ownership of the leased asset reverts to the Company at the end of the lease term. Accordingly, leased assets are depreciated using the Company’s normal depreciation methods and lives. Ownership of certain assets was transferred to the Company in accordance with the terms of the leases and these assets have been excluded from the leased asset disclosure above.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2023

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation - 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, 2022. Interim results are not necessarily indicative of results for the full year.

Use of Estimates

Use of Estimates - 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.

Revenue Recognition

Revenue Recognition - The Company enters into contracts with its customers that generally represent purchase orders specifying general terms and conditions, order quantities and per unit product prices. The Company has determined that each unit of product purchased represents a separate performance obligation. The Company satisfies its performance obligations and recognizes revenue at a point in time when control of a unit of product is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. For the majority of product sales, transfer of control occurs when the products are shipped from the Company’s manufacturing facility to the customer. The cost of delivering products to the Company’s customers is recorded as a component of cost of products sold. Those costs may include the amounts paid to a third party to deliver the products. Any freight costs billed to and paid by a customer are included in revenue.  

The Company considers collectability of amounts due under a contract to be probable upon inception of a sale based on an evaluation of the creditworthiness of each customer. The Company sells its products typically under agreements with payment terms of 30-60 days. The Company does not normally include extended payment terms or significant financing components in contracts with customers. The majority of the Company’s contracts have an obligation to transfer products within one year. Thus, the Company elects to use the practical expedient where incremental cost of obtaining a contract, such as commissions, is expensed when incurred because the amortization period for those costs is one year or less. The Company treats shipping and handling activities that occur after control of the product transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation. Customer deposits are funds received in advance from customers and are recognized as revenue when the Company has transferred control of product to the customer. Product revenues are recognized upon shipment of goods as the customer has assumed the significant risks and rewards of ownership and the Company is entitled to payment at this point. Service revenues are recognized upon completion as the customer cannot realize the benefit of the service until fully completed.

All revenue was from the photonics industry during the three months ended March 31, 2023 and 2022. The top two customers represented approximately 86% and 89% of total revenue for the three months ended March 31, 2023 and 2022, respectively. International shipments were 1% of total revenue for the first three months of 2023 and 2022.

Employee Retention Credit (ERC)

Employee Retention Credit (ERC) - The Company qualified for federal government assistance through Employee Retention Credit provisions of the Consolidated Appropriations Act of 2021 during 2021 and 2020. The purpose of the Employee Retention Credit was to encourage employers to keep employees on the payroll, even if they were not working during the covered period because of the coronavirus outbreak. These funds were recorded in the Statements of Income as an offset to payroll costs in their respective expense lines and as a tax receivable on the balance sheets.  A balance of $40,539 appears as a tax receivable on the balance sheets at March 31, 2023 and December 31, 2022.

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Investments (Tables)

3 Months Ended

Mar. 31, 2023

Investments

Schedule of amortized cost, fair value of investments, and related gross unrealized gains/(losses)

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
March 31, 2023
Corporate bonds	$	1,500,000	$	—	$	(9,116)	$	1,490,884
U.S. government treasuries		489,265		8,280		—		497,545
Total investments	$	1,989,265	$	8,280	$	(9,116)	$	1,988,429
Allowance for credit losses		(5,000)
Total investments, net	$	1,984,265
December 31, 2022
Corporate bonds	$	1,500,000	$	—	$	(1,924)	$	1,498,076
U.S. government treasuries		489,265		2,665		—		491,930
Total investments	$	1,989,265	$	2,665	$	(1,924)	$	1,990,006

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Common Stock and Stock Options (Tables)

3 Months Ended

Mar. 31, 2023

Common Stock and Stock Options

Schedule of share-based compensation, employee stock options, activity

		Weighted
		Average
	Stock	Exercise
	Options	Price
Outstanding at January 1, 2022	41,304	$	1.05
Outstanding at December 31, 2022	41,304	$	1.05
Outstanding at March 31, 2023	41,304	$	1.05
Options exercisable at December 31, 2022	34,361	$	1.01
Options exercisable at March 31, 2023	34,361	$	1.01

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Inventories (Tables)

3 Months Ended

Mar. 31, 2023

Inventories

Schedule of inventories

	March 31,		December 31,
	2023		2022
Raw materials	$	416,367	$	1,375,669
Work-in-process		2,095,341		528,631
Finished goods		118,808		284,048
		2,630,516		2,188,348
Inventory reserve		(11,385)		(10,431)
	$	2,619,131	$	2,177,917

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2023

Earnings Per Share

Summary of reconciliation of earnings per share calculations

	Three months ended March 31,
	2023		2022
Net income	$	538,020	$	384,401
Weighted average common shares outstanding - basic		4,525,103		4,510,276
Effect of dilution - stock options		30,306		27,889
Weighted average shares outstanding - diluted		4,555,409		4,538,165

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2023

Income Taxes

Schedule of components of the income tax expense

	Three months ended March 31,
	2023		2022
Federal	$	146,374	$	56,000
State and local		11,836		4,800
	$	158,210	$	60,800

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Operating Lease (Tables)

3 Months Ended

Mar. 31, 2023

Operating Lease

Schedule of annual undiscounted cash flows of the operating lease liabilities

		2023
2023	$	86,212
2024		102,550
Total minimum lease payments		188,762
Less debt discount		8,927
Total operating lease obligations	$	179,835

Schedule of operating lease other information

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Finance Leases (Tables)

3 Months Ended

Mar. 31, 2023

Finance Leases

Schedule of future minimum lease payments

2023	$	75,349
2024		49,859
Total minimum lease payments		125,208
Less amount representing interest		3,532
Present value of minimum lease payments		121,676
Less current portion		92,966
Finance lease obligations, net of current portion	$	28,710
Weighted average remaining lease term – finance leases		1.2	years
Weighted average discount rate – finance leases		4.29	%

Schedule of equipment under finance leases

	March 31, 2023		Dec. 31, 2022
Machinery and equipment	$	385,923	$	385,923
Less accumulated depreciation and amortization		114,024		104,376
Net book value	$	271,899	$	281,547

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Business Organization and Purpose (Details)	3 Months Ended
	Mar. 31, 2023 segment
Business Organization and Purpose
Number of operating segments	1

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Summary of Significant Accounting Policies (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022	Dec. 31, 2022
Summary of Significant Accounting Policies
Stock based compensation	$ 45,090	$ 23,299
Accounts receivable Tax - Employee Retention Credit	$ 40,539		$ 40,539
Geographic Concentration Risk | Sales Revenue, Net | International
Summary of Significant Accounting Policies
Concentration risk, percentage	1.00%	1.00%
Two Customers | Photonics industry | Sales Revenue, Net
Summary of Significant Accounting Policies
Concentration risk, percentage	86.00%	89.00%

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Recent Accounting Pronouncements (Details) - USD ($)	Mar. 31, 2023	Dec. 31, 2022	Mar. 31, 2022	Dec. 31, 2021
Schedule of Held-to-Maturity Securities [Line Items]
Stockholders' Equity Attributable to Parent	$ 9,323,759	$ 8,745,649	$ 7,147,004	$ 6,739,304
Period of Adoption, Adjustment
Schedule of Held-to-Maturity Securities [Line Items]
Stockholders' Equity Attributable to Parent		$ (5,000)

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Investments - Bond Maturity (Details) - Recurring - Fair Value, Inputs, Level 2 [Member]	3 Months Ended
	Mar. 31, 2023
Minimum
Investments
Maturity of bonds (in months)	2 months
Maximum
Investments
Maturity of bonds (in months)	20 months

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Investments (Details) - Recurring - USD ($)	Mar. 31, 2023	Dec. 31, 2022
Investments
Allowance for credit losses	$ (5,000)
Total investments, net	1,984,265
Level 2
Investments
Amortized Cost, before credit allowance	1,989,265	$ 1,989,265
Gross Unrealized Gains	8,280	2,665
Gross Unrealized Losses	(9,116)	(1,924)
Fair value	1,988,429	1,990,006
Corporate bonds | Level 2
Investments
Amortized Cost, before credit allowance	1,500,000	1,500,000
Gross Unrealized Losses	(9,116)	(1,924)
Fair value	1,490,884	1,498,076
U.S. government treasuries | Level 2
Investments
Amortized Cost, before credit allowance	489,265	489,265
Gross Unrealized Gains	8,280	2,665
Fair value	$ 497,545	$ 491,930

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Common Stock and Stock Options - Additional Information (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022	Dec. 31, 2022	Dec. 31, 2021
Common Stock and Stock Options
Stock based compensation	$ 45,090	$ 23,299
Unrecognized compensation expense	394
Stock Issued During Period, Value, New Issues	$ 43,908	22,116
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	$ 0.84
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit	1.25
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Outstanding Options, Weighted Average Exercise Price, Ending Balance	$ 1.05
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	3 years 4 months 24 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	41,304		41,304	41,304
Common Stock
Common Stock and Stock Options
Stock Issued During Period, Value, New Issues	$ 43,908	22,116
Non-employee director | Common Stock
Common Stock and Stock Options
Stock Issued During Period, Shares, New Issues	2,305
Stock Issued During Period, Value, New Issues		$ 7,491
Employee Stock Grants | Common Stock
Common Stock and Stock Options
Stock Issued During Period, Shares, New Issues	10,683	4,500
Stock Issued During Period, Value, New Issues	$ 43,908	$ 14,625

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Common Stock and Stock Options (Details) - $ / shares	Mar. 31, 2023	Dec. 31, 2022	Dec. 31, 2021
Common Stock and Stock Options
Options	41,304	41,304	41,304
Stock Options, Options exercisable	34,361	34,361
Weighted average option price	$ 1.05	$ 1.05	$ 1.05
Weighted Average Exercise Price, Options exercisable	$ 1.01	$ 1.01

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Inventories (Details) - USD ($)	Mar. 31, 2023	Dec. 31, 2022
Inventories
Raw materials	$ 416,367	$ 1,375,669
Work-in-process	2,095,341	528,631
Finished goods	118,808	284,048
Inventory, Gross	2,630,516	2,188,348
Inventory reserve	(11,385)	(10,431)
Inventory, Net	$ 2,619,131	$ 2,177,917

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Earnings Per Share - Reconciliation of Earnings Per Share Calculations (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
Earnings Per Share
Income applicable to common stock	$ 538,020	$ 384,401
Weighted average common shares outstanding - basic	4,525,103	4,510,276
Effect of dilution	30,306	27,889
Weighted average shares outstanding - diluted	4,555,409	4,538,165

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Notes Payable (Details) - Fifth Third Bank - USD ($)	Mar. 31, 2023	Aug. 31, 2022
Debt Instrument
Line of Credit Facility, Maximum Borrowing Capacity		$ 1,000,000
Line of credit	$ 0

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Income Taxes - Income tax expense (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
Income Taxes
Federal	$ 146,374	$ 56,000
State and local	11,836	4,800
Total	$ 158,210	$ 60,800

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Income Taxes (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022	Dec. 31, 2022
Income Taxes
Deferred Tax Assets, Operating Loss Carryforwards, State and Local			$ 42,000
Operating Loss Carry forward Expiration Year	2038
Net deferred tax asset	$ 34,231		$ 151,164
Deferred Tax Assets, Valuation Allowance	0
Income tax expense	$ 158,210	$ 60,800

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Operating Lease - Future Minimum Lease Payments (Details)	Mar. 31, 2023 USD ($)
Operating Lease
2023	$ 86,212
2024	102,550
Total minimum lease payments	188,762
Less debt discount	8,927
Total operating lease obligations	$ 179,835

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Operating Lease (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
Operating cash outflows from operating lease - year-to-date	$ 25,788	$ 23,675
Weighted average remaining lease term - operating lease	1 year 8 months 12 days	2 years 8 months 12 days
Weighted average discount rate - operating lease	5.50%	5.50%
Operating lease, renewal term	5 years
Operating lease costs	$ 28,600	$ 28,100
Variable lease costs	23,200	$ 13,500
Minimum
Monthly lease payments	9,200
Maximum
Monthly lease payments	$ 9,700

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Finance Leases - Future minimum lease payments (Details) - USD ($)	Mar. 31, 2023	Dec. 31, 2022
Finance Leases
2023	$ 75,349
2024	49,859
Total minimum lease payments	125,208
Less amount representing interest	3,532
Present value of minimum lease payments	121,676
Less current portion	92,966	$ 97,367
Finance lease obligations, net of current portion	$ 28,710	$ 49,149

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Finance Leases - Weighted Averages (Details)	Mar. 31, 2023
Finance Leases
Weighted average remaining lease term - finance leases	1 year 2 months 12 days
Weighted average discount rate - finance leases	4.29%

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Finance Leases - Equipment under finance lease and additional information (Details) - USD ($)	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022	Dec. 31, 2022
Finance Leases
Machinery and equipment	$ 385,923		$ 385,923
Less accumulated depreciation and amortization	114,024		104,376
Net book value	$ 271,899		$ 281,547
Finance lease amortization period (in years)	10 years
Finance lease costs	$ 24,840	$ 23,783