SCIA 10-K & 10-Q changes, risk factors and insider trading

Prior to 2017, the Company frequently reported annual net losses. Our results for 20242025 reflect the eighthninth consecutive year of net income; however, while assurances cannot be provided that we will be able to operate profitably in the future,future. managementManagement continuously monitors business conditions and responds promptly through proactive actions. We continue to invest in developing new products for all our markets. These efforts include ongoing research and development expense and accelerating time to market for those products and involve ongoing research and development expense.products.

During 20242025 we reduced our accumulated deficit by $1,861,389$54,305 to $54,305$0 and had retained earnings of $1,690,980 at December 31, 2024.2025. Management’s plans include continuing to grow our business in current and additional niche markets, developing new products, and increasing our revenue and presence in those markets. Management believes the actions that began during the last several years and continue today provide the opportunity for maintaining and improving liquidity and profitability. However, no assurances are made that such actions will result in sustained profitability.

Revenue attributable to these customers includes the sale of multiple applications. Our top two customers accounted for approximately 88.4%84.5% of our net sales for the fiscal year ended December 31, 2024.2025, compared to 88.4% the prior year. Although they have been major customers of the Company for more than twenty years, we do not have written agreements with these customers that require any minimum purchase obligations, and the customers could stop buying the Company’s products at any time and for any reason. A reduction, delay, or cancellation of orders from these customers or the loss of these customers could significantly reduce our future revenues and profits. We cannot provide assurance that these customers or any of our other current customers will continue to place orders, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

We continue to develop our marketing and sales capabilities through targeted marketing, online marketing campaigns, and our sales, technical, customer service and distribution capabilities. This includes increased participation in industry specific trade shows which attract representatives from domestic and international companies. We may enter into agreements with third parties to also provide these services to successfully market our products outside North America.

Our success depends in large part on our ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel. The loss of services of one of our executive officers or other key personnel, or our failure to attract and retain other executive officers or key personnel could have a material adverse effect on our business, operating results, and financial condition. Jeremy Young was named president and chief executive officer in January 2019 and has an employment agreement with the Company that contains non-competition provisions as well as severance payments. Mr. Young has been with the Company for more than nineteen years. All other key management personnel have entered into non-competition agreements with the Company. As announced in September 2025, Jerry Blaskie, the Company’s Vice President, Chief Financial Officer, Treasurer and Assistant Secretary, plans to retire on April 1, 2026. A thorough search process will be completed prior to this date culminating with a successor in place prior to his departure. Although we have been successful in planning for and retaining highly capable and qualified successor management in the past, there can be no assurance that we will be able to do so in the future.

The Company continues to actively monitor and respond to changes in national and global economic conditions, which include, but are not limited to, international tariffs, inflation, interest rates, supply chain disruptions, and a continuingcontinued global semiconductor chip shortage.shortages. Changes in these conditions could impact implementation of our growth plans and access to capital markets. Inflation continues to impact labor, raw material costscosts, 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. Customer demand and supply-related issues could result in increased operating, transportation and shipping, material, wages, and labor costs. An economic recession has the potential to change customer purchasing patterns which could negatively impact our revenue and profitability.

Political uncertainties could affect global markets and thus could have a negative effect on our business. Although we currently have no customers or suppliers in RussiaRussia, Ukraine, or Ukraine,Venezuela, we continue to monitor thethese situationsituations as some raw materials come from Russia for the PVD industry. We have a customer in Israel; however, revenue related to these sales is negligible to our total revenue for the years 2024 and 2023, respectively. We continue to actively monitor these developments, including ongoing contact with suppliers and customers, identifying additional suppliers, and adapting to our customers’ specific circumstances and forecasts. In addition, supply chain disruptions are adversely impacting customers’ businesses in certain markets. Thus far, we have not experienced material adverse effects regarding product shipments; however, timely deliveries and sourcing of certain materials isare ofmonitored increased concern.regularly.

The market for PVD materials is substantial with significant competition in both ceramic and metal materials. While weWe believe our products enjoy certain competitive advantages in design, function, quality, and availability,availability. considerableConsiderable competition exists from well-established firms such as Vacuum Engineering & Materials, Process Materials, Inc., and Materion,Materion. and theyThey may have additional products or more financial resources than us. We cannot provide assurance that developments by others will not render our products or technologies obsolete or less competitive.

Our competitors may be larger, more diversified, better funded, and have access to more advanced technology, including Artificial Intelligence (AI). These competitive advantages may enable our competition to innovate better and more quickly, to compete more effectively on quality and price, causing us to lose business and profitability. Burgeoning interest in AI may increase our competition and disrupt our business model. AI may also lower barriers to entry in our industryindustry, and we may be unable to effectively compete with the products or services offered by new competitors.

Some of our products are in the early stages of commercialization and we believe it willcould be several years before these products have significant commercial end-use applications. Significant development work may be necessary to improve the commercial feasibility and acceptance of these products. There can be no assurance that we will be able to commercialize any of the products currently under development.

The Company has a line of credit with Fiftha Thirdregional Bankbank for $1 million which expires on August 29, 2025.2026. However, our liquidity and financial condition could be materially and adversely affected if our ability to borrow money from new or existing lenders to finance our operations is reduced or eliminated. Similar adverse effects may also result if we realize reduced credit availability from trade creditors. Additionally, many of our customers require the availability of financing to facilitate the purchase of our products. As a result, a continuing period of reduced credit availability in the marketplace could have adverse effects on our business. As of December 31, 2025 and 2024 the Company had no debt outstanding.

Our facilities sometimes require capital expenditures to address ongoing required maintenance and additional equipment to upgrade our capabilities. In addition, we are often required to make significant capital expenditures to satisfyalign our manufacturing capabilities with customer requirements and manufacture newly developed products.

Although weWe utilize internal and external independent controls to monitor and mitigate the risk of these threats, including a Security Incident Response Plan and periodic Information Technology training for all employees,employees. thereThere can be no assurance that these procedures and controls will be sufficient. We face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information and networks; employee threats; virtual and cyber threats to the safety of our directors, officers, and employees; threats to the security of our facilities and infrastructure; and threats from terrorist acts or other acts of aggression. Our customers and vendors face similar threats. Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information to gain access to our data or our user’s or customer’s data. These threats could lead to losses of sensitive information or capabilities, harm to personnel, infrastructure, or products, and/or damage to our reputation as well as our vendor’s ability to perform on our contracts.

Cyber threats are evolving and include, but are not limited to, the use of artificial intelligence, ransomware, malicious software, destructive malware, attempts to gain unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches. Any of these could lead to disruptions in critical systems, unauthorized release of confidential, personal, or otherwise protected information (ours or that of our employees, customers, or vendors), and corruption of data, networks, or systems.

We have a portfolio of intellectual property that includes common law and state rights, as well ofas federally and internationally recognized trademark and patent rights. In addition, we take active precautions to protect our trade secret rights through various contractual means. However, we recognize that third parties may challenge these rights, including through unauthorized use or misappropriation or theft, or by legal challenge in administrative proceedings or challenge in state or district court. Such challenges include the risks of long and costly litigation, as well as the potential loss of property rights and the assessment of damages against a losing party.

Because U.S. patent applications are maintained in secret until patents are issued, and publications of discoveries in the scientific or patent literature tend to lag actual discoveries by severalup months,to a year or more, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Moreover, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed. We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial costs. Litigation may also be necessary to enforce any patents held by or issued to us or to determine the scope and validity of others’ proprietary rights, which could result in substantial costs.

The PVD market is characterized by rapidly advancing technology coupled with long and uncertain paths to large market acceptance. Our success depends on our ability to keep pace with advancing technology and processes and industry standards. We have focused our development efforts on sputtering targets. We intend to continue to develop innovative materials and integrate those advances to the thin film coatingscoating industryapplications andwithin otherthe potential industries.industry. However, our development efforts may be rendered obsolete by research efforts and technological advances made by others or by the failure of anticipated markets to emerge, and materials other than those we currently use may prove more advantageous.

The Company is authorized to issue up to 15,000,000 shares of common stock. The Board of Directors may approve the issuance of common stock as they consider sufficient without seeking shareholder approval. As of December 31, 2024,2025, we had 4,568,1274,483,407 shares outstanding and 5,945no shares underlying options that are currently exercisable resulting in 10,425,92810,416,593 shares of common stock available for issue. We purchased 100,000 shares of SCI’s common stock in December 2025 pursuant to a share repurchase program. The issuance of additional shares of common stock in the future may reduce the proportionate ownership and voting power of current shareholders.

We have not paid dividends on our common stock in the past and do not expect to do so in the foreseeable future.past.

We have never declared or paid cash dividends on our shares of common stockstock. andWhile doit notis expectpossible tothat dowe somay pay a cash dividend in the foreseeablefuture, future. Wewe currently intend to use future earnings for the growth of our business. As a result, investors must currently rely on sales of the common stock based on price appreciation, which may or may not occuroccur, as the best way to realize future gains on their investments.

Our stock price, trading volume, and market listing may make it more difficult for our shareholders to sell shares when desired or at attractive prices. In 2001, our stock began trading on The Over-the-Counter Bulletin Board, which is now known as the OTC Markets. Our common stock trades in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks. This has the effect of limiting the pool of potential purchases of our common stock at present price levels. Shareholders may find greater percentage spreads between bid and asked prices, and more difficulty in completing transactions and higher transaction costs when buying or selling our common stock than they would if our stock were listed on a major stock exchange.

Our common stock currently trades on the OTC Markets’ OTCQB market under the symbol “SCIA.” Based on a trading price occasionallyoften below $5 per share, our common stock is considered a “penny stock” for purposes of federal securities laws, and therefore has been subject to regulations, which affected the ability of broker-dealers to sell our securities. Broker-dealers who recommend a “penny stock” to persons (other than established customers and accredited investors) must make a special written suitability determination and receive the purchaser’sclient’s written agreement to a transaction prior to a purchase or sale.

Environmental compliance costs and liabilities associated with our facility may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to various federal, state, and local environmental and health and safety laws and regulations with respect to our operations. These laws and regulations address various matters, including asbestos, fuel oil management, wastewater discharges, air emissions, and hazardous wastes. The costs of complying with these laws and regulations and the penalties for non-compliance can be substantial. For example, with respect to leased property, we may be held liable for costs relating to the investigation and cleanup of our leased property from which there has been a release or threatened release of a regulated material as well as other properties affected by the release. In addition to these costs, which are typically not limited by law or regulation and could exceed the property’s value, we could be liable for certain other costs, including, without limitation, governmental fines, and injuries to persons, property, or natural resources. Further, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. While weWe are not aware of any potential environmental problems,problems. noNo assurances are made that such problems and costs associated with them will not arise in the future. If any of our properties were found to violate environmental laws, we may be required to expend significant amounts of time and money to rehabilitate the property, and we may be subject to significant liability. Any environmental compliance costs and liabilities incurred may have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Import tariffs and/or other mandates imposed by sovereign governments could potentially lead to a trade war with other foreign governments and could significantly increase thehigher prices on raw materials that are critical to our business. We could be forced to increase prices to our customers or, if unable to do so, result in lowering our gross margin on products sold.

Gross profit was $5,068,301$5,031,395 for 20242025 compared to $5,251,633$5,068,301 for 2023.2024. The slight decrease was attributable to lower revenue.volume. Gross margin increased to 25.7% in 2025 versus 22.2% in 2024 versus 18.8% in 2023.2024. While lower rawvolume material costs werewas the key factor to the decrease in gross profit, gross margin benefited from product mix and lower raw material costs and product mix.costs.

Several issues continueare tocurrently affectimpacting 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. Second,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 isare of increased concern and may be subjectinfluenced by changes in international tariffs and reactions to potentialsuch tariffs. Third, increased political uncertainties continue to affect global markets. Although we currently have no customers or suppliers in Russia or Ukraine we continue to monitor the situation as some raw materials come from Russia for the PVD industry. We have a customer in Israel; however, revenue related to these sales is negligible to our total revenue for the years of 2024 and 2023, respectively.changes. We are actively maintaining contact with our suppliers and customers, identifying additional suppliers, and adapting to our customers’ specific circumstances and forecasts.

For the year ended December 31, 2024,2025, we had total revenue of $22,870,192,$19,606,123, compared to $27,984,083,$22,870,192, for the year ended December 31, 2023.2024. This was a decrease of $5,113,891$3,264,069 or 18.3%. Lower cost of a key raw material, especially during the third quarter of 2024, was the was the primary factor that contributed to the decrease.14.3%. Product mix alongand withlower avolume slightwere decreasethe key factors in volumethe alsoreduction impactedin revenue.

Gross profit was $5,068,301$5,031,395 for 20242025 compared to $5,251,633$5,068,301 for 2023.2024. Gross profit as a percentage of revenue (gross margin) was 22.2%25.7% and 18.8%22.2% for 20242025 and 2023,2024, respectively. While lower rawrevenue material costs werewas the key factor toin the decrease in gross profit, gross margin benefited from lower material costs and product mix.

General and administrative expense for 20242025 and 2023,2024, was $1,939,895$2,166,607 and $1,771,263,$1,939,895, respectively, an increase of 9.5%.11.7%. During 2024,2025, compensation increased by $114,868$137,387 which included increased staff.headcount. In addition, professional fees increased by $76,915$56,293 related to auditing, information technology, legal, and stockholdershareholder relation services.services and rent increased $29,589.

Research and development expense was $434,436 and $564,576, for 20242025 and 2024, respectively, a decrease of 23.1%. This decrease was $564,576 compareddue to $501,937,fewer for 2023, an increase of 12.5%. This increase was attributed to increases in compensation of $19,668 andresearch materials and supplies of $121,979$140,187 whichas werethe offsetCompany byintroduced atwo decreasenew inproducts outsideduring consultingthe expensessecond quarter of $66,216.2025. Specialty materials are being researched for use in niche markets which include custom applicationsapplications, additive manufacturing and additivespherical manufacturing.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 was $519,064$600,581 and $484,185$519,064 duringfor 20242025 and 2023,2024, respectively. This was an increase of $34,879$81,517 or 7.2%.15.7%. An increase in staff during 20232025 resultedcontributed into higher compensation of $54,260$57,234 duringand 2024,trade which was partially offset by lower travelshow expenses ofincreased $15,025.$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 20242025. andConsulting 2023.fees increased $11,600 due to the Company’s evaluation of complementary market opportunities.

Net interest income was $393,441$449,367 and $286,361$393,441 for the years ended December 31, 20242025 and 2023,2024, respectively. The increase was primarily due to higher cash and $2,758,478$608,647 of additional investments in marketable securities. Interest expense related to finance lease obligations was $706$0 and $4,309$706 for 20242025 and 2023,2024, respectively.

Income tax expense was $576,818$533,853 and $586,710$576,818 for the twelve months ended December 31, 20242025 and 2023,2024, respectively. The effective tax rate was 23.6%23.4% for 20242025 compared to 21.1%23.6% for 2023.2024. 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 $121,649$389,572 and $69,846$121,649 at December 31, 20242025 and 2023,2024, respectively.

Net income for 20242025 and 20232024 was $1,861,389$1,745,285 and $2,193,899,$1,861,389, respectively. LowerSlightly lower gross profit and higher expenses were partially offset by higher interest income.

As of December 31, 2024,2025, cash on hand was $6,753,403$7,939,000 compared to $5,673,994$6,753,403 at December 31, 2023.2024. 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.

Net cash provided by operating activities during 20242025 was $2,369,815$3,299,815 and $2,281,279$2,369,815 duringin 2023.2024. In addition to the net income generated, this included adjustments for depreciation and amortization of $474,458$453,025 and $469,790,$474,458, for 2025 and 2024, respectively, and noncash stock-based compensation costs ofwere $43,980$47,206 and $45,485$43,980 for the twelve months ended December 31, 2024,2025 and 2023,2024, respectively. TheInventories decrease inand prepaid purchase orders was primarily related to inventory paid for in December 2023 and received in January 2024. Inventories, prepaid purchase orders and customer deposits primarily decreased due to continued efforts by the Company and our customers monitoring inventory very closelyclosely. withCustomer emphasisdeposits onincreased intra-quarterdue shipments.to payments received during the fourth quarter of 2025 for shipments scheduled for early 2026.

Cash of $499,805$1,005,571 and $453,671$499,805 was used in investing activities during the twelve months ended December 31, 20242025 and 2023,2024, respectively, for the acquisition of production equipmentequipment. and the enclosure of our ceramic machining area in 2023. During 2024 we purchased additional marketable securities in the amount of $750,000 basedBased on available free cash flow and our desire to earn higher returns.returns, we purchased additional marketable securities during 2025 which resulted in an increase in the investment amount of $608,647.

Cash of $49,149$500,000 andwas $97,367used in 2025 for 2024the andpurchase 2023,of respectively,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.

TotalThere was no debt outstanding was $0 at December 31, 20242025 comparedand to $49,149 at December 31, 2023.2024. The final finance lease payment was made during the third quarter of 2024.

While there was not a significant impact from inflation on our operations prior to 2023,operations, we experienced increased costs during 20242025 and 20232024 that are expected to continue into 2025.2026.

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, 2025, 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 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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.

For the three months ended MarchJune 31,30, 2026, total revenue was a record $8,160,362$9,485,119 compared to $3,500,232$3,609,304 for the three months ended MarchJune 31,30, 2025. Total revenue for the six months ended June 30, 2026, was $17,645,481 versus $7,109,536 for the same period last year. The increase in total revenue for the three and six months ended MarchJune 31,30, 2026 versus Marchthe 31,same 2025periods last year was primarily due to higher raw material input costs, product mix, and higher volume. Sales products introduced during the second half of 2025 and sales to new customers primarily contributed to the year-over-year increase.

Gross profit was $2,035,120$2,276,455 for the three months ended MarchJune 31,30, 2026, compared to $1,072,814$1,158,157 for the same three months in 2025. Gross profit as a percentage of revenue (gross margin) was 24.0% and 32.1% for the three months ended June 30, 2026 and 2025, respectively. Higher revenue contributed to the increase in gross profit while higher raw material costs and product mix were the primary reasons for the decreased gross margin for the three months ended MarchJune 31,30, 2026, compared to the same three months in 2025. Gross profit aswas a$4,311,575 percentagefor ofthe six months ended June 30, 2026 compared to $2,230,971 for the same six months in 2025, and gross margin was 24.4% and 31.4% for the six months ended June 30, 2026 and 2025, respectively. Higher revenue (contributed to the increase in gross profit due to higher raw material input costs and product mix, while the same factors were the primary reasons for the lower gross margin) was 24.9% and 30.6% for the three and six months ended MarchJune 31,30, 2026 and 2025, respectively, duecompared to the factorssame notedperiods above.in 2025.

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 AprilJune 30, 2026, the Company recovered $336,299 hasof beenthat recovered.amount Comprehensiveresulting effortsin continuefraud expense of $562,026 recorded in the first quarter. On July 12, 2026, the Company was informed that a $250,000 claim related to beits activelySmart pursuedCyber insurance policy was approved. When the insurance proceeds are realized they will reduce the fraud expense to recover the funds involved. The business and operations were not affected.$312,026.

Income from operations was $488,924$1,399,466 and $302,539$355,807 for the three months ended MarchJune 31,30, 2026, and 2025, respectively and $1,888,390 and $658,346 for the six months ended June 30, 2026, and 2025, respectively.

The Company invests in research and development to develop innovative applications focused on 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 which offer multiple benefits were recently introduced induring severalthe second quarter of our markets. Our Enriched Boron Carbide products are particularly valued in the defense and aerospace markets since they are manufactured domestically.2025. 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.

During the second half of 2025, the Company identified an additional niche market that can benefit from its custom powder solutions, including spherical powders used in additive manufacturing. The Company identified additional opportunities through development of debinding processes for domestic commercial additive manufacturing applications.

Several issues are currently impacting national and global market conditions. First, continued political uncertainties in the MideastMiddle East region and status of 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 reactionstheir to such changes.availability. We are actively maintaining contact with our suppliers and customers, identifying additional suppliers, and adapting to our customers’ specific circumstances and forecasts.

Three and six months ended MarchJune 31,30, 2026 (unaudited) compared to three and six months ended MarchJune 31,30, 2025 (unaudited):

For the three months ended MarchJune 31,30 2026, total revenue was $8,160,362$9,485,119 compared to $3,500,232$3,609,304 for the three months ended MarchJune 31,30, 2025. The increase in revenue for the three months ended MarchJune 31,30, 2026 versus MarchJune 31,30, 2025 was primarily due to higher raw material input costs, product mix, and higher volume. Total revenue was $17,645,481 for the six months ended June 30, 2026, compared to $7,109,536 for the six months ended June 30, 2025. The combination of product mix, higher raw material costs and volume contributed to the increase in total revenue for the six months ended June 30, 2026 versus the same period last year. We constantly monitor the costs of our raw materials as they continue to fluctuate.

Gross profit was $2,035,120$2,276,455 for the three months ended MarchJune 31,30, 2026, compared to $1,072,814$1,158,157 for the same three months in 2025. Higher revenue contributed to the increase in gross profit while higher raw material input costs and product mix were the primary reasons for the decreasedlower gross margin for the three months ended MarchJune 31,30, 2026, compared to the same three months in 2025. Gross profit as a percentage of revenue (gross margin) was 24.9%24.0% and 30.6%32.1% for the three months ended MarchJune 31,30, 2026 and 2025, respectively.respectively, due to the factors noted above.

General and administrative expense for the three months ended MarchJune 31,30, 2026 and 2025, was $642,043$512,090 and $547,821,$549,540, respectively.respectively, Increaseda decrease of 6.8%. Lower compensation and benefits, primarilywhich duedid tonot timing issues ofinclude non-cash stock based compensation for the three months ended June 30, 2026 compared to $47,206 for the same period lastin year,2025, were key factors that contributed to the year-over-year increase.decrease. General and administrative expense for the six months ended June 30, 2026 and 2025 was $1,154,133 and $1,097,361 respectively an increase of 5.2%. The increase is attributed to higher compensation and benefits and non-cash compensation for the first half of 2026 compared to 2025.

On February 10, 2026, the Company reported it was subjected to an imposter scam of $898,325 executed in conjunction with bank fraud. TheAs of June 30, 2026, the Company has recovered $336,299 as of Aprilthat 30, 2025,amount resulting in a fraud expense of $562,026 recorded in the first quarterquarter. ofOn 2026.July Comprehensive12, efforts2026, continuethe Company was informed that a $250,000 claim related to beits activelySmart pursuedCyber insurance policy was approved. When the insurance proceeds are realized they will reduce the fraud expense to recover the funds involved.$312,026.

Net income for the three months ended March 31, 2026 and 2025, was $462,262$1,632,538 and $309,717,$674,176, respectively. Higher gross profit primarily contributed to the increase in net income for the three and six months ended MarchJune 31,30, 2026 compared to the three and six months ended MarchJune 31,30, 2025.

As of MarchJune 31,30, 2026, cash and cash equivalents were $8,540,160$9,889,753 compared to $7,939,000 at December 31, 2025. Additionally, the Company had investments of $3,367,688$3,368,250 and $3,367,125 in marketable securities at MarchJune 31,30, 2026, and December 31, 2025, respectively.

At MarchJune 31,30, 2026, working capital was $8,585,299,$10,060,714, compared to $8,389,706 at December 31, 2025, an increase of 2.3%19.9% or $195,593.$1,671,008. For the first threesix months of 2026, cash and cash equivalents increased $601,160,$1,950,753, inventories increased $2,185,924,$2,532,949, customer deposits increased $2,727,283$3,716,965 and accounts receivable increased $67,546.$321,286. In addition, accounts payable increased $20,735$231,757 and accrued liabilities decreased $141,443$149,738 compared to 2025 year-end.

Net cash provided by operating activities was $1,178,205$3,088,986 and $933,353$1,923,241 for the threesix months ended MarchJune 31,30, 2026 and 2025, respectively. In addition to the net income generated in each period, these amounts included depreciation and accretion of $125,189$251,138 and $105,602,$211,740, and noncash stock-based compensation costs of $87,129 and $0$47,206 for the threesix months ended MarchJune 31,30, 2026, and March 31, 2025, respectively. The increase in customer deposits and inventory compared to December 31, 2025, were primarily related to orders received late in the firstsecond quarter of 2026. Customers continue to adapt to external economic and market issues, while monitoring their inventory very closely including intra-quarter shipments while also attempting to minimize their inventory at quarter end.

Cash of $326,982$870,733 and $83,336$705,976 was used in investing activities for the acquisition of production equipment during the threesix months ended MarchJune 31,30, 2026 and 2025, respectively.

WeThe haveCompany has no off-balance sheet arrangements including special purpose entities.

The preparation of condensed 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 condensed financial statements and accompanying notes. Note 2 to the condensed financial statements in our 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 condensed 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 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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.