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 June 30, 2022

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 ☒

4,515,379 shares of Common Stock, without par value, were outstanding at July 28, 2022.

FORM 10-Q

SCI ENGINEERED MATERIALS, INC.

Table of Contents

		Page No.
PART I.          FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	3
	Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	5
	Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	6
	Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)	7
	Notes to Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	N/A
Item 4.	Controls and Procedures	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

	June 30,		December 31,
	2022		2021
	(UNAUDITED)
Current Assets
Cash	$	5,409,210	$	4,140,942
Accounts receivable
Trade, less allowance for doubtful accounts of $15,000		714,269		425,327
Tax - Employee Retention Credit		105,000		105,000
Other		—		1,250
Inventories, net		3,617,648		1,073,218
Prepaid expenses		46,052		678,357
Total current assets		9,892,179		6,424,094
Property and Equipment, at cost
Machinery and equipment		8,066,539		7,949,746
Furniture and fixtures		135,665		132,365
Leasehold improvements		596,867		596,867
Construction in progress		330,972		287,510
		9,130,043		8,966,488
Less accumulated depreciation		(6,994,759)		(6,809,850)
		2,135,284		2,156,638
Right of use asset, net		230,457		274,298
Deferred tax asset		531,720		663,820
Other assets		87,346		89,552
Total other assets		849,523		1,027,670
TOTAL ASSETS	$	12,876,986	$	9,608,402

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

3

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

	June 30,		December 31,
	2022		2021
	(UNAUDITED)
Current Liabilities
Finance lease obligations, current portion	$	98,828	$	96,702
Operating lease obligations, current portion		101,525		97,292
Accounts payable		430,808		250,383
Customer deposits		3,862,439		1,724,556
Accrued compensation		198,471		225,190
Accrued expenses and other		114,147		122,836
Total current liabilities		4,806,218		2,516,959
Finance lease obligations, net of current portion		96,564		146,516
Operating lease obligations, net of current portion		153,654		205,623
Total liabilities		5,056,436		2,869,098
Shareholders’ Equity
Common stock, no par value, authorized 15,000,000 shares; 4,515,379 and 4,506,269 shares issued and outstanding, respectively		10,603,450		10,573,843
Additional paid-in capital		2,229,443		2,227,078
Accumulated deficit		(5,012,343)		(6,061,617)
		7,820,550		6,739,304
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	12,876,986	$	9,608,402

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

4

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF INCOME

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2022		2021		2022		2021
Revenue	$	6,505,005	$	1,972,049	$	11,831,437	$	4,994,359
Cost of revenue		5,127,337		1,409,495		9,459,668		3,628,769
Gross profit		1,377,668		562,554		2,371,769		1,365,590
General and administrative expense		423,401		283,708		796,589		571,589
Research and development expense		92,085		54,377		179,116		92,596
Marketing and sales expense		108,140		46,434		190,328		97,827
Income from operations		754,042		178,035		1,205,736		603,578
Gain on extinguishment of debt		—		—		—		(325,300)
Interest expense		5,769		9,014		12,262		16,652
Income before provision for income taxes		748,273		169,021		1,193,474		912,226
Provision for income taxes		83,400		47,473		144,200		138,093
Net income		664,873		121,548		1,049,274		774,133
Dividends on preferred stock		—		6,038		—		12,076
INCOME APPLICABLE TO COMMON STOCK	$	664,873	$	115,510	$	1,049,274	$	762,057
Earnings per share - basic and diluted (Note 7)
Income per common share
Basic	$	0.15	$	0.03	$	0.23	$	0.17
Diluted	$	0.15	$	0.03	$	0.23	$	0.17
Weighted average shares outstanding
Basic		4,514,492		4,497,903		4,512,396		4,488,913
Diluted		4,541,819		4,526,062		4,539,988		4,516,478

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

5

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

	Convertible				Additional
	Preferred Stock,		Common		Paid-In		Accumulated
	Series B		Stock		Capital		Deficit		Total
Balance 12/31/2020	$	514,438	$	10,530,669	$	2,246,501	$	(7,740,441)	$	5,551,167
Accretion of cumulative dividends		6,038		—		(6,038)		—		—
Stock based compensation expense (Note 4)		—		—		1,183		—		1,183
Common stock issued (Note 4)		—		20,705		—		—		20,705
Net income		—		—		—		652,585		652,585
Balance 3/31/2021	$	520,476	$	10,551,374	$	2,241,646	$	(7,087,856)	$	6,225,640
Accretion of cumulative dividends		6,038		—		(6,038)		—		—
Payment of cumulative dividends (Note 5)		(24,152)		—		—		—		(24,152)
Stock based compensation expense (Note 4)		—		—		1,182		—		1,182
Common stock issued (Note 4)		—		7,493		—		—		7,493
Net income		—		—		—		121,548		121,548
Balance 6/30/2021	$	502,362	$	10,558,867	$	2,236,790	$	(6,966,308)	$	6,331,711
Balance 12/31/2021	$	—	$	10,573,843	$	2,227,078	$	(6,061,617)	$	6,739,304
Stock based compensation expense (Note 4)		—		—		1,183		—		1,183
Common stock issued (Note 4)		—		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
Stock based compensation expense (Note 4)		—		—		1,182		—		1,182
Common stock issued (Note 4)		—		7,491		—		—		7,491
Net income		—		—		—		664,873		664,873
Balance 6/30/2022	$	—	$	10,603,450	$	2,229,443	$	(5,012,343)	$	7,820,550

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

6

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,049,274	$	774,133
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and accretion		203,944		230,689
Amortization of right of use asset		43,841		40,792
Amortization of patents		2,207		2,207
Stock based compensation		31,972		30,563
(Gain) loss on disposal of equipment		(5,166)		3,224
Deferred tax asset		132,100		131,002
Gain on extinguishment of debt		—		(325,300)
Inventory reserve		(16,855)		600
Changes in operating assets and liabilities:
Accounts receivable		(287,692)		(144,555)
Inventories		(2,527,575)		(3,066,009)
Prepaid expenses		632,305		(151,276)
Other assets		(2)		2,656
Accounts payable		180,425		286,866
Operating lease obligations		(47,736)		(43,565)
Accrued expenses and customer deposits		2,099,024		3,477,435
Net cash provided by operating activities		1,490,066		1,249,462
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment		5,166		591
Purchases of property and equipment		(179,140)		(558,828)
Net cash used in investing activities		(173,974)		(558,237)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cumulative dividends on preferred stock		—		(24,152)
Principal payments on finance lease obligations and notes payable		(47,824)		(87,422)
Net cash used in financing activities		(47,824)		(111,574)
NET INCREASE IN CASH		1,268,268		579,651
CASH - Beginning of period		4,140,942		2,917,551
CASH - End of period	$	5,409,210	$	3,497,202
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	4,826	$	5,895
Income taxes		10,863		2,778
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in asset retirement obligation		3,450		3,450

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

7

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

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, 2021. 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 credit worthiness of each customer. The Company sells its products typically under agreements with 30 day payment terms. The Company does not typically 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 six months ended June 30, 2022 and 2021. The top two customers represented approximately 87% and 79% of total revenue for the six months ended June 30, 2022 and 2021, respectively. International shipments resulted in 1% and 3% of total revenue for the first six months of 2022 and 2021, respectively.

8

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

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 the first six months of 2021 in the amount of $255,507 during the first quarter of 2021 and $151,701 during the second quarter of 2021. 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. The Company also qualified for the ERC in the third quarter of 2021. A balance of $105,000 appears as a tax receivable on the balance sheets at June 30, 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 will measure credit losses for most financial assets, including accounts and notes receivables, 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 will become effective for us in the first quarter of 2023. We are evaluating the impact that the adoption of this update will have on our financial statements.

Note 4.  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 $8,673 and $8,675 for the three months ended June 30, 2022, and 2021, respectively. Noncash stock-based compensation expense was $31,972 and $30,563 for the six months ended June 30, 2022, and 2021, respectively.

Unrecognized compensation expense was $3,941 as of June 30, 2022 and will be recognized through 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.

The non-employee Board members received compensation of 4,610 and 5,265 aggregate shares of common stock of the Company during the six months ended June 30, 2022 and 2021, respectively. The stock had an aggregate value of $14,982 and $14,987 for the six months ended June 30, 2022 and 2021, respectively, and was recorded as non-cash stock compensation expense in the financial statements.

Employees received compensation of 4,500 and 4,804 aggregate shares of common stock of the Company during the six months ended June 30, 2022 and 2021, respectfully. These shares had an aggregate value of $14,625 and $13,211 and was recorded as non-cash stock compensation expense in the financial statements for the six months ended June 30, 2022 and 2021, respectively. In addition, during the six months ended June 30, 2021, a total of 30,181 stock options were exercised by management.

The cumulative status of options granted and outstanding at June 30, 2022, and December 31, 2021, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

		Weighted
		Average
	Stock Options	Exercise Price
Outstanding at January 1, 2021	76,037	$	1.03
Exercised	(34,733)		1.00
Outstanding at December 31, 2021	41,304	$	1.05
Outstanding at June 30, 2022	41,304	$	1.05
Options exercisable at December 31, 2021	27,418	$	0.95
Options exercisable at June 30, 2022	34,361	$	1.01

9

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 4.  Common Stock and Stock Options (continued)

Exercise prices for options ranged from $0.84 to $1.25 at June 30, 2022. The weighted average option price for all options outstanding at June 30, 2022, was $1.05 with a weighted average remaining contractual life of 4.1 years. There were no non-employee director stock options outstanding during 2022 and 2021.

Note 5.  Preferred Stock

The Board of Directors voted in November 2021 to authorize full redemption of the 24,152 shares of the Company’s Convertible Preferred Stock, Series B (“Series B”) outstanding effective December 31, 2021. This involved cash payments of $248,766 ($10.30 per Series B share, which includes a 3% premium to the stated value of $10 per share), plus unpaid annual dividends of $265,672 ($11.00 per Series B share).

Dividends on the Convertible Preferred Stock, Series B accrued at 10% annually on the outstanding shares prior to the redemption in 2021 and were $6,038 and $12,076 for the three and six months ended June 30, 2021, respectively. During June 2021, a cash dividend payment of $24,152 was made to preferred shareholders.

Note 6.  Inventories

Inventories consisted of the following:

	June 30,		December 31,
	2022		2021
	(unaudited)
Raw materials	$	1,759,561	$	440,759
Work-in-process		1,700,549		549,369
Finished goods		166,101		108,508
Inventory reserve		(8,563)		(25,418)
	$	3,617,648	$	1,073,218

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 4 that were out-of-the-money or anti-dilutive were excluded from diluted earnings per share. The following is provided to reconcile the earnings per share calculations:

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Income applicable to common shares	$	664,873	$	115,510	$	1,049,274	$	762,057
Weighted average common shares outstanding - basic		4,514,492		4,497,903		4,512,396		4,488,913
Effect of dilution		27,327		28,159		27,592		27,565
Weighted average shares outstanding - diluted		4,541,819		4,526,062		4,539,988		4,516,478

10

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 8.   Notes Payable

On April 17, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), with a principal amount of $325,300. Under the terms of the CARES Act, PPP loan recipients were eligible to apply for, and be granted, forgiveness for all or a portion of loans granted. Such forgiveness was subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company applied for forgiveness of the entire amount of the loan during the fourth quarter of 2020, and the SBA approved the Forgiveness Application in full during the first quarter of 2021. This amount is included in the Statements of Income as gain on extinguishment of debt for the six months ended June 30, 2021.

The Company commenced a line of credit with Fifth Third Bank for $1 million during 2021. 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, 2022. No amounts were drawn on this line of credit as of June 30, 2022.

Note 9.  Income Taxes

The provision for income taxes for the six months ended June 30, 2022 is based on our projected annual effective tax rate for fiscal year 2022, 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 and six months ended June 30:

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Federal - deferred	$	76,100	$	43,160	$	132,100	$	131,002
State and local		7,300		4,313		12,100		7,091
	$	83,400	$	47,473	$	144,200	$	138,093

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 $2,100,000 at December 31, 2021, which expire in varying amounts through 2041.

As of December 31, 2021, management determined that there was sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $663,820 were realizable principally because we achieved five 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 $531,720 at June 30, 2022.

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 $56,200 and $55,000 during the six months ended June 30, 2022 and 2021, respectively.

11

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 10. Operating Lease (continued)

The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operating lease liabilities as of June 30, 2022:

2022	$	56,443
2023		114,857
2024		102,550
Total minimum lease payments		273,850
Less debt discount		18,671
Total operating lease obligations	$	255,179

Operating cash outflows from operating leases	$	47,736
Weighted average remaining lease term		2.4	years
Weighted average discount rate		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 June 30, 2022, are shown in the following table.

2022	$	52,650
2023		101,675
2024		49,859
Total minimum lease payments		204,184
Less amount representing interest		8,792
Present value of minimum lease payments		195,392
Less current portion		98,828
Finance lease obligations, net of current portion	$	96,564

The equipment under finance lease at June 30, 2022, and December 31, 2021, is included in the accompanying balance sheets as follows:

	June 30, 2022		Dec. 31, 2021
Machinery and equipment	$	385,923	$	385,923
Less accumulated depreciation and amortization		85,080		65,783
Net book value	$	300,843	$	320,140

These assets are amortized over a period of ten years using the straight-line method and amortization is included in depreciation expense.

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 were transferred to the Company in accordance with the terms of the leases and these assets have been excluded from the leased asset disclosure above.

Note 12. Subsequent Event

The Company expects to receive shipment of additional manufacturing equipment during the third quarter of 2022. This includes a hot press that will enable production of higher temperature materials with increased capacity. A final cash payment of $220,075 was made for the hot press during late July of this year.

12

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

The following discussion should be read in conjunction with the Financial Statements and Notes contained herein and with those in our Form 10-K for the year ended December 31, 2021.

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, 2021, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our business and financial condition and could cause actual results to differ materially from plans and projections. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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

Executive Summary

For the six months ended June 30, 2022, we had record total revenue of $11,831,437. Higher pricing, primarily attributable to increased raw material costs, higher volume and product mix were key factors that contributed to the increase.

Gross profit was $2,371,769 for the six months ended June 30, 2022 compared to $1,365,590 for the same six months in 2021. The increase was due to higher volume, favorable product mix, and improved manufacturing efficiency. The first half of 2021 included a reduction of expenses of approximately $238,000 related to the Employee Retention Credit (“ERC”) enacted in 2020.

Operating expenses were $1,166,033 and $762,012 for the six months ended June 30, 2022 and 2021, respectively. The first six months of  2021 included a reduction of expenses of approximately $169,000 related to the ERC.

Income from operations was $1,205,736 and $603,578 for the six months ended June 30, 2022 and 2021, respectively.

We expect to receive shipment of additional manufacturing equipment during the third quarter of 2022. This includes a hot press that will enable production of higher temperature materials with increased capacity. A final cash payment of $220,075 was made for the hot press during late July of this year.

In March 2020, the World Health Organization declared the coronavirus disease (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. Since then, most federal, state, and local executive orders have been lifted. Based on ongoing conversations with customers, we do not expect to experience any material impairments or changes in accounting judgements related to COVID-19. We continue to follow practical safety procedures as needed. During the first half of 2022, we resumed in-person meetings, participated onsite in industry trade shows, and continue to maintain regular contact, via phone and other electronic means, with all customers and suppliers.

13

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 has accelerated, impacting 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 at least into the fourth quarter of 2022. 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, and adapting to their specific circumstances and forecasts.

On April 17, 2020, we entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), with a principal amount of $325,300. The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (the “SBA”). The SBA approved our Forgiveness Application in full on January 6, 2021 and appears as gain on extinguishment of debt in the Statements of Income during the six months ended June 30, 2021.

The Employee Retention Credit (“ERC”), as originally enacted on March 27, 2020, by the CARES Act, was a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer paid to employees after March 12, 2020, and before January 1, 2021. The Taxpayer Certainty and Disaster Tax Relief Act (the “Relief Act”), enacted on December 27, 2020, amended, and extended the ERC. On March 1, 2021, the IRS released Notice 2021-20 to provide guidance on the original ERC, as modified by the Relief Act. During 2021 we filed Form 941-X to claim a credit of $105,000 on qualified wages paid in 2020. This receivable appears on the balance sheets as of June 30, 2022 and December 31, 2021, as Tax Receivable, and as a credit to wages in the Statements of Income during the six months ended June 30, 2021.

The Relief Act extended and enhanced the ERC for qualified wages paid after December 31, 2020, through June 30, 2021. Under the Relief Act, eligible employers may claim a refundable tax credit against certain employment taxes equal to 70% of the qualified wages an eligible employer paid to employees after December 31, 2020, through June 30, 2021. As of the March 11, 2021, passage of the American Rescue Plan Act, the ERC was available for all four quarters of 2021. However, the Infrastructure Investment and Jobs Act enacted on November 15, 2021, ended the ERC effective September 30, 2021.

During the first and second quarter of 2021, we were qualified to receive the ERC. The ERC of $150,507 and $151,701 on qualified wages paid in the first and second quarter of 2021, respectively,  appears as a credit to wages in the Statements of Income.

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 press, 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 continue to require 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)

RESULTS OF OPERATIONS

Three and six months ended June 30, 2022 (unaudited) compared to three and six months ended June 30, 2021 (unaudited):

Revenue

For the three months ended June 30, 2022, we had record total revenue of $6,505,005. This was an increase of $4,532,956 compared to the three months ended June 30, 2021. For the six months ended June 30, 2022, we had record total revenue of $11,831,437. This was an increase of $6,837,078 compared to the six months ended June 30, 2021. Higher pricing, primarily attributable to increased raw material costs, higher volume and product mix were key factors that contributed to the increase.

Gross profit

Gross profit was $1,377,668 for the three months ended June 30, 2022, compared to $562,554 for the same three months in 2021, an increase of $815,114. Gross profit as a percentage of revenue (gross margin) was 21.2% for the second quarter of 2022 compared to 28.5% for the same period in 2021. Gross profit was $2,371,769 for the six months ended June 30, 2022, compared to $1,365,590 for the first six months of 2021, an increase of $1,006,179.  Gross margin was 20.0% for the first six months of 2022 compared to 27.3% for the same period in 2021.

The increases in gross profit were due to higher revenue during 2022. The Employee Retention Credit (ERC) reduced cost of revenue in the three and six months ended June 30, 2021, by approximately $87,000 and $238,000, respectively. The lower gross margin in 2022 compared to a year ago was due to higher raw material costs in the first half of 2022.

General and administrative expense

General and administrative expense for the three months ended June 30, 2022, and 2021, was $423,401 and $283,708, respectively, an increase of 49.2%. General and administrative expense for the six months ended June 30, 2022, and 2021, was $796,589 and $571,589, respectively, an increase of 39.4%. During 2022 there was an increase in staff resulting in higher compensation of approximately $44,000. Business liability insurance (due to higher revenue) and professional fees, primarily related to SEC compliance costs for legal, accounting and stockholder relations fees, increased approximately $59,000. The three and six months ended June 30, 2021 included the ERC of $21,000 and $57,000, respectively.

Research and development expense

Research and development expense for the three months ended June 30, 2022, was $92,085 compared to $54,377 for the same period in 2021, an increase of 69.3%. Research and development expense for the six months ended June 30, 2022, was $179,116 compared to $92,596 for the same period in 2021, an increase of 93.4%. The ERC of $22,750 and $61,750 was included in the three and six months ended June 30, 2021, respectively. 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.

Marketing and sales expense

Marketing and sales expense was $108,140 and $46,434 for the three months ended June 30, 2022, and 2021, respectively. This was an increase of 132.9%. Marketing and sales expense was $190,328 and $97,827 for the six months ended June 30, 2022, and 2021, respectively, an increase of 94.6%.

Travel expenses increased approximately $22,000 and $39,000 during the three and six months ended June 30, 2022, respectively, versus the same periods in 2021, as we resumed in-person meetings with some customers and participated onsite in industry trade shows. The three and six months ended June 30, 2021, included the ERC of approximately $21,000 and $50,000, respectively.

15

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

Stock compensation expense

Included in total expenses were noncash stock-based compensation costs of $8,673 and $8,675 for the three months ended June 30, 2022, and 2021, respectively, and $31,972 and $30,563 for the six months ended June 30, 2022, and 2021, 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 $3,941 as of June 30, 2022 and will be recognized through 2023.

Interest

Interest expense was $5,769 for the three months ended June 30, 2022, and $9,014 for the three months ended June 30, 2021. Interest expense was $12,262 for the six months ended June 30, 2022, and $16,652 for the six months ended June 30, 2021. The decrease was due to final payments of multiple finance leases during 2021.

Income taxes

Income tax expense was $83,400 and $47,473 for the three months ended June 30, 2022, and 2021, respectively, and $144,200 and $138,093 for the six months ended June 30, 2022, and 2021, respectively. At December 31, 2021, the deferred tax asset was $663,820. Management considered new evidence, both positive and negative, during the first half of 2022 that could affect its view of the future realization of deferred tax assets and determined that no valuation allowance was necessary, and the deferred tax asset was $531,720 at June 30, 2022.

Income applicable to common stock

Income applicable to common stock for the three months ended June 30, 2022, and 2021, was $664,873 and $115,510, respectively. Income applicable to common stock for the six months ended June 30, 2022, and 2021, was $1,049,274 and $762,057, respectively. The increase was primarily the result of higher revenue and gross profit.

Liquidity and Capital Resources

Cash

As of June 30, 2022, cash on hand was $5,409,210 compared to $4,140,942 at December 31, 2021. The increase was principally due to record total revenue and higher gross profit for the first six months of 2022.

Working capital

At June 30, 2022 working capital was $5,085,961 compared to $3,907,135 at December 31, 2021, an increase of $1,178,826 or 30.2%. Cash increased $1,268,268, receivables increased $287,692, inventories increased $2,544,430, customer deposits increased $2,137,883, while prepaid expenses decreased $632,305.

Cash from operations

Net cash provided by operating activities during the six months ended June 30, 2022, was $1,490,066 and $1,249,462 for the six months ended June 30, 2021. In addition to the net income generated, this included depreciation and amortization of $249,992 and $273,688, and noncash stock-based compensation costs of $31,972 and $30,563 for the six months ended June 30, 2022, and 2021, respectively.

The decrease in prepaid expenses was related to the receipt of inventory paid for in December 2021 and received in January 2022. Inventories and customer deposits increased due to orders received late in 2021 and throughout the first six months of 2022.

16

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

Cash from investing activities

Cash of $179,140 and $558,828 was used in investing activities during the six months ended June 30, 2022, and June 30, 2021, respectively, for the acquisition of production equipment.

Cash from financing activities

Cash of $47,824 and $87,422 was used in financing activities for principal payments to third parties for finance lease obligations during the six months ended June 30, 2022, and 2021, respectively. The decrease was due to final payments of multiple finance leases during 2021. A cash dividend payment of $24,152 was made to owners of our Series B preferred stock during the six months ended June 30, 2021.

Debt outstanding

Total debt outstanding was $195,392 at June 30, 2022, compared to $243,218 at December 31, 2021, a decrease of 19.7%. As previously mentioned, cash of $47,824 was used for principal payments for finance lease obligations during 2022.

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, 2021, describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, revenue recognition, 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 credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. 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.

17

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 June 30, 2022, 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.

18

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).
10(a)		Description of Unsecured Promissory Note administered by the U.S. Small Business Administration for funds received April 24, 2020 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated April 29, 2020).
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 July 29, 2022, entitled “SCI Engineered Materials, Inc., Reports 2022 Second Quarter and Year-to-date Results.”
101		The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets at June 30, 2022 and December 31, 2021 (ii) Statements of Income for the three and six months ended June 30, 2022 and 2021, (iii)  Statement of Changes in Equity for the three and six months ended June 30, 2022 and 2021, (iv) Statements of Cash Flows for the six months ended June 30, 2022 and 2021, and (v) Notes to Financial Statements.

*  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: July 29, 2022	/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: July 29, 2022	/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: July 29, 2022	/s/ Gerald S. Blaskie
	Gerald S. Blaskie
	Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting
	Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SCI Engineered Materials, Inc.  (the “Company”) on Form 10-Q for the period ending June 30, 2022 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)

July 29, 2022

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 June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerald S. Blaskie, Vice President, and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Gerald S. Blaskie

Gerald S. Blaskie

Vice President and Chief Financial Officer of

SCI Engineered Materials, Inc. (Principal Financial

Officer and Principal Accounting Officer)

July 29, 2022

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Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2022	Jul. 28, 2022
Document And Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Jun. 30, 2022
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		4,515,379
Entity Central Index Key	0000830616
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q2
Amendment Flag	false

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BALANCE SHEETS - USD ($)	Jun. 30, 2022	Dec. 31, 2021
Current Assets
Cash	$ 5,409,210	$ 4,140,942
Accounts receivable Trade, less allowance for doubtful accounts of $15,000	714,269	425,327
Accounts receivable Tax - Employee Retention Credit	105,000	105,000
Other		1,250
Inventories, net	3,617,648	1,073,218
Prepaid expenses	46,052	678,357
Total current assets	9,892,179	6,424,094
Property and Equipment, at cost
Machinery and equipment	8,066,539	7,949,746
Furniture and fixtures	135,665	132,365
Leasehold improvements	596,867	596,867
Construction in progress	330,972	287,510
Property, Plant and Equipment, Gross	9,130,043	8,966,488
Less accumulated depreciation	(6,994,759)	(6,809,850)
Property, Plant and Equipment, Net	2,135,284	2,156,638
Right of use asset, net	230,457	274,298
Deferred tax asset	531,720	663,820
Other assets	87,346	89,552
Total other assets	849,523	1,027,670
TOTAL ASSETS	12,876,986	9,608,402
Current Liabilities
Finance lease obligations, current portion	98,828	96,702
Operating lease obligations, current portion	101,525	97,292
Accounts payable	430,808	250,383
Customer deposits	3,862,439	1,724,556
Accrued compensation	198,471	225,190
Accrued expenses and other	114,147	122,836
Total current liabilities	4,806,218	2,516,959
Finance lease obligations, net of current portion	96,564	146,516
Operating lease obligations, net of current portion	153,654	205,623
Total liabilities	5,056,436	2,869,098
Shareholders' Equity
Common stock, no par value, authorized 15,000,000 shares; 4,515,379 and 4,506,269 shares issued and outstanding, respectively	10,603,450	10,573,843
Additional paid-in capital	2,229,443	2,227,078
Accumulated deficit	(5,012,343)	(6,061,617)
Total shareholders' equity	7,820,550	6,739,304
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 12,876,986	$ 9,608,402

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BALANCE SHEETS (Parenthetical) - USD ($)	Jun. 30, 2022	Dec. 31, 2021
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	4,515,379	4,506,269
Common stock, shares outstanding	4,515,379	4,506,269

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STATEMENTS OF INCOME - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
STATEMENTS OF INCOME
Revenue	$ 6,505,005	$ 1,972,049	$ 11,831,437	$ 4,994,359
Cost of revenue	5,127,337	1,409,495	9,459,668	3,628,769
Gross profit	1,377,668	562,554	2,371,769	1,365,590
General and administrative expense	423,401	283,708	796,589	571,589
Research and development expense	92,085	54,377	179,116	92,596
Marketing and sales expense	108,140	46,434	190,328	97,827
Income from operations	754,042	178,035	1,205,736	603,578
Gain on extinguishment of debt				(325,300)
Interest expense	5,769	9,014	12,262	16,652
Income before provision for income taxes	748,273	169,021	1,193,474	912,226
Provision for income taxes	83,400	47,473	144,200	138,093
Net income	664,873	121,548	1,049,274	774,133
Dividends on preferred stock		6,038		12,076
INCOME APPLICABLE TO COMMON STOCK	$ 664,873	$ 115,510	$ 1,049,274	$ 762,057
Income per common share
Basic (In dollars per share)	$ 0.15	$ 0.03	$ 0.23	$ 0.17
Diluted (In dollars per share)	$ 0.15	$ 0.03	$ 0.23	$ 0.17
Weighted average shares outstanding
Basic (In shares)	4,514,492	4,497,903	4,512,396	4,488,913
Diluted (In shares)	4,541,819	4,526,062	4,539,988	4,516,478

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STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)	Convertible Preferred Stock, Series B Preferred stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Balance at Dec. 31, 2020	$ 514,438	$ 10,530,669	$ 2,246,501	$ (7,740,441)	$ 5,551,167
Accretion of cumulative dividends	6,038		(6,038)
Stock based compensation expense (Note 4)			1,183		1,183
Common stock issued (Note 4)		20,705			20,705
Net income				652,585	652,585
Balance at Mar. 31, 2021	520,476	10,551,374	2,241,646	(7,087,856)	6,225,640
Balance at Dec. 31, 2020	514,438	10,530,669	2,246,501	(7,740,441)	5,551,167
Net income					774,133
Balance at Jun. 30, 2021	502,362	10,558,867	2,236,790	(6,966,308)	6,331,711
Balance at Mar. 31, 2021	520,476	10,551,374	2,241,646	(7,087,856)	6,225,640
Accretion of cumulative dividends	6,038		(6,038)
Stock based compensation expense (Note 4)			1,182		1,182
Payment of cumulative dividends (Note 7)	(24,152)				(24,152)
Common stock issued (Note 4)		7,493			7,493
Net income				121,548	121,548
Balance at Jun. 30, 2021	$ 502,362	10,558,867	2,236,790	(6,966,308)	6,331,711
Balance at Dec. 31, 2021		10,573,843	2,227,078	(6,061,617)	6,739,304
Stock based compensation expense (Note 4)			1,183		1,183
Common stock issued (Note 4)		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, 2021		10,573,843	2,227,078	(6,061,617)	6,739,304
Net income					1,049,274
Balance at Jun. 30, 2022		10,603,450	2,229,443	(5,012,343)	7,820,550
Balance at Mar. 31, 2022		10,595,959	2,228,261	(5,677,216)	7,147,004
Stock based compensation expense (Note 4)			1,182		1,182
Common stock issued (Note 4)		7,491			7,491
Net income				664,873	664,873
Balance at Jun. 30, 2022		$ 10,603,450	$ 2,229,443	$ (5,012,343)	$ 7,820,550

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STATEMENTS OF CASH FLOWS - USD ($)	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 1,049,274	$ 774,133
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and accretion	203,944	230,689
Amortization of right of use asset	43,841	40,792
Amortization of patents	2,207	2,207
Stock based compensation	31,972	30,563
(Gain) loss on disposal of equipment	(5,166)	3,224
Deferred tax asset	132,100	131,002
Gain on extinguishment of debt		(325,300)
Inventory reserve	(16,855)	600
Changes in operating assets and liabilities:
Accounts receivable	(287,692)	(144,555)
Inventories	(2,527,575)	(3,066,009)
Prepaid expenses	632,305	(151,276)
Other assets	(2)	2,656
Accounts payable	180,425	286,866
Operating lease obligations	(47,736)	(43,565)
Accrued expenses and customer deposits	2,099,024	3,477,435
Net cash provided by operating activities	1,490,066	1,249,462
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment	5,166	591
Purchases of property and equipment	(179,140)	(558,828)
Net cash used in investing activities	(173,974)	(558,237)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cumulative dividends on preferred stock		(24,152)
Principal payments on finance lease obligations and notes payable	(47,824)	(87,422)
Net cash used in financing activities	(47,824)	(111,574)
NET INCREASE IN CASH	1,268,268	579,651
CASH - Beginning of period	4,140,942	2,917,551
CASH - End of period	5,409,210	3,497,202
Cash paid during the period for:
Interest	4,826	5,895
Income taxes	10,863	2,778
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in asset retirement obligation	$ 3,450	$ 3,450

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Business Organization and Purpose

6 Months Ended

Jun. 30, 2022

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

6 Months Ended

Jun. 30, 2022

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, 2021. 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 credit worthiness of each customer. The Company sells its products typically under agreements with 30 day payment terms. The Company does not typically 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 six months ended June 30, 2022 and 2021. The top two customers represented approximately 87% and 79% of total revenue for the six months ended June 30, 2022 and 2021, respectively. International shipments resulted in 1% and 3% of total revenue for the first six months of 2022 and 2021, respectively.

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 the first six months of 2021 in the amount of $255,507 during the first quarter of 2021 and $151,701 during the second quarter of 2021. 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. The Company also qualified for the ERC in the third quarter of 2021. A balance of $105,000 appears as a tax receivable on the balance sheets at June 30, 2022.

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2022

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 will measure credit losses for most financial assets, including accounts and notes receivables, 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 will become effective for us in the first quarter of 2023. We are evaluating the impact that the adoption of this update will have on our financial statements.

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Common Stock and Stock Options

6 Months Ended

Jun. 30, 2022

Common Stock and Stock Options

Common Stock and Stock Options

Note 4.  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 $8,673 and $8,675 for the three months ended June 30, 2022, and 2021, respectively. Noncash stock-based compensation expense was $31,972 and $30,563 for the six months ended June 30, 2022, and 2021, respectively.

Unrecognized compensation expense was $3,941 as of June 30, 2022 and will be recognized through 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.

The non-employee Board members received compensation of 4,610 and 5,265 aggregate shares of common stock of the Company during the six months ended June 30, 2022 and 2021, respectively. The stock had an aggregate value of $14,982 and $14,987 for the six months ended June 30, 2022 and 2021, respectively, and was recorded as non-cash stock compensation expense in the financial statements.

Employees received compensation of 4,500 and 4,804 aggregate shares of common stock of the Company during the six months ended June 30, 2022 and 2021, respectfully. These shares had an aggregate value of $14,625 and $13,211 and was recorded as non-cash stock compensation expense in the financial statements for the six months ended June 30, 2022 and 2021, respectively. In addition, during the six months ended June 30, 2021, a total of 30,181 stock options were exercised by management.

The cumulative status of options granted and outstanding at June 30, 2022, and December 31, 2021, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

		Weighted
		Average
	Stock Options	Exercise Price
Outstanding at January 1, 2021	76,037	$	1.03
Exercised	(34,733)		1.00
Outstanding at December 31, 2021	41,304	$	1.05
Outstanding at June 30, 2022	41,304	$	1.05
Options exercisable at December 31, 2021	27,418	$	0.95
Options exercisable at June 30, 2022	34,361	$	1.01

Note 4.  Common Stock and Stock Options (continued)

Exercise prices for options ranged from $0.84 to $1.25 at June 30, 2022. The weighted average option price for all options outstanding at June 30, 2022, was $1.05 with a weighted average remaining contractual life of 4.1 years. There were no non-employee director stock options outstanding during 2022 and 2021.

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Preferred Stock

6 Months Ended

Jun. 30, 2022

Preferred Stock

Preferred Stock

Note 5.  Preferred Stock

The Board of Directors voted in November 2021 to authorize full redemption of the 24,152 shares of the Company’s Convertible Preferred Stock, Series B (“Series B”) outstanding effective December 31, 2021. This involved cash payments of $248,766 ($10.30 per Series B share, which includes a 3% premium to the stated value of $10 per share), plus unpaid annual dividends of $265,672 ($11.00 per Series B share).

Dividends on the Convertible Preferred Stock, Series B accrued at 10% annually on the outstanding shares prior to the redemption in 2021 and were $6,038 and $12,076 for the three and six months ended June 30, 2021, respectively. During June 2021, a cash dividend payment of $24,152 was made to preferred shareholders.

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Inventories

6 Months Ended

Jun. 30, 2022

Inventories

Inventories

Note 6.  Inventories

Inventories consisted of the following:

	June 30,		December 31,
	2022		2021
	(unaudited)
Raw materials	$	1,759,561	$	440,759
Work-in-process		1,700,549		549,369
Finished goods		166,101		108,508
Inventory reserve		(8,563)		(25,418)
	$	3,617,648	$	1,073,218

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Earnings Per Share

6 Months Ended

Jun. 30, 2022

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 4 that were out-of-the-money or anti-dilutive were excluded from diluted earnings per share. The following is provided to reconcile the earnings per share calculations:

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Income applicable to common shares	$	664,873	$	115,510	$	1,049,274	$	762,057
Weighted average common shares outstanding - basic		4,514,492		4,497,903		4,512,396		4,488,913
Effect of dilution		27,327		28,159		27,592		27,565
Weighted average shares outstanding - diluted		4,541,819		4,526,062		4,539,988		4,516,478

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Notes Payable

6 Months Ended

Jun. 30, 2022

Notes Payable

Notes Payable

Note 8.   Notes Payable

On April 17, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), with a principal amount of $325,300. Under the terms of the CARES Act, PPP loan recipients were eligible to apply for, and be granted, forgiveness for all or a portion of loans granted. Such forgiveness was subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company applied for forgiveness of the entire amount of the loan during the fourth quarter of 2020, and the SBA approved the Forgiveness Application in full during the first quarter of 2021. This amount is included in the Statements of Income as gain on extinguishment of debt for the six months ended June 30, 2021.

The Company commenced a line of credit with Fifth Third Bank for $1 million during 2021. 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, 2022. No amounts were drawn on this line of credit as of June 30, 2022.

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Income Taxes

6 Months Ended

Jun. 30, 2022

Income Taxes

Income Taxes

Note 9.  Income Taxes

The provision for income taxes for the six months ended June 30, 2022 is based on our projected annual effective tax rate for fiscal year 2022, 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 and six months ended June 30:

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Federal - deferred	$	76,100	$	43,160	$	132,100	$	131,002
State and local		7,300		4,313		12,100		7,091
	$	83,400	$	47,473	$	144,200	$	138,093

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 $2,100,000 at December 31, 2021, which expire in varying amounts through 2041.

As of December 31, 2021, management determined that there was sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $663,820 were realizable principally because we achieved five 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 $531,720 at June 30, 2022.

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Operating Lease

6 Months Ended

Jun. 30, 2022

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 $56,200 and $55,000 during the six months ended June 30, 2022 and 2021, respectively.

Note 10. Operating Lease (continued)

The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operating lease liabilities as of June 30, 2022:

2022	$	56,443
2023		114,857
2024		102,550
Total minimum lease payments		273,850
Less debt discount		18,671
Total operating lease obligations	$	255,179

Operating cash outflows from operating leases	$	47,736
Weighted average remaining lease term		2.4	years
Weighted average discount rate		5.5	%

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Finance Leases

6 Months Ended

Jun. 30, 2022

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 June 30, 2022, are shown in the following table.

2022	$	52,650
2023		101,675
2024		49,859
Total minimum lease payments		204,184
Less amount representing interest		8,792
Present value of minimum lease payments		195,392
Less current portion		98,828
Finance lease obligations, net of current portion	$	96,564

The equipment under finance lease at June 30, 2022, and December 31, 2021, is included in the accompanying balance sheets as follows:

	June 30, 2022		Dec. 31, 2021
Machinery and equipment	$	385,923	$	385,923
Less accumulated depreciation and amortization		85,080		65,783
Net book value	$	300,843	$	320,140

These assets are amortized over a period of ten years using the straight-line method and amortization is included in depreciation expense.

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 were 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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Subsequent Event

6 Months Ended

Jun. 30, 2022

Subsequent Event

Subsequent Event

Note 12. Subsequent Event

The Company expects to receive shipment of additional manufacturing equipment during the third quarter of 2022. This includes a hot press that will enable production of higher temperature materials with increased capacity. A final cash payment of $220,075 was made for the hot press during late July of this year.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2022

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, 2021. 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 credit worthiness of each customer. The Company sells its products typically under agreements with 30 day payment terms. The Company does not typically 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 six months ended June 30, 2022 and 2021. The top two customers represented approximately 87% and 79% of total revenue for the six months ended June 30, 2022 and 2021, respectively. International shipments resulted in 1% and 3% of total revenue for the first six months of 2022 and 2021, respectively.

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 the first six months of 2021 in the amount of $255,507 during the first quarter of 2021 and $151,701 during the second quarter of 2021. 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. The Company also qualified for the ERC in the third quarter of 2021. A balance of $105,000 appears as a tax receivable on the balance sheets at June 30, 2022.

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Common Stock and Stock Options (Tables)

6 Months Ended

Jun. 30, 2022

Common Stock and Stock Options

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

The cumulative status of options granted and outstanding at June 30, 2022, and December 31, 2021, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

Employee Stock Options

		Weighted
		Average
	Stock Options	Exercise Price
Outstanding at January 1, 2021	76,037	$	1.03
Exercised	(34,733)		1.00
Outstanding at December 31, 2021	41,304	$	1.05
Outstanding at June 30, 2022	41,304	$	1.05
Options exercisable at December 31, 2021	27,418	$	0.95
Options exercisable at June 30, 2022	34,361	$	1.01

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Inventories (Tables)

6 Months Ended

Jun. 30, 2022

Inventories

Schedule of Inventories

	June 30,		December 31,
	2022		2021
	(unaudited)
Raw materials	$	1,759,561	$	440,759
Work-in-process		1,700,549		549,369
Finished goods		166,101		108,508
Inventory reserve		(8,563)		(25,418)
	$	3,617,648	$	1,073,218

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2022

Earnings Per Share

Summary of reconciliation of earnings per share calculations

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Income applicable to common shares	$	664,873	$	115,510	$	1,049,274	$	762,057
Weighted average common shares outstanding - basic		4,514,492		4,497,903		4,512,396		4,488,913
Effect of dilution		27,327		28,159		27,592		27,565
Weighted average shares outstanding - diluted		4,541,819		4,526,062		4,539,988		4,516,478

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2022

Income Taxes

Schedule of components of the income tax expense

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

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Federal - deferred	$	76,100	$	43,160	$	132,100	$	131,002
State and local		7,300		4,313		12,100		7,091
	$	83,400	$	47,473	$	144,200	$	138,093

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Operating Lease (Tables)

6 Months Ended

Jun. 30, 2022

Operating Lease

Schedule of annual undiscounted cash flows of the operating lease liabilities

Note 10. Operating Lease (continued)

The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operating lease liabilities as of June 30, 2022:

2022	$	56,443
2023		114,857
2024		102,550
Total minimum lease payments		273,850
Less debt discount		18,671
Total operating lease obligations	$	255,179

Schedule of operating lease other information

Operating cash outflows from operating leases	$	47,736
Weighted average remaining lease term		2.4	years
Weighted average discount rate		5.5	%

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Finance Leases (Tables)

6 Months Ended

Jun. 30, 2022

Finance Leases

Schedule of future minimum lease payments

The Company leases certain equipment under finance leases. Future minimum lease payments, by year, with the present value of such payments, as of June 30, 2022, are shown in the following table.

2022	$	52,650
2023		101,675
2024		49,859
Total minimum lease payments		204,184
Less amount representing interest		8,792
Present value of minimum lease payments		195,392
Less current portion		98,828
Finance lease obligations, net of current portion	$	96,564

Schedule of equipment under finance leases

The equipment under finance lease at June 30, 2022, and December 31, 2021, is included in the accompanying balance sheets as follows:

	June 30, 2022		Dec. 31, 2021
Machinery and equipment	$	385,923	$	385,923
Less accumulated depreciation and amortization		85,080		65,783
Net book value	$	300,843	$	320,140

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Business Organization and Purpose (Details)	6 Months Ended
	Jun. 30, 2022 segment
Business Organization and Purpose
Number of operating segments	1

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Summary of Significant Accounting Policies (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2021	Mar. 31, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Accounting Policies [Line Items]
Employee retention credit provisions	$ 151,701	$ 255,507
Accounts receivable Tax - Employee Retention Credit			$ 105,000		$ 105,000
Geographic Concentration Risk | Sales Revenue, Net | International
Accounting Policies [Line Items]
Concentration risk, percentage			1.00%	3.00%
Two Customers | Photonics industry | Sales Revenue, Net
Accounting Policies [Line Items]
Concentration risk, percentage			87.00%	79.00%

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Common Stock and Stock Options (Details) - Employee Stock Option - $ / shares	6 Months Ended		12 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Common Stock and Stock Options
Stock Options, Outstanding, Beginning Balance	41,304	76,037	76,037
Stock Options, Exercised	0	(30,181)	(34,733)
Stock Options, Outstanding, Ending Balance	41,304		41,304
Stock Options, Options exercisable	34,361		27,418
Weighted Average Exercise Price, Outstanding, Beginning Balance	$ 1.05	$ 1.03	$ 1.03
Weighted Average Exercise Price, Exercised	0.00		1.00
Weighted Average Exercise Price, Outstanding, Ending Balance	1.05		1.05
Weighted Average Exercise Price, Options exercisable	$ 1.01		$ 0.95

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Common Stock and Stock Options - Additional Information (Details) - USD ($)	3 Months Ended				6 Months Ended		12 Months Ended
	Jun. 30, 2022	Mar. 31, 2022	Jun. 30, 2021	Mar. 31, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Common Stock and Stock Options
Stock based compensation	$ 8,673		$ 8,675		$ 31,972	$ 30,563
Unrecognized compensation expense	3,941				$ 3,941
Stock Issued During Period, Value, New Issues	$ 7,491	$ 22,116	7,493	$ 20,705
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				$ 1.05
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term					4 years 1 month 6 days
Common Stock
Common Stock and Stock Options
Stock Issued During Period, Value, New Issues	$ 7,491	$ 22,116	$ 7,493	$ 20,705
Employee Stock Option
Common Stock and Stock Options
Stock options exercised					0	30,181	34,733
Non-employee director | Common Stock
Common Stock and Stock Options
Stock Issued During Period, Shares, New Issues					4,610	5,265
Stock Issued During Period, Value, New Issues					$ 14,982	$ 14,987
Employee Stock Grants | Common Stock
Common Stock and Stock Options
Stock Issued During Period, Shares, New Issues					4,500	4,804
Stock Issued During Period, Value, New Issues					$ 14,625	$ 13,211

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Preferred Stock - Additional Information (Details) - USD ($)	1 Months Ended	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2021	Jun. 30, 2021	Jun. 30, 2021	Dec. 31, 2021
Preferred Stock Dividends, Income Statement Impact		$ 6,038	$ 12,076
Convertible Preferred Stock, Series B
Preferred Stock, Dividend Rate, Percentage			10.00%
Preferred Stock Redemption Percentage				3.00%
Preferred Stock, Shares Outstanding				24,152
Dividend Payment, Preferred Stock				$ 248,766
Preferred redemption price per share				$ 10.30
Preferred stock stated value				$ 10
Unpaid dividends				$ 265,672
Dividend rate				$ 11.00
Preferred Stock Dividends, Income Statement Impact		$ 6,038	$ 12,076
Cash dividend payment	$ 24,152

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Inventories (Details) - USD ($)	Jun. 30, 2022	Dec. 31, 2021
Inventories
Raw materials	$ 1,759,561	$ 440,759
Work-in-process	1,700,549	549,369
Finished goods	166,101	108,508
Inventory reserve	(8,563)	(25,418)
Inventory, Net	$ 3,617,648	$ 1,073,218

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Earnings Per Share - Reconciliation of Earnings Per Share Calculations (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Earnings Per Share
Income applicable to common stock	$ 664,873	$ 115,510	$ 1,049,274	$ 762,057
Weighted average common shares outstanding - basic	4,514,492	4,497,903	4,512,396	4,488,913
Effect of dilution	27,327	28,159	27,592	27,565
Weighted average shares outstanding - diluted	4,541,819	4,526,062	4,539,988	4,516,478

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Notes Payable (Details) - USD ($)	Jun. 30, 2022	Jun. 30, 2021	Apr. 17, 2020
SBA PPP Loan
Debt Instrument [Line Items]
Unsecured promissory note			$ 325,300
Fifth Third Bank
Debt Instrument [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity		$ 1,000,000
Borrowings on line of credit	$ 0

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Income Taxes - Income tax expense (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Income Taxes
Federal	$ 76,100	$ 43,160	$ 132,100	$ 131,002
State and local	7,300	4,313	12,100	7,091
Total	$ 83,400	$ 47,473	$ 144,200	$ 138,093

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Income Taxes - Additional information (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Income Taxes
Deferred Tax Assets, Operating Loss Carryforwards, State and Local					$ 2,100,000
Operating Loss Carry forward Expiration Year			2041
Net deferred tax asset	$ 531,720		$ 531,720		$ 663,820
Deferred Tax Assets, Valuation Allowance	0		0
Provision for income taxes	$ 83,400	$ 47,473	$ 144,200	$ 138,093

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Operating Lease - Future Minimum Lease Payments (Details)	Jun. 30, 2022 USD ($)
Operating Lease
2022	$ 56,443
2023	114,857
2024	102,550
Total minimum lease payments	273,850
Less debt discount	18,671
Total operating lease obligations	$ 255,179

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Operating Lease - Additional Information (Details) - USD ($)	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021
Operating cash outflows from operating leases	$ 47,736
Weighted average remaining lease term	2 years 4 months 24 days
Weighted average discount rate	5.50%
Operating lease, renewal term	5 years
Operating Lease, Cost	$ 56,200	$ 55,000
Minimum
Operating Lease Monthly Rent Payable	9,200
Maximum
Operating Lease Monthly Rent Payable	$ 9,700

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Finance Leases - Future minimum lease payments (Details) - USD ($)	Jun. 30, 2022	Dec. 31, 2021
Finance Leases
2022	$ 52,650
2023	101,675
2024	49,859
Total minimum lease payments	204,184
Less amount representing interest	8,792
Present value of minimum lease payments	195,392
Less current portion	98,828	$ 96,702
Finance lease obligations, net of current portion	$ 96,564	$ 146,516

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Finance Leases - Equipment under finance lease and additional information (Details) - USD ($)	6 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
Finance Leases
Machinery and equipment	$ 385,923	$ 385,923
Less accumulated depreciation and amortization	85,080	65,783
Net book value	$ 300,843	$ 320,140
Amortization period, Finance lease (in years)	10 years

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Subsequent Event (Details)	Jul. 31, 2022 USD ($)
Subsequent Event [Member]
Subsequent Event [Line Items]
Cash Payment	$ 220,075