(Former name, former address and former fiscal year, if changed since last report)

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 x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

~~Large accelerated filer~~ ¨ ~~Accelerated filer~~ ¨ ~~Non-accelerated filer~~ x ~~Smaller reporting company~~ x ~~Emerging growth company~~¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~4,342,744~~4,421,604 shares of Common Stock, without par value, were outstanding at ~~November 1, 2019.~~August 5, 2020.

~~NINE MONTHS ENDED SEPTEMBER 30, 2019~~LIABILITIES AND ~~2018~~SHAREHOLDERS' EQUITY

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF OPERATIONS

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(UNAUDITED)

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2020		2019		2020		2019
Revenue	$	2,606,587	$	2,741,948	$	6,045,382	$	6,756,986

Cost of revenue		2,168,803		2,047,279		5,098,260		5,366,015

Gross profit		437,784		694,669		947,122		1,390,971

General and administrative expense		272,216		349,636		555,381		709,436

Research and development expense		90,421		94,600		177,325		203,469

Marketing and sales expense		47,387		69,346		99,171		137,965

Income from operations		27,760		181,087		115,245		340,101

Interest		7,300		14,669		11,369		13,481

Income before provision for income taxes		20,460		166,418		103,876		326,620

Income taxes		-		-		1,900		4,860

Net income		20,460		166,418		101,976		321,760

Dividends on preferred stock		6,038		6,038		12,076		12,076

INCOME APPLICABLE TO COMMON SHARES	$	14,422	$	160,380	$	89,900	$	309,684

Earnings per share - basic and diluted (Note 7)
Income per common share
Basic	$	0.00	$	0.04	$	0.02	$	0.07
Diluted	$	0.00	$	0.04	$	0.02	$	0.07

Weighted average shares outstanding
Basic		4,411,714		4,321,387		4,398,856		4,308,504
Diluted		4,418,325		4,363,276		4,406,478		4,352,297

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

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

	Convertible					Additional
	Preferred Stock,			Common		Paid-In			Accumulated
	Series B			Stock		Capital			Deficit			Total
Balance 12/31/2019	$	514,438		$	10,410,677	$	2,265,925		$	(9,242,204	)	$	3,948,836

Accretion of cumulative dividends		6,038			-		(6,038	)		-			-

Stock based compensation expense (Note 4)		-			-		1,182			-			1,182

Common stock issued (Note 4)		-			29,998		-			-			29,998

Net income		-			-		-			81,516			81,516

Balance 3/31/2020	$	520,476		$	10,440,675	$	2,261,069		$	(9,160,688	)	$	4,061,532

Accretion of cumulative dividends		6,038			-		(6,038	)		-			-

Payment of cumulative dividends (Note 5)		(24,152	)		-		-			-			(24,152	)

Stock based compensation expense (Note 4)		-			-		1,182			-			1,182

Common stock issued (Note 4)		-			30,000		-			-			30,000

Net income		-			-		-			20,460			20,460

Balance 6/30/2020	$	502,362		$	10,470,675	$	2,256,213		$	(9,140,228	)	$	4,089,022


Balance 12/31/2018	$	514,438		$	10,275,733	$	2,280,060		$	(9,547,555	)	$	3,522,676

Accretion of cumulative dividends		6,038			-		(6,038	)		-			-

Stock based compensation expense (Note 4)		-			-		4,158			-			4,158

Proceeds from exercise of stock options (Note 4)		-			14,952		-			-			14,952

Common stock issued (Note 4)		-			30,002		-			-			30,002

Net income		-			-		-			155,342			155,342

Balance 3/31/2019	$	520,476		$	10,320,687	$	2,278,180		$	(9,392,213	)	$	3,727,130

Accretion of cumulative dividends		6,038			-		(6,038	)		-			-

Payment of cumulative dividends (Note 5)		(24,152	)		-		-			-			(24,152	)

Stock based compensation expense (Note 4)		-			-		1,379			-			1,379

Common stock issued (Note 4)		-			29,997		-			-			29,997

Net income		-			-		-			166,418			166,418

Balance 6/30/2019	$	502,362		$	10,350,684	$	2,273,521		$	(9,225,795	)	$	3,900,772

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

SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(UNAUDITED)

	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	101,976		$	321,760
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and accretion		226,956			219,302
Amortization		1,724			36,261
Stock based compensation		62,362			65,536
(Gain) loss on disposal of equipment		(3,063	)		4,226
Inventory reserve		33,629			600
Changes in operating assets and liabilities:
Accounts receivable		(39,814	)		126,685
Note receivable		-			(7,477	)
Inventories		1,844,385			(809,964	)
Prepaid expenses		(50,569	)		558,476
Right of use asset		37,806			(505,700	)
Other assets		(6,488	)		(8,757	)
Accounts payable		(74,390	)		5,623
Operating lease obligations		(39,456	)		509,756
Accrued expenses and customer deposits		(2,086,240	)		(223,047	)
Net cash provided by operating activities		8,818			293,280

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment		3,063			-
Purchases of property and equipment		(167,999	)		(212,195	)
Net cash used in investing activities		(164,936	)		(212,195	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options		-			14,952
Payment of cumulative dividends on preferred stock		(24,152	)		(24,152	)
Proceeds from SBA Paycheck Protection Program		325,300			-
Principal payments on finance lease obligations and notes payable		(48,620	)		(76,391	)
Net cash provided by (used in) financing activities		252,528			(85,591	)

NET INCREASE (DECREASE) IN CASH		96,410			(4,506	)

CASH - Beginning of period		1,828,397			1,802,839

CASH - End of period	$	1,924,807		$	1,798,333

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	5,826		$	5,939
Income taxes		1,900			4,860

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in asset retirement obligation		1,800			1,271

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

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

~~Note 1. Business Organization and Purpose~~

Note 1.

Business Organization and Purpose

SCI Engineered Materials, Inc. (“SCI”, or the “Company”), an Ohio corporation, was incorporated in 1987. The Company operates in one segment as a global supplier and manufacturer of advanced materials for Physical Vapor Deposition (“PVD”) Thin Film Applications. The Company is focused on specific markets within the PVD industry (Photonics, Thin Film Solar, Glass and Transparent Electronics). Substantially all of the Company’s revenues are generated from customers with multi-national operations. The Company develops innovative customized solutions enabling commercial success through collaboration with end users and Original Equipment Manufacturers.

~~Note 2. Summary of Significant Accounting Policies~~

Note 2.

Summary of Significant Accounting Policies

Basis of Presentation - The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation of the results of operations for the periods presented have been included. The financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, ~~2018.~~2019. Interim results are not necessarily indicative of results for the full year.

Use of Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition - The Company enters into contracts with its customers that generally represent purchase orders specifying general terms and conditions, order quantities and per unit product prices. The Company has determined that each unit of product purchased represents a separate performance obligation. The Company satisfies its performance obligations and recognizes revenue at a point in time when control of a unit of product is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. For the majority of product sales, transfer of control occurs when the products are shipped from the Company's manufacturing facility to the customer. The cost of delivering products to the Company's customers is recorded as a component of cost of products sold. Those costs may include the amounts paid to a third party to deliver the products. Any freight costs billed to and paid by a customer are included in revenue.

The Company considers collectability of amounts due under a contract to be probable upon inception of a sale based on an evaluation of the credit worthiness of each customer. The Company sells its products typically under agreements with payment terms less than 45 days. The Company does not typically include extended payment terms or significant financing components in contracts with customers. The majority of the Company’s contracts have an obligation to transfer products within one year. Thus, the Company elects to use the practical expedient where incremental cost of obtaining a contract, such as commissions, is expensed when incurred because the amortization period for those costs is one year or less. The Company treats shipping and handling activities that occur after control of the product transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation. Customer deposits are funds received in advance from customers and are recognized as revenue when the Company has transferred control of product to the customer. Product revenues are recognized upon shipment of goods as the customer has assumed the significant risks and rewards of ownership and the Company is entitled to payment at this point. Service revenues are recognized upon completion as the customer cannot realize the benefit of the service until fully completed.

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 2.

Summary of Significant Accounting Policies (continued)

During the three months ended June 30, 2020 and 2019, revenue from the photonics market was approximately 96% and 92% of total revenue, respectively. During the six months ended June 30, 2020 and 2019, revenue from the photonics market was approximately 98% and 95% of total revenue, respectively. The balance of the revenue in these periods was almost entirely from the thin film solar market. The top two customers represented approximately 87% and 76% of total revenue for the six months ended June 30, 2020 and 2019, respectively. International shipments resulted in 4% and 14% of total revenue for the first six months of 2020 and 2019, respectively.

Note 3.

Recent Accounting Pronouncements

~~Note 3. Recent Accounting Pronouncements~~

~~Leases -~~ In ~~February~~June 2016, the FASB issued ASU No. ~~2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU)~~2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables, by replacing today’s “incurred loss” approach with an “expected loss” model ~~that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases~~under which allowances will be ~~classified as either finance or operating, with classification affecting the pattern of expense recognition~~recognized based on expected rather than incurred losses. ASU No. 2016-13 will become effective for us in the ~~income statement. In July 2018,~~first quarter of 2023. We are evaluating the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. The amendments in ASU 2018-10 clarify, correct or remove inconsistencies in the guidance provided under ASU 2016-02 related to sixteen specific issues identified. Also in July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements to Topic 842. This amendment provides the Company with an additional and optional transition method to adopt the new lease standard. Under this new transition method, the Company can apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and present the accounting on a prospective or go-forward basis instead of applying to the earliest comparative period presented in the financial statements. The new lease standard became effective for the Company January 1, 2019.

The Company elected to apply the new transition method upon adoption of the new standard. The Company also elected the available practical expedients on adoption. The new standard did not have a material impact ~~on the Company’s income statements. The most significant impact of the new standard was the recognition of a ROU asset and lease liability of over $500,000 as of January 1, 2019.~~

~~SCI ENGINEERED MATERIALS, INC~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~Note 3. Recent Accounting Pronouncements (continued)~~

~~Revenue Recognition - The core principle of ASC 606 is~~ that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company’s analysis of sales contracts under ASC 606 supports the recognition of revenue at a point in time, typically when title passes to the customer upon shipment, which is consistent with the previous revenue recognition model.

~~The core principle of ASC 606 is supported by five steps which are listed below:~~

	1.	~~Identify the contract with the customer.~~
	2.	~~Identify the performance obligation in the contract.~~
	3.	~~Determine the transaction price.~~
	4.	~~Allocate the transaction price to performance obligations in the contract.~~
	5.	~~Recognize revenue when or as the Company satisfies a performance obligation.~~

The Company adopted this guidance as of January 1, 2018 utilizing the modified retrospective approach method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning on or after January 1, 2018 are presented in accordance with ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s revenue recognition policies prior to the adoption of ~~ASC 606. Implementation of the standard did not~~this update will have ~~a material impact~~ on ~~the Company’s~~our financial statements as the Company’s method for recognizing revenue subsequent to the implementation of ASC 606 does not vary significantly from its revenue recognition practices under the prior revenue standard. Accordingly, there was no required cumulative adjustment to retained earnings as of January 1, 2018.statements.

The Company enters into contracts with its customers that generally represent purchase orders specifying general terms and conditions, order quantities and per unit product prices. The Company has determined that each unit of product purchased represents a separate performance obligation. The Company satisfies its performance obligations and recognizes revenue at a point in time when control of a unit of product is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. For the majority of product sales, transfer of control occurs when the products are shipped from the Company's manufacturing facility to the customer. The cost of delivering products to the Company's customers is recorded as a component of cost of products sold. Those costs may include the amounts paid to a third party to deliver the products. Any freight costs billed to and paid by a customer are included in revenue.

~~SCI ENGINEERED MATERIALS, INC~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~Note 3. Recent Accounting Pronouncements (continued)~~

During the three months ended September 30, 2019 and 2018, revenue from the photonics market was approximately 100% and 71% of total revenue, respectively. During the nine months ended September 30, 2019 and 2018, revenue from the photonics market was approximately 97% and 80% of total revenue, respectively. The balance of the revenue in these periods was almost entirely from the thin film solar market. The top two customers represented approximately 79% and 63% of total revenue for the nine months ended September 30, 2019 and 2018, respectively. International shipments resulted in 10% and 20% of total revenue for the first nine months of 2019 and 2018, respectively.

~~Note 4. Common Stock and Stock Options~~

Note 4.

Common Stock and Stock Options

Stock Based Compensation cost for all stock awards is based on the grant date fair value and recognized over the required service (vesting) period. Non cash stock based compensation expense was ~~$32,765~~$31,182 and ~~$40,941~~$31,376 for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Non cash stock based compensation expense was ~~$98,301~~$62,362 and ~~$83,960~~$65,536 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Unrecognized compensation expense was ~~$17,473~~$13,398 as of ~~September~~June 30, ~~2019~~2020 and will be recognized through 2023. There was no tax benefit recorded for this compensation cost as the expense primarily relates to incentive stock options that do not qualify for a tax deduction until, and only if, a qualifying disposition occurs.

The non-employee Board members received compensation of ~~35,725~~51,085 and ~~52,487~~18,080 aggregate shares of common stock of the Company during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The stock had an aggregate value of ~~$89,995~~$59,998 and ~~$73,379~~$59,999 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and was recorded as non-cash stock compensation expense in the financial statements.

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 4.

Common Stock and Stock Options (continued)

The cumulative status of options granted and outstanding at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, as well as options which became exercisable in connection with the Company’s stock option plans is summarized as follows:

~~SCI ENGINEERED MATERIALS, INC~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~Note 4. Common Stock and Stock Options (continued)~~

Employee Stock Options

Weighted
Average
Stock Options Exercise Price
Outstanding at January 1, 2018 381,447 $ 4.54
Granted 41,719 1.25
Exercised (21,225 ) 0.84
Expired (5,000 ) 3.10
Outstanding at December 31, 2018 396,941 $ 4.41
Exercised (31,788 ) 0.84
Expired (271,500 ) 6.00
Forfeited (17,616 ) 1.00
Outstanding at September 30, 2019 76,037 $ 1.03
Options exercisable at December 31, 2018 329,988 $ 5.09
Options exercisable at September 30, 2019 33,643 $ 0.92

During the nine months ended September 30, 2019, a total of 31,788 stock options were exercised. The Company’s new President, Mr. Jeremy Young, received a loan from the Company in the amount of $14,952 in February 2019 to enable him to exercise 17,800 stock options. Per a Promissory Note signed by Mr. Young this loan is to be repaid in two installments with the final installment due January 1, 2020. The first installment of $7,475 was repaid in February 2019 and the balance is recorded on the balance sheet as a Note Receivable as of September 30, 2019.

				Weighted
				Average
	Stock Options			Exercise Price
Outstanding at January 1, 2019		396,941		$	4.41
Exercised		(31,788	)		0.84
Expired		(271,500	)		6.00
Forfeited		(17,616	)		1.00
Outstanding at December 31, 2019		76,037		$	1.03
Outstanding at June 30, 2020		76,037		$	1.03
Options exercisable at December 31, 2019		48,265		$	0.90
Options exercisable at June 30, 2020		55,208		$	0.94

Exercise prices for options ranged from $0.84 to $1.25 at ~~September~~June 30, ~~2019.~~2020. The weighted average option price for all options outstanding at ~~September~~June 30, ~~2019,~~2020, was $1.03 with a weighted average remaining contractual life of ~~6.7~~6.0 years. There were no non-employee director stock options outstanding during ~~2019~~2020 and ~~2018.~~2019.

~~Note 5. Preferred Stock~~

Note 5.

Preferred Stock

Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares. Dividends on the Series B preferred stock were $6,038 for the three months ended ~~September~~June 30, 2020 and 2019, and ~~2018, and $18,114~~$12,076 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. The Company had accrued dividends on Series B preferred stock of ~~$259,634~~$253,596 at ~~September~~June 30, ~~2019,~~2020, and $265,672 at December 31, ~~2018.~~2019. These amounts are included in Convertible preferred stock, Series B, on the balance sheet at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018.~~2019. During ~~the first nine months of 2019 and 2018,~~June 2020, a dividend payment of $24,152 was made to preferred shareholders of ~~record.~~record as of December 31, 2019. Also, during 2019, a dividend payment of $24,152 was made to preferred shareholders of record as of December 31, 2018.

Note 6.

Inventories

Inventories consisted of the following:	June 30,			December 31,
	2020			2019
	(unaudited)
Raw materials	$	283,062		$	883,767
Work-in-process		574,943			1,802,092
Finished goods		68,645			85,176
Inventory reserve		(55,626	)		(21,997	)
	$	871,024		$	2,749,038

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

~~Note 6. Inventories~~

Inventories consisted of the following: September 30, December 31,
2019 2018
(unaudited)
Raw materials $ 1,523,573 $ 1,568,487
Work-in-process 1,444,909 1,144,080
Finished goods 157,103 70,019
Inventory reserve (30,641 ) (29,741 )
$ 3,094,944 $ 2,752,845

~~Note 7. Earnings Per Share~~

Note 7.

Earnings Per Share

Basic income per share is calculated as income applicable to common shareholders divided by the weighted average of common shares outstanding. Diluted earnings per share is calculated as diluted income applicable to common shareholders divided by the diluted weighted average number of common shares. Diluted weighted average number of common shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive. All convertible preferred stock and common stock options listed in Note 4 that were out-of-the-money or anti-dilutive were excluded from diluted earnings per share. The following is provided to reconcile the earnings per share calculations:

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Income applicable to common shares	$	14,422	$	160,380	$	89,900	$	309,684

Weighted average common shares outstanding - basic		4,411,714		4,321,387		4,398,856		4,308,504

Effect of dilution		6,611		41,889		7,622		43,793
Weighted average shares outstanding - diluted		4,418,325		4,363,276		4,406,478		4,352,297

Three months ended Sept. 30, Nine months ended Sept. 30,
2019 2018 2019 2018
Income applicable
to common shares $ 56,294 $ 138,088 $ 365,978 $ 524,259

Weighted average common
shares outstanding - basic 4,335,839 4,232,214 4,317,716 4,214,573

Effect of dilution 21,108 62,000 39,557 14,370
Weighted average
shares outstanding - diluted 4,356,947 4,294,214 4,357,273 4,228,943

Note 8.

Notes Payable

On April 17, 2020 we entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), with a principal amount of $325,300. The PPP was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The term of the PPP loan is two years. The interest rate on this loan is 1.0% per annum, which shall be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly payments of principal and interest until maturity with respect to any portion of the PPP loan which is not forgiven as described below. The Company is permitted to prepay or partially prepay the PPP loan at any time with no prepayment penalties. Under the terms of the CARES Act, PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. While there is no assurance the Company will obtain forgiveness of the PPP loan in whole or in part, it expects most (if not all) of this loan to be forgiven by the SBA.

~~Note 8. Note Payable~~

~~During October of 2019, the~~The Company renewed its line of credit with Huntington National Bank for $1 ~~million.~~million during 2019. The line of credit bears interest at 0.5 percentage points over the Prime Commercial Rate with an expiration date of October 5, 2020. At ~~September~~June 30, ~~2019,~~2020, no amounts were drawn on the line of credit.

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 8.

Notes Payable (continued)

~~Note 9. Income Taxes~~

Notes payable at June 30, 2020 is included in the accompanying balance sheets as follows:

	2020
U.S. SBA Paycheck Protection Program	$	325,300
Less current portion		143,976
Notes payable, net of current portion	$	181,324

Annual maturities of notes payable:

2020	$	35,904
2021		216,685
2022		72,711
Total	$	325,300

Note 9.

Income Taxes

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

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Federal - deferred $ - $ - $ - $ -
State and local - 4,586 4,860 11,078
$ - $ 4,586 $ 4,860 $ 11,078

	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Federal - deferred	$	-	$	-	$	-	$	-
State and local		-		-		1,900		4,860
	$	-	$	-	$	1,900	$	4,860

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. A full valuation allowance has been recorded against the realization of the net deferred tax assets at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The Company has net operating loss carryforwards available for federal and state tax purposes of approximately ~~$3,800,000~~$3,900,000 which expire in varying amounts through ~~2038.~~2039.

~~Note 10. Operating Lease~~SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 10.

Operating Lease

The Company entered into an operating lease with a third party on March 18, 2014 for its headquarters in Columbus, Ohio. The terms of the lease include monthly payments ranging from ~~$8,700~~$9,000 to $9,700 with a maturity date of November 30, 2024. The Company has the option to extend the lease period for an additional five years beyond the original expiration date. There are no restrictions or covenants associated with the lease. The lease costs were approximately ~~$78,400~~$53,900 and $52,300 during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020 and 2019, respectively.

The following is a maturity analysis, by year, of the annual undiscounted cash ~~outflows~~flows of the operating lease liabilities as of ~~September~~June 30, ~~2019:~~2020:

2019	$	26,715
2020		108,117	$	54,196
2021		110,364		110,364
2022		112,611		112,611
2023		114,857		114,857
2024		102,550		102,550
Total minimum lease payments	$	575,214	$	494,578

Operating cash ~~outflows~~flows from operating leases	~~53,890~~112,272
Weighted average remaining lease term – operating leases	~~5.1~~4.4 years
Weighted average discount rate – operating leases	~~5.5%~~5.5	%

Note 11.

Finance Lease

~~SCI ENGINEERED MATERIALS, INC~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~Note 11. Finance Leases~~

The Company leases certain equipment under finance leases. Future minimum lease payments, by year, with the present value of such payments, as of ~~September~~June 30, ~~2019,~~2020, are shown in the following table.

2019 $ 26,952
2020 107,808
2021 91,398
2022 21,756
2023 16,315
Total minimum lease payments 264,229
Less amount representing interest 18,043
Present value of minimum lease payments 246,186
Less current portion 97,322
Finance lease obligations, net of current portion $ 148,864

2020	$	53,903
2021		91,398
2022		21,609
2023		18,129
Total minimum lease payments		185,039
Less amount representing interest		9,824
Present value of minimum lease payments		175,215
Less current portion		101,115
Finance lease obligations, net of current portion	$	74,100

The equipment under finance lease at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, is included in the accompanying balance sheets as follows:

	Sept. 30, 2019		Dec. 31, 2018		June 30, 2020		Dec. 31, 2019
Machinery and equipment	$	438,316	$	725,036	$	438,316	$	438,316
Less accumulated depreciation and amortization		85,374		222,973		120,221		98,305
Net book value	$	352,942	$	502,063	$	318,095	$	340,011

SCI ENGINEERED MATERIALS, INC

NOTES TO FINANCIAL STATEMENTS

Note 11.

Finance Lease (continued)

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

The finance leases are structured such that ownership of the leased asset reverts to the Company at the end of the lease term. Accordingly, leased assets are depreciated using the Company's normal depreciation methods and lives. Ownership of certain assets were transferred to the Company in accordance with the terms of the leases and these assets have been excluded from the leased asset disclosure above.

Note 12.

Subsequent Event

~~The~~

During July 2020, the Company ~~entered~~was approved to enter into a finance lease ~~obligation during September 2019 for the purchase of new production and testing equipment~~agreement in the amount of ~~$78,950.~~$306,972 for the rebuild of production equipment. This lease includes a term of 47 months and an interest rate of 4.2%.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

~~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, ~~2018.~~2019.

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, ~~2018,~~2019, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our business and financial condition and could cause actual results to differ materially from plans and projections. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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

~~Overview~~

SCI Engineered Materials, Inc. (“SCI”, “we” or the “Company”), an Ohio corporation, was incorporated in 1987. We operate in one segment as a global supplier and manufacturer of advanced materials for Physical Vapor Deposition (“PVD”) Thin Film Applications. We are focused on specific markets within the PVD industry (Photonics, Thin Film Solar, Glass and Transparent Electronics). Substantially all of our revenues are generated from customers with multi-national operations. We have made considerable resource investments in Thin Film Solar applications and several customers have adopted our products. The Company develops innovative customized solutions enabling commercial success through collaboration with end users and Original Equipment Manufacturers.

Item 2.

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

For the three months ended September 30, 2019, we had total revenue of $3,255,201. This was an increase of $602,566, or 22.7%, compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, we had total revenue of $10,012,187. This was an increase of $2,968,943, or 42.2%, compared to the nine months ended September 30, 2018. Volume and pricing were higher in our photonics market during 2019. We expect revenue for the full year 2019 to exceed full year 2018. We anticipate revenue to be lower in the fourth quarter of 2019 compared to recent quarters as a result of product mix and continued uncertainties concerning the thin film solar market in China.

Gross profit was $458,520 for the three months ended September 30, 2019 compared to $665,884 for the same three months in 2018 and $1,849,491 and $1,917,425 for the nine months ended September 30, 2019 and 2018, respectively.

Operating expenses were $391,649 and $519,187 for the three months ended September 30, 2019 and 2018, respectively and $1,442,519 and $1,353,025 for the nine months ended September 30, 2019 and 2018, respectively. The transition costs related to our new President and CEO working closely with our former President and CEO led to increased expenses during the first half of 2019. Our former President and CEO retired in June of 2019 and these expenses are expected to continue to be lower for the remainder of this year.

We have new materials under development that may replace the Cadmium Sulfide buffer layer in CIGS solar cells. These materials were tested at Case Western Reserve University during the second half of 2017 and the results support the use of our innovative material in thin film solar applications that could lead to higher efficiencies. We are working with customers through product trials and qualifications to accelerate adoption of these materials. We continue to invest in developing new products for all of our markets including transparent conductive oxide systems for the thin film solar and display markets as well as with our transparent electronic products. Those products involve research and development expense to accelerate time to market.

A bonding facility and on-site training was completed in the second quarter of 2019 pursuant to a joint agreement with publicly owned Konfoong Materials International Co., LTD (KFMI). KFMI will bond rotatable thin film solar Aluminum Zinc Oxide cylinders produced in Columbus, Ohio for thin film solar customers in China. This arrangement is intended to enable us to provide an advantage to thin film solar customers in China and to also enhance our access to this growing market. We will continue to produce the ceramic portion of the end product in our facility in Columbus. We will continue to exercise control over our trade secrets and proprietary property through assiduous scrutiny of our Intellectual Property. Our products for photonics and thin film solar customers in areas other than China will continue to be bonded at our manufacturing facility in Columbus.

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

In March 2020, the World Health Organization declared the coronavirus disease (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in restrictions and shutdowns implemented by national, state, and local authorities. As a result of the pandemic, we are complying with executive orders issued in Ohio and U.S. Centers for Disease Control and Prevention guidelines regarding safety procedures. These procedures include, but are not limited to: social distancing, staggering start times, remote working, and teleconferencing versus in person meetings. We are maintaining regular contact, via phone and other electronic means, with our customers and suppliers. During the third quarter of 2020, and perhaps longer, we may operate below our normal production schedule due to uncertainty in our domestic and global market due to COVID-19. Thus, we expect revenue to be lower in the second half of 2020 compared to the first six months of this year.

Some employees worked remotely during most of the second quarter of 2020 and we do not believe it adversely affected our ability to maintain operations, including financial reporting. The Chief Financial Officer maintained constant contact with the accounting staff in addition to the Chief Executive Officer and the Operations Manager. We do not believe our disclosure controls and procedures were materially affected and there were no changes in controls. Communication was maintained with the Board of Directors as well. These employees returned to work in our office in June 2020.

Based on recent conversations with customers, we do not expect to experience any material impairments and do not anticipate any changes in accounting judgements. We are not aware of any material adverse impact on our supply chain and remain in contact with our suppliers.

We continue to face a period of uncertainty regarding the ongoing impact of the COVID-19 pandemic on both our projected customer demand and supply chain. During this challenging economic environment, we are focused on continuing to take the necessary steps to respond quickly to changes in our business and maintaining our financial flexibility in the face of the unprecedented and continuing impact of COVID-19, including (but not limited to): reviewing and monitoring planned capital expenditures, reviewing all operating expenses for opportunities to reduce spending, and aligning inventory to estimated revenue.

We continue to monitor the rapidly evolving situation related to COVID-19 including guidance from federal, state and local public health authorities and may take additional actions based on these recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our results of operations, cash flows and liquidity in the future.

For the three months ended June 30, 2020, we had total revenue of $2,606,587. This was a decrease of $135,361, or 4.9%, compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, we had total revenue of $6,045,382. This was a decrease of $711,604, or 10.5%, compared to the six months ended June 30, 2019. Volume was lower in 2020 compared to 2019 as international shipments decreased by $677,216.

Gross profit was $437,784 for the three months ended June 30, 2020 compared to $694,669 for the same three months in 2019 and $947,122 and $1,390,971 for the six months ended June 30, 2020 and 2019, respectively, primarily due to lower revenue.

Operating expenses were $410,024, and $513,582 for the three months ended June 30, 2020 and 2019, respectively and $831,877 and $1,050,870 for the six months ended June 30, 2020 and 2019, respectively. The decrease was primarily due to additional expenses incurred during our management transition in the first half of 2019. Our former president and CEO retired in June 2019.

Three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 (unaudited) compared to three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 (unaudited):

For the three months ended ~~September~~June 30, ~~2019,~~2020, we had total revenue of ~~$3,255,201.~~$2,606,587. This was ~~an increase~~a decrease of ~~$602,566,~~$135,361, or ~~22.7%~~4.9%, compared to the three months ended ~~September~~June 30, ~~2018.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we had total revenue of ~~$10,012,187 compared to $7,043,244 for the same period in 2018.~~$6,045,382. This was ~~an increase~~a decrease of ~~$2,968,943~~$711,604, or ~~42.2%~~10.5%, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Volume ~~and pricing were higher in our photonics market and volume~~ was lower in ~~our thin film solar market during 2019.~~2020 compared to 2019 as international shipments decreased by $677,216.

Gross profit was ~~$458,520~~$437,784 for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$665,884~~$694,669 for the same three months in ~~2018.~~2019. This was a decrease of ~~$207,364,~~$256,885, or ~~31.1%~~37.0%. Gross profit as a percentage of revenue (gross margin) was ~~14.1%~~16.8% for the ~~third~~second quarter of ~~2019~~2020 compared to ~~25.1%~~25.3% for the same period in ~~2018.~~2019. Gross profit was ~~$1,849,491~~$947,122 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$1,917,425~~$1,390,971 for the first ~~nine~~six months of ~~2018.~~2019. This was a decrease of ~~$67,934~~$443,849 or ~~3.5%~~31.9%. Gross margin was ~~18.5%~~15.7% for the first ~~nine~~six months of ~~2019~~2020 compared to ~~27.2%~~20.6% for the same period in ~~2018.~~2019. The decrease in gross profit and gross margin was primarily ~~due to product mix including lower volume in our thin film solar market previously mentioned. A certain raw material~~ related to ~~the increased volume in our photonics market had an increase in pricing which contributed to a~~ lower ~~gross margin which impacted overall gross margin.~~revenue previously mentioned as well as product mix.

General and administrative expense for the three months ended ~~September~~June 30, 2020 and 2019, was $272,216 and ~~2018, was $247,984 and $310,464,~~$349,636, respectively, a decrease of ~~20.1%~~22.1%. General and administrative expense for the six months ended June 30, 2020 and 2019, was $555,381 and $709,436, respectively, a decrease of 21.7%. This decrease was primarily related to lower compensation of approximately ~~$67,000, principally due to~~$58,000 during the ~~retirement in June~~second quarter of ~~2019~~2020 and $139,000 during the first six months of ~~our former President and CEO.~~

~~General and administrative~~2020. Higher compensation expense for the ~~nine months ended September 30,~~same periods in 2019 ~~and 2018,~~ was ~~$957,420 and $840,171, respectively, an increase of 14.0%. This increase was primarily~~ related to higher compensation of approximately $15,000, higher director compensation of $37,000, higher professional fees of $30,000 and start-up training costs at KFMI in China of approximately $11,000. The transition of our new President and CEO working closely with our former President and CEO ~~led to increased expenses~~ during the first half of 2019. ~~Our former CEO retired in June of 2019 and these expenses are expected to continue to be lower for the remainder of this year.~~

Included in total expense was ~~$39,799~~$56,555 and ~~$35,022~~$53,953 for professional fees for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively and ~~$160,252~~$120,137 and ~~$130,657 for professional fees~~$120,454 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. These ~~ongoing~~continued expenses were primarily related to SEC compliance costs for legal, accounting and stockholder relations ~~fees as well as costs associated with the transition of our new President and CEO.~~

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

Research and development expense for the three months ended ~~September~~June 30, ~~2019,~~2020, was ~~$80,203~~$90,421 compared to ~~$98,514~~$94,600 for the same period in ~~2018,~~2019, a decrease of ~~18.6%~~4.4%. ~~The decrease is primarily related to less compensation.~~ Research and development expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$283,672~~$177,325 compared to ~~$252,049~~$203,469 for the same period in ~~2018, an increase~~2019, a decrease of ~~12.5%~~12.8%. This ~~increase~~decrease was ~~principally~~primarily related to lower compensation expense due to ~~ongoing research as we~~staffing levels in the first half of 2019. We continue to invest in developing new applications for all of our markets including an innovative buffer layer for thin film solar cells, transparent conductive oxide systems for transparent electronics and thin film solar. These efforts include accelerating time to market for those applications and involve ongoing research and development expense.

Marketing and sales expense was ~~$63,462~~$47,387 and ~~$110,209~~$69,346 for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. This was a decrease of ~~$46,747~~$21,959 or ~~42.4%~~31.7%. This decrease was primarily related to lower travel and compensation ~~and commissions~~expenses of approximately ~~$43,000.~~$19,000.

Marketing and sales expense was ~~$201,427~~$99,171 and ~~$260,805~~$137,965 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. This was a decrease of ~~$59,378~~$38,794 or ~~22.8%~~28.1%. This decrease was primarily related to lower ~~compensation~~travel expenses of approximately ~~$42,000~~$27,000 and lower outside sales commissions of $6,000. Travel was limited during the first six months of 2020 due the cancellation of tradeshows and limited direct contact with customers in response to ~~the allocation of salary expenses for our new President~~COVID-19 orders issued by national health organizations and ~~CEO who previously was also engaged in marketing and sales activities. In addition, commissions were lower by approximately $16,000 compared to the same time period in 2018.~~state officials.

Included in total expenses were non-cash ~~stock based~~stock-based compensation costs of ~~$32,765~~$31,182 and ~~$40,941~~$31,376 for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$98,301~~$62,362 and ~~$83,960~~$65,536 for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~This increase was primarily related to higher director compensation.~~ Compensation expense for all stock-based awards is based on the grant date fair value and recognized over the required service (vesting) period. Unrecognized non-cash ~~stock based~~stock-based compensation expense was ~~$17,473~~$13,398 as of ~~September~~June 30, ~~2019~~2020 and will be recognized through 2023.

Interest expense was ~~$4,539~~$7,300 for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~$18,020 for the nine months ended September 30, 2019. Interest income was $2,015~~$14,669 for the three months ended ~~September~~June 30, ~~2018.~~2019. Interest expense was ~~$10,949~~$11,369 for the ~~nine~~six months ended ~~September~~June 30, ~~2018. Interest~~2020 and $13,481 for the six months ended June 30, 2019. The second quarter of 2019 included $17,396 of expense ~~during~~for the first six months of 2019 which was ~~higher due~~related to the new operating lease standard that became effective January 1, ~~2019 which reclasses a portion of rent expense to interest expense.~~2019.

Income applicable to common stock for the three months ended ~~September~~June 30, 2020 and 2019, was $14,422 and ~~2018, was $56,294 and $138,088,~~$160,380, respectively. Income applicable to common stock for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 was $89,900 and ~~2018~~$309,684, respectively. The decrease was ~~$365,978 and $524,259, respectively.~~the result of lower gross profit which was partially offset by lower operating expenses.

As of ~~September~~June 30, ~~2019,~~2020, cash on hand was ~~$1,694,890. Cash on-hand was $1,802,839~~$1,924,807 compared to $1,828,397 at December 31, ~~2018. The lower cash balance was due to purchases~~2019. On April 17, 2020 we entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), with a principal amount of ~~inventory as well as an in-plant office structured mezzanine and production equipment.~~

~~Item 2. Management’s Discussion and Analysis~~$325,300 received April 24, 2020. We anticipate that most (if not all) of ~~Financial Condition and Results of Operations (continued)~~this loan will be forgiven by the SBA.

At ~~September~~June 30, ~~2019~~2020 working capital was ~~$1,991,067~~$2,309,261 compared to ~~$1,672,036~~$1,992,328 at December 31, ~~2018,~~2019, an increase of ~~$319,031~~$316,933, or ~~19.1%~~15.9%. Inventories ~~increased $342,099 and prepaid expenses~~ decreased ~~$521,269 due to orders received late in 2018 and inventory purchased in 2019. Accrued expenses~~$1,878,014 and customer deposits decreased ~~$763,827~~$2,071,317 due to prepaid orders shipped during 2019 and the timing of accrued compensation at December 31, 2018 which was paid in 2019. The right of use asset appeared on the balance sheet for the first time in January 2019 and there was a net balance of $452,841 at September 30, 2019. The new operating lease obligations line items on the balance sheet had a combined balance of $491,429 at September 30, 2019.2020. Also, accounts payable decreased $74,390.

Net cash provided by operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$340,194~~$8,818 and ~~$1,965,836~~$293,280 for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. This included depreciation and amortization of ~~$370,106~~$228,680 and ~~$346,305,~~$255,563 and non-cash stock-based compensation costs of ~~$98,301~~$62,362 and ~~$83,960~~$65,536 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. In addition, accrued expenses and customer deposits decreased ~~$763,827~~$2,086,240 and $223,047 for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and~~respectively, which were offset by reduced inventory levels in 2020. The inventory reserve increased ~~$2,923,898 for~~$39,814 during the ~~nine~~first six months ~~ended September 30, 2018. The increase in 2018 was~~of 2020 due ~~primarily~~ to ~~customer deposits received for~~current uncertainties regarding specific product shipments ~~in 2018 and 2019.~~to international customers.

Cash of ~~$343,448~~$167,999 was used in investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019, which included an in-plant office structured mezzanine in addition to~~2020, for the acquisition of production equipment. During the ~~nine~~six months ended ~~September~~June 30, ~~2018, $345,140~~2019, $212,195 was used in investing ~~activities.~~activities which included an in-plant office mezzanine in addition to the acquisition of production equipment.

Cash of ~~$95,495~~$48,620 and ~~$255,444~~$76,391 was used in financing activities for principal payments to third parties for finance lease obligations and notes payable during the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. AAs previously mentioned, during the second quarter of 2020 we entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), with a principal amount of $325,300, with the expectation that most (if not all) of this loan will be forgiven by the SBA. Also, a dividend payment of $24,152 was made to owners of our Series B preferred stock during the ~~first nine months~~second quarter of ~~2019~~2020 and ~~2018.~~2019.

Total debt outstanding ~~decreased~~increased to ~~$246,186~~$500,515 at ~~September~~June 30, ~~2019,~~2020, from ~~$262,731~~$223,835 at December 31, ~~2018, a decrease of 6.3%. During~~2019. The increase was due to the ~~first nine months of 2019 and 2018, we incurred new capital lease obligations of $78,950 and $105,325, respectively.~~proceeds received from the unsecured promissory note under the Paycheck Protection Program (the “PPP”)

We have no ~~off balance~~off-balance sheet arrangements including special purpose entities.

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, ~~2018,~~2019, describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives, revenue recognition, tax valuation allowance, ~~stock based~~stock-based compensation and assessing changes in which impairment of certain long-lived assets may occur. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. Depreciable and useful lives estimated for property and equipment, licenses and patents are based on initial expectations of the period of time these assets and intangibles will benefit us. Changes in circumstances related to a change in our business, change in technology or other factors could result in these assets becoming impaired, which could adversely affect the value of these assets.

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 operated, can only provide reasonable assurance of achieving the desired control ~~objectives and management~~objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Due to a segregation of duties material weakness described below, and based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2019, the Company’s disclosureDisclosure controls and procedures ~~were not effective, at the reasonable assurance level, in recording, processing, summarizing~~include, without limitation, controls and ~~reporting, on a timely basis, information required~~procedures designed to ~~be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring~~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 ~~Accounting~~Financial Officer, ~~as appropriate~~ to allow timely discussions regarding required disclosure. ~~Until~~

Management previously disclosed a material weakness in internal control over financial reporting in its annual report on Form 10-K, filed on February 5, 2020, for the year ended December 31, 2019, relating to insufficient segregation of duties consistent with control objectives. Management is aware of the risks associated with the lack of segregation of duties due to the small number of employees currently working with general administrative and financial matters. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions shall be performed by separate individuals.

To address and remediate the material weakness in internal control over financial reporting described above, we ~~are able~~performed a review of our related procedures and controls and strengthened cross approval of various functions, including financial reporting and disclosure review controls by the Chief Financial Officer, to ~~hire additional employees, we will~~include the Chief Executive Officer and Audit Committee Chairperson where appropriate. We continue to report to the Audit Committee and the Board of Directors at least monthly (and more often as necessary). ~~We believe this will continue to mitigate this weakness.~~ This reporting includes balance sheets, statements of operations, statements of cash flows, and other detail supporting these statements. ~~Accordingly, we believe~~

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 ~~financial statements included~~Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in ~~this report fairly present,~~reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in ~~all material respects, our financial condition, results of operation, changes in shareholders’ equity~~the SEC’s rules and ~~cash flows for all periods presented.~~forms.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.

~~Item 4. Controls~~Management is responsible for the consistency, integrity, and ~~Procedures (continued)~~presentation of information. To fulfill our responsibility, we maintain 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.

Management previously disclosed a material weakness in internal control over financial reporting in its annual report on Form 10-K, filed on February 5, 2019, for the year ended December 31, 2018, relating to insufficient segregation of duties consistent with control objectives. Management is aware of the risks associated with the lack of segregation of duties due to the small number of employees currently working with general administrative and financial matters. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions shall be performed by separate individuals. In order to remediate this weakness, we will need to hire additional employees. Although we will periodically reevaluate this situation, at this point we consider that the risks associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. Until we are able to hire additional employees, we will continue to report to the Audit Committee and theThe Board of Directors ~~at least monthly (and more often as necessary). We believe these efforts address this weakness. These reports include balance sheets, statements~~exercises its oversight role with respect to our systems of ~~operations, statements~~internal control primarily through its Audit Committee, which is comprised of ~~cash flows,~~independent directors. The Committee oversees our financial reporting, quarterly reviews and ~~other detail supporting these statements.~~audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders’ investments.

~~There~~Other than the remediation described above, there were no changes in our internal controls over financial reporting for the three months ended ~~September~~June 30, ~~2019,~~2020, that materially affected or were reasonably likely to materially affect our disclosure controls and procedures. Additionally, there were no changes in our internal controls that could materially affect our disclosure controls and procedures subsequent to the date of their evaluation.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Ohio		31-1210318
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, without par value		SCIA		OTCQB

			~~Page No.~~
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements


		Balance Sheets as of ~~September~~June 30, ~~2019~~2020 (unaudited)and December 31, ~~2018~~2019	3

		Statements of Operations for the Three and ~~Nine~~Six MonthsEnded ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	5

		Statements of Shareholder’s Equity for the Three and ~~Nine~~Six MonthsEnded ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	6

		Statements of Cash Flows for the ~~Nine~~Six MonthsEnded ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	7

		Notes to Financial Statements (unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	N/A

	Item 4.	Controls and Procedures	20

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	N/A

	Item 1A.	Risk Factors	N/A

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	N/A

	Item 3.	Defaults Upon Senior Securities	N/A

	Item 4.	Mine Safety Disclosures	N/A

	Item 5.	Other Information	N/A

	Item 6.	Exhibits	2223

	Signatures		24

	September 30,			December 31,
	2019			2018
	(UNAUDITED)
Current Assets
Cash	$	1,694,890		$	1,802,839
Accounts receivable, less allowance for doubtful accounts of $15,000		298,308			477,932
Note receivable		7,477			-
Inventories		3,094,944			2,752,845
Prepaid expenses		92,156			613,425
Total current assets		5,187,775			5,647,041

Property and Equipment, at cost
Machinery and equipment		8,155,324			8,017,850
Furniture and fixtures		129,683			127,610
Leasehold improvements		360,225			360,225
Construction in progress		330,651			138,067
		8,975,883			8,643,752
Less accumulated depreciation		(6,948,062	)		(6,720,847	)
		2,027,821			1,922,905

Right of use asset, net		452,841			-
Other assets		85,767			75,613
Total other assets		538,608			75,613

TOTAL ASSETS	$	7,754,204		$	7,645,559

	September 30,			December 31,
	2019			2018
	(UNAUDITED)
Current Liabilities
Finance lease obligations, current portion	$	97,322		$	114,853
Operating lease obligations, current portion		78,666			-
Accounts payable		243,838			321,348
Customer deposits		2,617,016			3,202,447
Accrued compensation		73,638			211,227
Accrued expenses and other		86,228			125,130
Total current liabilities		3,196,708			3,975,005

Finance lease obligations, net of current portion		148,864			147,878
Operating lease obligations, net of current portion		412,763			-
Total liabilities		3,758,335			4,122,883

Shareholders' Equity
Convertible preferred stock, Series B, 10% cumulative, nonvoting, no par value, $10 stated value, optional redemption at 103%; optional shareholder conversion 2 shares for 1; 24,152 shares issued and outstanding		508,400			514,438
Common stock, no par value, authorized 15,000,000 shares; 4,342,744 and 4,277,731 shares issued and outstanding, respectively		10,380,680			10,275,733
Additional paid-in capital		2,270,252			2,280,060
Accumulated deficit		(9,163,463	)		(9,547,555	)
		3,995,869			3,522,676

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	7,754,204		$	7,645,559

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2020

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period fromto

	THREE MONTHS ENDED SEPT. 30,					NINE MONTHS ENDED SEPT. 30,
	2019		2018			2019		2018
Revenue	$	3,255,201	$	2,652,635		$	10,012,187	$	7,043,244

Cost of revenue		2,796,681		1,986,751			8,162,696		5,125,819

Gross profit		458,520		665,884			1,849,491		1,917,425

General and administrative expense		247,984		310,464			957,420		840,171

Research and development expense		80,203		98,514			283,672		252,049

Marketing and sales expense		63,462		110,209			201,427		260,805

Income from operations		66,871		146,697			406,972		564,400

Interest expense (income)		4,539		(2,015	)		18,020		10,949

Income before provision for income taxes		62,332		148,712			388,952		553,451

Income tax expense		-		4,586			4,860		11,078

Net income		62,332		144,126			384,092		542,373

Dividends on preferred stock		6,038		6,038			18,114		18,114

INCOME APPLICABLE TO COMMON SHARES	$	56,294	$	138,088		$	365,978	$	524,259

Earnings per share - basic and diluted (Note 7)
Income per common share
Basic	$	0.01	$	0.03		$	0.08	$	0.12
Diluted	$	0.01	$	0.03		$	0.08	$	0.12

Weighted average shares outstanding
Basic		4,335,839		4,232,214			4,317,716		4,214,573
Diluted		4,356,947		4,294,214			4,357,273		4,228,943

	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Federal - deferred	$	-	$	-	$	-	$	-
State and local		-		4,586		4,860		11,078
	$	-	$	4,586	$	4,860	$	11,078

2019	$	26,952
2020		107,808
2021		91,398
2022		21,756
2023		16,315
Total minimum lease payments		264,229
Less amount representing interest		18,043
Present value of minimum lease payments		246,186
Less current portion		97,322
Finance lease obligations, net of current portion	$	148,864

3~~(a)~~3(a)		Certificate of Second Amended and Restated Articles of Incorporation of Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(a) to the Company’s initial Form 10-SB, filed on September 28, 2000)

3~~(b)~~3(b)		Restated Code of Regulations of Superconductive Components, Inc. (Incorporated by reference to Exhibit 3(b) to the Company’s initial Form 10-SB, filed on September 28, 2000)

3~~(c)~~3(c)		Amendment to Articles of Incorporation recording the change of the corporate name to SCI Engineered Materials, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB filed November 7, 2007).

4~~(a)~~4(a)		SCI Engineered Materials, Inc. 2011 Stock Incentive Plan (Incorporated by reference to the Company’s Definitive Proxy Statement for the 2011 Annual Meeting of Shareholders held on June 10, 2011, filed April 28, 2011).

4(b)		Superconductive Components, Inc. 2006 Stock Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders held on June 9, 2006, filed May 1, 2006).

10~~(a)~~10(a)		Description of Bonding Agreement between the Company and Konfoong Material International Co., Ltd. dated as of December 18, 2018 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated December 18, 2018).

10~~(b)~~10(b)		Employment Agreement entered into as of December 13, 2018, between Jeremy Young and the Company.

14~~(a)~~10(c)		Description of Unsecured Promissory Note administered by the U.S. Small Business Administration for funds received April 24, 2020 (Incorporated by reference to the Company’s Current Report on Form 8-K, dated April 29, 2020).

14(a)		SCI Engineered Materials Code of Ethics for the Chief Executive Officer and Chief Financial Officer (Incorporated by reference to the Company’s Current Report via the Company’s website atwww.sciengineeredmaterials.com)

31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.

31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.

32.1	*	Section 1350 Certification of Principal Executive Officer.

32.2	*	Section 1350 Certification of Principal Financial Officer.

99.1		Press Release dated ~~November 4, 2019,~~August 7, 2020, entitled “SCI Engineered Materials, Inc., Reports ~~2019 Nine Month~~Second Quarter and ~~Third Quarter~~Year-to-Date 2020 Results.”

101		The Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019,~~2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (ii) Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, (iii) Consolidated Statement of Changes in Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, (iv) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, and (v) Notes to Financial Statements.

	SCI ENGINEERED MATERIALS, INC.

Date: ~~November 4, 2019~~August 7, 2020	/s/ Jeremiah R. Young
	Jeremiah R. Young, President and Chief Executive Officer
	(Principal Executive Officer)

	/s/ Gerald S. Blaskie
	Gerald S. Blaskie, Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)