Financial Analysis

Note 5. Line of Credit The Company renewed its line of credit with a regional bank for $1 million during 2025. The line of credit bears interest equal to the rate of interest per annum established by the bank as its Prime Rate. This line of credit has a maturity date of August 29, 2026. No amounts were drawn on this line of credit during 2025 or 2024.

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Note 9. Stock Option Plans On June 10, 2011, shareholders approved the SCI Engineered Materials, Inc. 2011 Stock Incentive Plan (the 2011 Plan). The Company adopted the 2011 Plan as an incentive to key employees, directors, and consultants under which options to purchase up to 250,000 shares of the Companys common stock may be granted, subject to the execution of stock option agreements. Incentive stock options may be granted to key employees of the Company and non-statutory options may be granted to directors who are not employees, consultants, or advisors rendering services to the Company. Options may be exercised for periods up to 10 years from the date of grant at prices not less than 100% of fair market value on the date of grant. The Plan expired, and no additional stock options may be granted. As of December 31, 2024 there were 5,945 options outstanding from the 2011 Plan and all were exercised in 2025. On June 9, 2006, shareholders approved the Superconductive Components, Inc. 2006 Stock Incentive Plan (the 2006 Plan). The Company adopted the 2006 Plan as an incentive to key employees, directors, and consultants under which options to purchase up to 600,000 shares of the Companys common stock may be granted, subject to the execution of stock option agreements. Incentive stock options may be granted to key employees of the Company and non-statutory options may be granted to directors who are not employees and to consultants and advisors who render services to the Compa …

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Note 11. Fair Value of Financial Instruments The fair value of financial instrument represents the price that would be received to sell an asset or paid to transfer a liability (an exit price), and not the price that would be paid to acquire an asset or received to assume a liability (an entry price). Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical cost amounts. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: The fair values of cash and cash equivalents, trade receivables, accounts payable, short-term notes payable and finance lease obligations and current maturities of long-term notes payable and finance lease obligations: Amounts are reported at cost, approximate fair value based on the short-term nature and high credit quality of these financial instruments …

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Note 10. Income Taxes Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. Significant components of the Companys deferred tax assets and liabilities are as follows as of December 31: 2025 2024 Deferred tax assets (liabilities) Allowance for doubtful accounts $ 3,162 $ 3,162 Reserve for obsolete inventories 1,451 1,479 Allowance for credit losses 211 211 R&E Section 174 expense capitalization 218,926 Reserve for asset retirement 23,159 21,706 Property and equipment (417,555) (367,133) Total $ (389,572) $ (121,649) For the years ended December 31, 2025, and 2024, a reconciliation of the statutory rate and effective rate for the provisions for income taxes consists of the following: 2025 2024 Federal statutory rate $ 478,619 21.0 % $ 512,023 21.0 % State/city tax 38,746 1.7 42,337 1.7 Non-deductible expense 0.0 0.0 Other adjustments 16,488 0.7 22,458 0.9 Effective rate $ 533,853 23.4 % $ 576,818 23.6 % Components of the income tax provision are as follows: 2025 2024 Current: Federal $ 227,213 $ 483,560 State and local 38,746 41,456 Total current 265,959 525,016 Deferred: Federal 267,894 50,921 State and local 881 Total deferred 267,894 51,802 Total $ 533,853 $ 576,818 The Company follows guidance issued by the Financial Accounting Standards Board (FASB ASC 740) with respect to accounting for uncertainty in income taxes. A tax position is recognized as a benefit only if it is …

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Note 6. Operating Lease Obligations The Company entered into an operating lease with a third party on March 18, 2014, for its headquarters in Columbus, Ohio. The lease had a maturity date of November 30, 2024. During 2024, the Company modified its operating lease, which included changes to the lease terms and adjustments to the lease payments. The Company extended the lease period for an additional five years with a new maturity date of November 30, 2029. The terms of the lease include monthly payments ranging from $24,700 to $28,900. The modifications did not result in a change in the classification of the lease, which continues to be classified as an operating lease. The lease liability was remeasured using the discount rate as of the effective date of the modification. The right of use asset was adjusted by the amount of the remeasurement of the lease liability. Therefore, an increase to the right of use asset and operating lease liabilities totaling $750,799 was reflected in the accompanying financial statements for the year ended December 31, 2024. There are no restrictions or covenants associated with the lease. The lease costs were approximately $297,900 and $131,800 during the years ended December 31, 2025 and 2024, respectively. Additionally, the variable lease costs were approximately $96,400 and $62,500 for the years ended December 31, 2025 and 2024, respectively. The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operati …

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"N. Recent Accounting Pronouncements The Company reviewed the accounting pronouncements issued by the Financial Accounting Standards Board during the three months ended December 31, 2025. In November 2023, the Financial Accounting Standards Board (""FASB"") issued Accounting Standards Update (""ASU"") No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (""ASU 2023-07""). ASU 2023-07 updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. ASU 2023-07 did not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. Under ASU 2023-07, public entities with a single reportable segment must apply all of ASU 2023-07's disclosure requirements and the existing segment disclosure and reconciliation requirements in ASC 280 Segment Reporting on an annual and interim basis. We implemented ASU 2023-07 with retrospective application in the 2025 annual financial statements and have included the additional disclosures in Note 13, Segment Information. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (""ASU 2023-09""). ASU 2023-09 is intended to improve the transparency and decision usefulness of income tax disclosures, primarily related to the rate recon …

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"Note 13. Segment Information Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker (""CODM"") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer. We operate as one operating and reportable segment, in one location, as a global supplier and manufacturer of advanced materials for Physical Vapor Deposition thin film applications. We are managed on a consolidated basis and derive substantially all of our revenue from the sale and support of one group of similar products from customers with multinational operations. The accounting policies of the Company's operating segment are the same as those described in Note 2, Summary of Significant Accounting Policies. Our CODM does not receive profitability information at a lower level than consolidated results and evaluates net income on a consolidated basis to set financial performance targets. Our CODM assesses performance, and makes resource allocation decisions, primarily through comparison of actual results to forecasted results, year-over-year analysis, and review of historical performance trends. The measure of segment assets is reported on the Company's consolidated balance sheets as total consolidated assets. The Company's significant expenses and other segment items are provided in the table below: YEARS ENDED DECEMBER 31, 2025 2024 …

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"Note 2. Summary of Significant Accounting Policies A. Cash and cash equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash. B. Investments in marketable securities The Companys investments in marketable securities consist of corporate and government bonds and have been classified as held-to-maturity. The Company has the intent and ability to hold to maturity, and the securities are reported at amortized cost. The Company considers those investments which will mature in the next twelve months, including interest receivable on long-term bonds, as current assets. The remaining investments are considered non-current assets which the Company intends to hold longer than twelve months. The Company periodically evaluates the investments for impairment. The Company uses an expected credit loss measurement objective for held-to-maturity securities at the time the financial asset is originated or acquired. The Company monitors the credit quality of debt securities classified as held-to-maturity using their respective credit ratings and updates them on a quarterly basis with the latest assessment completed during December 2025. Our allowance for credit losses was $1,000 at December 31, 2025 and 2024. Expected credit losses are adjusted each period as necessary for changes in expected lifetime credit losses. The credit loss calculations for held-to-maturity securities are based upon historical default and r …

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Note 8. Common and Preferred Stock Common Stock Employees received compensation of 10,852 and 8,709 aggregate shares of common stock of the Company during 2025 and 2024, respectively. These shares had an aggregate value of $47,206 and $43,980 for 2025 and 2024, respectively, and were recorded as non-cash stock compensation expense in the financial statements. During 2025, 5,945 stock options were exercised by employees via cashless exercise at $1.25 per share. During 2024, 35,359 stock options were exercised by employees via cashless exercise, which included 15,116 options exercised at $1.25 per share and 20,243 options exercised at $0.84 per share. Note 8. Common and Preferred Stock (continued) Preferred Stock Shares of Preferred Stock authorized and outstanding as of December 31, 2025 and 2024, were as follows: Shares Shares Authorized Outstanding Cumulative Preferred Stock 10,000 Voting Preferred Stock 125,000 Cumulative Non-Voting Preferred Stock (a) 125,000 (a) Includes 700 shares of Series A Preferred Stock and 100,000 shares of Convertible Series B Preferred Stock authorized for issuance. Earnings Per Share Basic income per share is calculated as income available to common shareholders divided by the weighted average of common shares outstanding. Diluted earnings per share is calculated as diluted income available to common shareholders divided by the diluted weighted average number of common shares outstanding. Diluted weighted average number of common shares gives ef …

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Note 14. Subsequent Event On February 10, 2026, the Company reported that it was subjected to an imposter scam of $898,325 executed in conjunction with bank fraud. Immediately upon recognition of this event management contacted the Companys financial institution, filed an IC3 report with the U.S. Federal Bureau of Investigation, and is working with its Insurance carrier. Comprehensive efforts are being actively pursued to recover the funds involved; as of February 12, 2026, $336,299 has been recovered. To date, the Company has not found any evidence of additional fraudulent activity and currently does not believe the incident resulted in any unauthorized access to data or systems maintained by the Company. However, the Companys investigation into the incident and its impacts on the Company, including its internal controls, remains ongoing. The business and operations were not affected. …

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Note 8. Line of Credit The Company renewed its line of credit with a regional bank for $1 million during the third quarter of 2025. This line of credit has a maturity date of August 29, 2026 and bears interest equal to the rate of interest per annum established by the bank as its Prime Rate. No amounts were drawn on this line of credit as of June 30, 2026.

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Note 5. Common Stock and Stock Options Stock based compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period. Employees received compensation of 10,852 aggregate shares of common stock of the Company during the three months ended June 30, 2025. There was no stock-based compensation for the three months ended June 30, 2026. The shares granted for the three months ended June 30, 2025 had an aggregate value of $47,206 and were recorded as non-cash stock compensation expense in the condensed financial statements for the three months ended June 30, 2025. Employees received compensation of 16,596 and 10,852 aggregate shares of common stock of the Company during the six months ended June 30, 2026 and 2025, respectively. The shares granted in the first six months of 2026 had an aggregate value of $87,129 compared to $47,206 for the same period in 2025. These amounts were recorded as non-cash stock compensation expense in the financial statements for the six months ended June 30, 2026 and 2025, respectively. Employee Stock Options There were no stock options remaining as of June 30, 2026 or December 31, 2025.

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Note 9. Income Taxes The provision for income taxes for the three and six months ended June 30, 2026 and 2025 is based on our projected annual effective tax rate, adjusted for permanent differences and specific items that are required to be recognized in the period in which they are incurred. The effective tax rate was 22.5% for the three and six months ended June 30, 2026, and 22.7% for the same periods in 2025. The difference between the effective tax rate and the marginal rate is primarily due to the effect of state and local taxes. The following table presents the income tax expense: Three months ended June 30, Six months ended June 30, 2026 2025 2026 2025 Federal $ 314,120 $ 99,012 $ 439,702 $ 183,152 State and local 25,429 8,016 35,595 14,828 $ 339,549 $ 107,028 $ 475,297 $ 197,980 Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred taxes. Accordingly, management determined that no valuation Note 9. Income Taxes (continued) allowance was necessary at June 30, 2026. The deferred tax liability was $763,983 at June 30, 2026 and $389,572 at December 31, 2025. …

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Note 10. Operating Lease The Company entered into an operating lease with a third party in November 2024 for its headquarters in Columbus, Ohio. The terms of the lease included monthly payments ranging from $24,700 to $28,900 with a maturity date of November 30, 2029. There are no restrictions or covenants associated with the lease. The lease costs were approximately $77,190 and $74,200 for the three months ended June 30, 2026 and 2025, respectively. Additionally, the variable lease costs were approximately $40,600 and $18,600 for the three months ended June 30, 2026 and 2025, respectively. The lease costs were approximately $154,400 and $148,400 for the six months ended June 30, 2026 and 2025, respectively. Additionally, the variable lease costs were $59,600 and $59,200 for the six months ended June 30, 2026 and 2025, respectively. The following is a maturity analysis, by year, of the annual undiscounted cash outflows of the operating lease liabilities as of June 30, 2026: 2026 $ 155,412 2027 322,183 2028 335,072 2029 318,374 Total minimum lease payments 1,131,041 Less debt discount 171,817 Total operating lease obligations $ 959,224 The following summarizes additional information related to leases for the period ended June 30: 2026 2025 Operating cash outflows from operating leases $ 102,485 $ 83,782 Weighted average remaining lease term operating leases 3.4 years 4.4 years Weighted average discount rate operating leases 8.5 % 8.5 % …

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"Note 11. Segment Information Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker (""CODM"") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer. We operate as one operating and reportable segment, in one location, as a global supplier and manufacturer of advanced materials for Physical Vapor Deposition thin film applications. We are managed on a consolidated basis and derive substantially all of our revenue from the sale and support of one group of similar products from customers with multinational operations. The accounting policies of the Company's operating segment are the same as those described in Note 2, Summary of Significant Accounting Policies. Our CODM does not receive profitability information at a lower level than consolidated results and evaluates net income on a consolidated basis to set financial performance targets. Our CODM assesses performance, and makes resource allocation decisions, primarily through comparison of actual results to forecasted results, year-over-year analysis, and review of historical performance trends. The measure of segment assets is reported on the Company's consolidated balance sheets as total consolidated assets. Note 11. Segment Information (continued) The Company's significant expenses and other segment items are provided in the table b …

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Note 2. Summary of Significant Accounting Policies Basis of Presentation - The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim condensed 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 condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2025. Interim results are not necessarily indicative of results for the full year. Use of Estimates - The preparation of condensed 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 condensed 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 …

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Note 12. Subsequent Event On February 10, 2026, the Company reported it was subjected to an imposter scam of $898,325 executed in conjunction with bank fraud. As of June 30, 2026, the Company recovered $336,299 of that amount resulting in fraud expense of $562,026 recorded in the first quarter. On July 12, 2026, the Company was informed that a $250,000 claim related to its Smart Cyber insurance policy was approved. When the insurance proceeds are realized they will reduce the fraud expense to $312,026. …

SubsequentEventsTextBlock · excerpt; the full note is in the filing