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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2025

or

For the transition period from                       to                       

Commission file number: 0-31641

SCI ENGINEERED MATERIALS, INC.

(Exact name of registrant as specified in its charter)

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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:

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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.

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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 ☒

4,568,127 shares of Common Stock, without par value, were outstanding at May 1, 2025.

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FORM 10-Q

SCI ENGINEERED MATERIALS, INC.

Table of Contents

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

ASSETS

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

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SCI ENGINEERED MATERIALS, INC.

BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, 2025 AND 2024

(UNAUDITED)

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

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SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2025 AND 2024

(UNAUDITED)

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

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SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2025 AND 2024

(UNAUDITED)

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

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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, 2024.

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, 2024, 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. Considering the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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

Executive Summary

For the three months ended March 31, 2025, we had total revenue of $3,500,232 compared to $8,403,095 for the three months ended March 31, 2024. The combination of product mix, lower raw material costs and less volume contributed to the decrease in total revenue.    

Gross profit was $1,072,814 for the three months ended March 31, 2025, compared to $1,415,116 for the same three months in 2024. Gross profit as a percentage of revenue (gross margin) was 30.6% and 16.8% for the three months ended March 31, 2025 and 2024, respectively. While lower raw material costs and lower volume were key factors in the decrease in gross profit, gross margin benefited from lower raw material costs.

Operating expenses were $770,275 and $796,848 for the three months ended March 31, 2025, and 2024.  

Income from operations was $302,539 and $618,268 for the three months ended March 31, 2025, and 2024, respectively. Lower operating expenses partially offset lower gross profit compared to the same period last year.  

The Company continues to invest in developing innovative applications. For example, electrically conductive Indium Tin Oxide with a density of 99% is being introduced in several of our markets. Our Boron Carbide Armor and Enriched Boron Carbide products are particularly valued in the defense and aerospace markets since they are manufactured domestically. New initiatives are also being pursued that utilize our vacuum hot presses, cold isostatic press, and kilns for increased production and development projects, including specialty diffusion bonding processes.

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

Several issues are currently impacting national and global market conditions. First, increased political uncertainties, including recently announced international tariffs, are particularly affecting multinational customers. Second, inflation continues to impact labor, raw material costs and transportation expenses. We seek to pass these increases on to customers but are unable to predict how future or sustained inflationary pressure may impact our results. Third, supply chain disruptions are adversely impacting customers’ businesses in certain markets. Thus far, we have not experienced material adverse effects regarding sourcing of raw materials or product shipments; however, timely deliveries and sourcing of certain materials is of increased concern and may be influenced by the  changes in international tariffs and perceptions regarding such changes. We are actively maintaining contact with our suppliers and customers, identifying additional suppliers, and adapting to our customers’ specific circumstances and forecasts.

RESULTS OF OPERATIONS

Three months ended March 31, 2025 (unaudited) compared to three months ended March 31, 2024 (unaudited):

Revenue

For the three months ended March 31, 2025, we had total revenue of $3,500.232 compared to $8,403,095 for the three months ended March 31, 2024. The combination of product mix, lower raw material costs and lower volume contributed to the decrease in total revenue.    

Gross profit

Gross profit was $1,072,814 for the three months ended March 31, 2025, compared to $1,415,116 for the same three months in 2024. Gross profit as a percentage of revenue (gross margin) was 30.6% and 16.8% for the three months ended March 31, 2025 and 2024, respectively. While lower raw material costs and lower volume were  key factors in the decrease in gross profit, gross margin benefited from lower raw material costs.

General and administrative expense

General and administrative expense for the three months ended March 31, 2025, and 2024, was $547,821 and $482,261, respectively, an increase of 13.6%. The increase is attributed to increased staff and compensation, higher professional fees, and Information Technology consulting services, in the aggreate of $44,846, plus higher rent expense of $10,538 versus the first quarter of 2024.

Research and development expense

Research and development expense for the three months ended March 31, 2025, was $102,267, compared to $185,235 for the same period in 2024, a decrease of 44.8%. This decrease was due to fewer research materials and supplies of $62,447, and lower compensation and benefits of $23,898. 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 products which involve ongoing research and development expense.

Marketing and sales expense

Marketing and sales expense was $120,187 and $129,352 for the three months ended March 31, 2025, and 2024, respectively, a decrease of 7.1%. Travel expenses were $8,835 lower, while compensation and benefits expense decreased $3,334 during the three months ended March 31, 2025, compared to the same period in 2024.  

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

Stock compensation expense

Stock-based compensation costs were $0 and $43,980 for the three months ended March 31, 2025 and 2024, respectively. Compensation expense for all stock-based awards is based on the grant date fair value and recognized over the required service (vesting) period.  

Interest

Net interest income was $98,130, and $87,056 for the three months ended March 31, 2025, and 2024, respectively. The increase was primarily due to higher cash and cash equivalents plus approximately $3.0 million investment in marketable securities. Interest expense related to finance lease obligations was $0 and $1,486 for the three months ended March 31, 2025 and 2024, respectively.  

Income taxes

Income tax expense was $90,952, and $160,000 for the three months ended March 31, 2025, and 2024, respectively. The effective tax rate was 22.7% for the three months ended March 31, 2025, and 2024. The deferred tax liability was $205,789 at March 31, 2025 and $121,649 at December 31, 2024.

Net income

Net income for the three months ended March 31, 2025, and 2024, was $309,717, and $545,324, respectively. Lower gross profit, slightly offset by lower operating expenses, contributed to the decrease.

Liquidity and Capital Resources

Cash and cash equivalents

As of March 31, 2025, cash and cash equivalents were $7,353,420 compared to $6,753,403 at December 31, 2024. Additionally, we had investments of $3,009,478 and $2,759,478 in marketable securities at March 31, 2025 and December 31, 2024.

Working capital

At March 31, 2025, working capital was $8,400,791 compared to $8,245,712 at December 31, 2024, an increase of $155,079, or 1.9%. Cash increased $600,017, accounts receivable-trade decreased $85,817, inventories decreased $241,850, prepaid purchase orders decreased $56,898. In addition, customer deposits increased $200,162 and accrued compensation and other expenses decreased $219,617.

Cash from operations

Net cash provided by operating activities during the three months ended March 31, 2025, was $933,353, and net cash used in operating activities was $11,694 for the three months ended March 31, 2024. In addition to the net income generated in each period, these amounts included depreciation and amortization of $105,602 and $126,777, and noncash stock-based compensation costs of $0 and $43,980 for the three months ended March 31, 2025, and 2024, respectively. The changes in inventories and prepaid purchase orders compared to December 31, 2024, were related to lower raw material costs during the first three months of 2025. Customers continue to adapt to external economic and market issues, while monitoring their inventory very closely with continued emphasis on intra-quarter shipments while also attempting to minimize their inventory at quarter end.

Cash from investing activities

Cash of $83,336 and $176,534 was used in investing activities for the acquisition of production equipment during the three months ended March 31, 2025 and 2024, respectively. Continued reinvestments in marketable securities has been based on free cash flow and opportunities to earn higher returns.    

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

Cash from financing activities

Cash of $0 and $20,439 was used in financing activities for principal payments to third parties for finance lease obligations during the three months ended March 31, 2025 and 2024, respectively.  

Debt outstanding

Total debt outstanding was $0 at March 31, 2025 and December 31, 2024.

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, 2024, describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts and current expected credit losses, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, revenue recognition, income tax expense, deferred tax assets and liabilities, realization of deferred tax assets, stock-based compensation and assessing changes in which impairment of certain long-lived assets may occur. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and the aging of accounts receivable. If there is a deterioration of a major customer’s creditworthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances, and our gross margin could be adversely affected. The tax valuation allowance is based on our consideration of new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets. If we were to determine not to 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, changes in technology or other factors could result in these assets becoming impaired, which could adversely affect the value of these assets.

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 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.

Item 4.  Controls and Procedures (continued)

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 our financial statements.

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

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

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting for the three months ended March 31, 2025, 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 after the date of their evaluation.

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PART II. OTHER INFORMATION

Item 6. Exhibits