Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Executive Summary

For the year ended December 31, 2025, we had total revenue of $19,606,123 compared to $22,870,192 for the year ended December 31, 2024. Product mix along with a lower volume were the key factors in the decrease in revenue.

Gross profit was $5,031,395 for 2025 compared to $5,068,301 for 2024. The slight decrease was attributable to lower volume. Gross margin increased to 25.7% in 2025 versus 22.2% in 2024. While lower volume was the key factor to the decrease in gross profit, gross margin benefited from product mix and lower raw material costs.

Operating expenses were $3,201,624 and $3,023,535 for 2025 and 2024, respectively.

Income from operations was $1,829,771 and $2,044,766 for 2025 and 2024, respectively

The Company continues to invest in developing innovative applications and its Technical Committee establishes a defined path to commercialization. For example, electrically conductive Indium Tin Oxide with a density of 99% and rotatable targets up to three meters in length that offer multiple benefits were recently introduced in our markets. Our 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.

Several issues are currently impacting national and global market conditions. First, continued political uncertainties, including 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 are of increased concern and may be influenced by changes in international tariffs and reactions to 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

Year 2025 compared to Year 2024

Revenue

For the year ended December 31, 2025, we had total revenue of $19,606,123, compared to $22,870,192, for the year ended December 31, 2024. This was a decrease of $3,264,069 or 14.3%. Product mix and lower volume were the key factors in the reduction in revenue.

Gross profit

Gross profit was $5,031,395 for 2025 compared to $5,068,301 for 2024. Gross profit as a percentage of revenue (gross margin) was 25.7% and 22.2% for 2025 and 2024, respectively. While lower revenue was the key factor in the decrease in gross profit, gross margin benefited from product mix.

General and administrative expense

General and administrative expense for 2025 and 2024, was $2,166,607 and $1,939,895, respectively, an increase of 11.7%. During 2025, compensation increased by $137,387 which included increased headcount. In addition, professional fees increased by $56,293 related to auditing, information technology, legal, and shareholder relation services and rent increased $29,589.

Research and development expense

Research and development expense was $434,436 and $564,576, for 2025 and 2024, respectively, a decrease of 23.1%. This decrease was due to fewer research materials and supplies of $140,187 as the Company introduced two new products during the second quarter of 2025. Specialty materials are being researched for use in niche markets which include custom applications, additive manufacturing and spherical powders. 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 $600,581 and $519,064 for 2025 and 2024, respectively. This was an increase of $81,517 or 15.7%. An increase in staff during 2025 contributed to higher compensation of $57,234 and trade show expenses increased $9,903 due to the Company's participation in an additional tradeshow compared to the prior year. We exhibited at additional international photonics trade shows focused on specific niche markets during 2025. Consulting fees increased $11,600 due to the Company's evaluation of complementary market opportunities.

Interest

Net interest income was $449,367 and $393,441 for 2025 and 2024, respectively. The increase was primarily due to higher cash and $608,647 of additional investments in marketable securities. Interest expense related to finance lease obligations was $0 and $706 for 2025 and 2024, respectively.

Income taxes

Income tax expense was $533,853 and $576,818 for 2025 and 2024, respectively. The effective tax rate was 23.4% for 2025 compared to 23.6% for 2024. 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 net deferred tax liability was $389,572 and $121,649 at December 31, 2025 and 2024, respectively.

Net income

Net income for 2025 and 2024 was $1,745,285 and $1,861,389, respectively. Slightly lower gross profit and higher expenses were partially offset by higher interest income.

Liquidity and Capital Resources

Cash

As of December 31, 2025, cash on hand was $7,939,000 compared to $6,753,403 at December 31, 2024. The increase was due to net cash provided by operating activities partially offset by investment in the acquisition of production equipment and additional purchases of marketable securities. We initiated a share repurchase program during the fourth quarter of 2025 and $500,000 of SCI's common stock was purchased as of December 31, 2025.

Working capital

At December 31, 2025, working capital was $8,389,706 compared to $8,245,712 at December 31, 2024, an increase of $143,994 or 1.7%. The increase was primarily due to the increase in cash noted above.

Cash from operations

Net cash provided by operating activities during 2025 was $3,299,815 and $2,369,815 in 2024. In addition to the net income generated, this included adjustments for depreciation and amortization of $453,025 and $474,458, for 2025 and 2024, respectively, and noncash stock-based compensation costs were $47,206 and $43,980 for the twelve months ended December 31, 2025 and 2024, respectively. Inventories and prepaid purchase orders decreased due to continued efforts by the Company and customers monitoring inventory very closely. Customer deposits increased due to payments received during the fourth quarter of 2025 for shipments scheduled for early 2026.

Cash from investing activities

Cash of $1,005,571 and $499,805 was used in investing activities during the twelve months ended December 31, 2025 and 2024, respectively, for the acquisition of production equipment. Based on available free cash flow and our desire to earn higher returns, we purchased additional marketable securities during 2025 which resulted in an increase in the investment amount of $608,647.

Cash from financing activities

Cash of $500,000 was used in 2025 for the purchase of Treasury Stock as part of our share repurchase program. In 2024, cash of $49,149 was used in financing activities for principal payments to third parties for finance lease obligations.

Debt outstanding

There was no debt outstanding at December 31, 2025 and 2024. The final finance lease payment was made during the third quarter of 2024.

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 the Annual Report on Form 10-K for the year ended December 31, 2025, describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts and current expected credit losses, inventory allowances, property and equipment depreciable lives, patents and license 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 expected 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 expected losses, our estimates of the recoverability of amounts due us could be adversely affected. The credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as the current portfolio. 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 profit could be adversely affected.

Inflation

While there was not a significant impact from inflation on our operations, we experienced increased costs during 2025 and 2024 that are expected to continue into 2026.