ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, news releases, and other written and oral statements. These “forward-looking statements” are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations and could cause actual results to differ materially. These factors include, among other considerations, general economic and business conditions; political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our products; inflationary and supply chain pressures; international hostilities, including war with Iran; the recovery of the Electronics/Microelectronics and Medical markets; maintenance of increased order backlog; the imposition of tariffs; timely development and market acceptance of new products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the ability to enforce patents; maintenance of operating leverage; consummation of order proposals; completion of large orders on schedule and on budget; continued sales growth in the medical and alternative energy markets; successful transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems; and realization of quarterly and annual revenues within the forecasted range of sales guidance.
We undertake no obligation to update any forward-looking statement.
Sono-Tek Corporation Fiscal Year 2026 Highlights (compared with fiscal 2025 unless otherwise noted)
We refer to the twelve-month periods ended February 28, 2026 and February 28, 2025 as fiscal 2026 and fiscal 2025, respectively.
Net Sales: Record $20.9 million, up 2% from $20.5 million in fiscal 2025, reflecting continued demand for high average selling price (“ASP”) production systems and growth in the Medical and Electronics/Microelectronics markets.
Gross Profit: $10.6 million, an increase of $821k or 8% from the prior year. Gross profit percentage increased to 51% from 48%, driven by favorable product mix and a higher concentration of domestic system shipments.
Operating Income: Increased $815,000 to $1.82 million compared to $1.01 million in fiscal 2025, reflecting improved operating leverage and higher-margin system sales.
Net Income: $1.8 million, up 42% from $1.27 million in fiscal 2025, reflecting strong margin expansion and improved profitability.
Backlog: Equipment and service-related backlog of $9.12 million at fiscal year-end, up from $8.67 million in the prior year, reaching an historically high fiscal year-end level.
Geography: US/Canada sales increased 12% or $1.4 million, driven by increased shipments of high-ASP production systems and a greater concentration of domestic revenue.
Product Categories: Integrated Coating Systems increased 91% or $3.37 million, driven by shipments of multiple high-ASP production systems. Fluxing Systems increased 53% or $246K. Multi-Axis Systems decreased 25% or -$2.62 million, primarily due to reduced demand in electrolysis-related applications.
End Markets: Medical increased 54% or $1.75 million driven by strong demand across drug eluting balloon coating, stent, and diagnostic applications. Electronics/Microelectronics increased 16% or $864K. Alternative/Clean Energy declined 19% or -$1.86 million, primarily due to reduced electrolysis-related demand driven by government policy changes, partially offset by strong solar system shipments.
Balance Sheet: No outstanding debt as of February 28, 2026, with cash, cash equivalents, and marketable securities totaling $14.8 million, compared to $11.9 million at the prior year-end.
Other Income: Interest income, dividend income, and unrealized losses on marketable securities totaled $442K, down $82K due to a slight reduction in interest rates and a decrease in unrealized gains.
Market and Geographic Diversity
We have invested significant resources to enhance our market diversity. By leveraging our core ultrasonic coating technology, we have expanded our portfolio of products, the industries we serve, and the countries in which we sell our products.
Today, we serve five industries: microelectronics/electronics, medical, alternative/clean energy, industrial markets, and emerging research and development and other.
We are a geographically diverse company with a presence either directly or through distributors and trade representatives in the United States and Canada, EMEA (Europe, Middle East and Africa), APAC (Asia Pacific) and Latin America (including Mexico). In fiscal 2026, approximately 33% of sales originated outside of the United States and Canada.
We have an established infrastructure of application process development laboratories located at our distributor sites in Japan, China, Germany, Singapore, South Korea and our home office in New York. These laboratories are equipped with Sono-Tek systems and technical personnel to conduct customer demonstrations and process development for new coating applications that our customers bring to us. Our engineering, service and sales teams all continue to grow as we expand our addressable markets and enhance our product line to include larger more sophisticated machinery and systems with increased capabilities.
We believe that the new products we have introduced, the new markets we have penetrated, and the expanded regions in which we now sell our products, are a strong foundation for our future sales growth and enhanced profitability.
Results of Operations
Sales and Gross Profit:
Fiscal Year Ended
February 28,
February 28
Change
Net Sales
Cost of Goods Sold
Gross Profit
Gross Profit %
Gross profit increased $821,000, or 8% to $10,560,000 for fiscal 2026 compared with $9,739,000 in fiscal 2025. The gross profit percentage increased to 51% for fiscal 2026, compared to 48% for fiscal 2025.
In fiscal 2026 the increase in the gross profit percentage was influenced by product mix, including a favorable mix of mature high ASP systems with reduced manufacturing costs. In addition, sales to the United States were strong, which carry fewer distributor related expenses.
Product Sales:
Twelve Months Ended
February 28,
February 28,
Change
Total
total
Fluxing Systems
In-Line Coating Systems
Multi-Axis Coating Systems
OEM Systems
Other
TOTAL
Total sales for fiscal year 2026 increased by 2%, driven primarily by significant growth in Integrated Coating Systems and Fluxing Systems, partially offset by declines in Multi-Axis Coating Systems and other product categories.
In-Line Coating System sales increased by 91%, or $3,367,000, to $7,070,000 due to shipments of multiple high ASP production systems, including several systems delivered to a key customer in the solar energy market. This increase reflects continued success in transitioning customers from research and development systems to production-scale platforms.
Fluxing System sales increased 53%, or $246,000, to $713,000, primarily driven by increased demand in Asia.
Multi-Axis Coating System sales decreased by $2,623,000, or 25%, to $8,055,000, primarily due to reduced demand in electrolysis-related applications within the Alternative/Clean Energy market.
OEM System sales decreased 18%, or $274,000, to $1,210,000, and Other product sales declined 7%, or $311,000, to $3,861,000, reflecting normal variability in customer demand and order timing.
Overall, product mix in fiscal 2026 continued to shift toward higher-value, production-scale systems, consistent with the Company’s strategic focus on expanding its portfolio of complex, high-ASP coating solutions.
Market Sales:
Twelve Months Ended
February 28,
February 28,
Change
Total
Total
Electronics/Microelectronics
Medical
Alternative Energy
Emerging R&D and Other
Industrial
TOTAL
Sales to the Medical market increased $1,754,000, or 54%, to $5,004,000 in fiscal 2026 compared to $3,250,000 in fiscal 2025. The increase was driven by strong demand for coating systems used in applications such as balloon catheter manufacturing, specialty stent coating needs, and custom medical device applications.
Electronics/Microelectronics sales increased $864,000, or 16%, to $6,290,000 in fiscal 2026 compared to $5,426,000 in fiscal 2025, reflecting continued demand for electrically active coatings for diagnostic-related applications.
Sales to the Alternative/Clean Energy market decreased $1,864,000, or 19%, to $7,974,000 in fiscal 2026 compared to $9,838,000 in fiscal 2025. The decrease was primarily attributable to reduced demand for electrolysis-related systems, influenced by reductions and eliminations of government incentives, partially offset by solar-related system shipments earlier in the fiscal year.
Industrial sales decreased $348,000, or 18%, to $1,575,000 in fiscal 2026 compared to $1,923,000 in fiscal 2025, reflecting continued variability in demand for industrial coating applications.
Emerging R&D and Other sales remained relatively unchanged and continue to represent an increasingly smaller portion of total revenue. As customer applications progress from development-stage activity to commercial adoption, the related revenue opportunity typically transitions into our larger addressable end markets, including Medical, Electronics/Microelectronics, Alternative/Clean Energy and Industrial.
Geographic Sales:
Twelve Months Ended
February 28,
February 28,
Change
U.S. & Canada
Asia Pacific (APAC)
Europe, Middle East, Africa (EMEA)
Latin America
TOTAL
In fiscal 2026, approximately 67% of our sales were to US and Canadian customers. This is compared to 61% in fiscal 2025, reflecting a continued shift toward domestic, production-oriented customers and higher-value system shipments.
Sales in the United States and Canada increased $1,440,000, or 12%, to $13,946,000 in fiscal 2026 compared to $12,506,000 in fiscal 2025. This increase was driven by increased shipments of production systems with high ASPs, including significant system deliveries to a major solar customer, as well as a greater concentration of revenue from domestic customers where we benefit from lower distribution and logistical costs.
Sales in international markets declined, with Asia Pacific decreasing $128,000, or 5%, to $2,630,000, Europe, Middle East and Africa decreasing $689,000, or 16%, to $3,742,000, and Latin America decreasing $218,000, or 27%, to $591,000. These decreases reflect variability in regional demand and the timing of system shipments.
Operating Expenses:
Twelve Months Ended
February 28,
February 28,
Change
Research and product development
Marketing and selling
General and administrative
Total Operating Expenses
Research and Product Development:
Research and product development costs decreased $170,000 to $2,554,000 for fiscal 2026 due to a decrease in salary associated with the departure of a senior engineer, a decrease in research and development materials, supplies, insurance expense and travel expenses. These decreases were partially offset by additional lab salaries.
Marketing and Selling:
Marketing and selling expenses decreased $153,000 to $3,525,000 for fiscal 2026 due to a decrease in salary expense, a decrease in travel and trade show expenses and a decrease in commission expense.
During fiscal 2026, we expended approximately $568,000 for travel and trade show expenses compared with $595,000 for the prior fiscal year, a decrease of $27,000. Our sales and marketing costs are variable, and a large portion of the costs are dependent upon trade shows and where geographically our sales are generated. We anticipate that our costs will increase in the future as we increase our trade show presence and the potential change in geographic origin of our sales from our in-house sales team to our external distributors.
In fiscal 2026, we expended approximately $635,000 for commissions as compared with $767,000 for the prior fiscal year, a decrease of $132,000. The decline was driven by a higher mix of sales closed directly by our in-house team. Our in-house team earns a consistent commission percentage on all sales. When sales are made through distributors or manufacturer representatives, we also incur their additional commissions (and related channel costs), which increase total selling costs. The shift toward direct sales reduced those third-party costs in the current period.
We expect our marketing and sales expenses to increase in fiscal 2027 as we invest in additional sales personnel, forward deployed engineering personnel, and programming talent to support new business opportunities, particularly those associated with production systems that have high ASPs to drive future growth.
General and Administrative:
General and Administrative (G&A) costs increased $329,000 to $2,656,000 for fiscal 2026 due to an increase in salaries, insurance expense, corporate expenses, stock-based compensation and other expenses. These increases were partially offset by a decrease in professional fees.
In fiscal 2026 stock-based compensation expense increased $69,000 to $317,000, compared with $248,000 in fiscal 2025. The increase in stock-based compensation expense in fiscal 2026 is due to option awards that were issued in the prior fiscal year. Option awards are expensed over three years based on vesting terms.
In the fourth quarter of fiscal 2024, we were notified by the State of California that we were required to collect sales tax on our shipments to customers in California. In connection with previous taxable sales, we collected approximately $86,000 of delinquent sales tax from our customers in fiscal 2025. As of February 29, 2024, on the basis of a preliminary analysis of our sales to our California customers commencing on April 1, 2019, we recorded an accrual in the amount of $138,000 for the estimated sales tax, penalties and interest that we may have been required to remit to the State of California.
In the second quarter of fiscal 2025, we filed all necessary sales tax returns with the State of California. Our net expense for sales tax and interest amounted to $72,000. In the second quarter of fiscal 2025, we reversed the remaining accrual of $66,000. This reversal is recorded in general and administrative expenses.
Operating Income:
Our operating income increased $815,000 or 81%, to $1,825,000 in fiscal 2026 compared with $1,010,000 for the prior fiscal year. Operating margin for fiscal 2026 increased to 9% compared with 5% in fiscal 2025. In fiscal 2026, the increase in gross profit was the key factor in the increase in operating income.
Interest and Dividend Income:
Interest and dividend income decreased $45,000 to $444,000 for fiscal 2026 as compared with $489,000 for the prior fiscal year, reflecting a minor reduction in interest rates earned on our cash balances in fiscal 2026. Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities and certificates of deposit. At February 28, 2026, the majority of our holdings are rated at or above investment grade.
Income Tax Expense:
We recorded an income tax expense of $461,000 for fiscal 2026 compared with $261,000 for the prior fiscal year. The increase in income tax expense in fiscal 2026 is due to the current year’s increase in income before income taxes offset by the application of available research and development tax credits.
The deferred tax asset decreased approximately $384,000, to $1,142,000 at February 28, 2026 from $1,525,000 at February 28, 2025. Additionally, the deferred tax liability decreased approximately $76,000, to $56,000 at February 28, 2026 from $132,000 at February 28, 2025. The net decrease in the deferred tax asset and liability was approximately $307,000 for fiscal 2026. This decrease is primarily due to the retroactive expensing of research and development expenses that were capitalized for tax purposes, prior to the enactment of the One Big Beautiful Bill Act (the “Act” or “OBBBA”) on July 4, 2025.
The Act introduced significant changes to the Internal Revenue Code, including the permanent extension of many provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) and various new tax incentives and adjustments. The financial reporting implications of the Act were recorded in the income tax provision for fiscal 2026, in accordance with ASC 740, Income Taxes.
The OBBBA did not change the statutory U.S. federal tax rate. Accordingly, the OBBBA did not compel us to remeasure our deferred tax assets and liabilities solely because of a rate change. However, the various changes in tax law did impact our current and deferred tax calculations.
The most significant tax provisions impacting us include:
Bonus Depreciation – The Act permanently restores 100% bonus depreciation for qualified property acquired and placed into service after January 19, 2025.
Research and Development (“R&D”) Costs – The Act reinstates the ability for entities to immediately expense domestic R&D costs for tax years beginning after December 31, 2024. Certain small businesses may also retroactively expense R&D costs, which were capitalized under the TCJA during the calendar years 2022 – 2024.
In accordance with the Act, for the fiscal year ended February 28, 2026, the Company has expensed the R&D costs incurred for the current calendar year end. Pursuant to the Act, R&D costs amounts previously capitalized and recorded as a deferred tax asset now are eligible to be expensed in full verses being amortized periodically over a five year term. Any prior year R&D amounts capitalized and not utilized in the current year will be carried over as a deferred tax asset. Some states have decoupled from the federal tax provisions of the Act and continue to follow the prior tax laws per the 2017 Tax Cuts and Jobs Act for capitalizing and amortizing R&D costs. The expensing of these costs is subject to taxable income limitations.
Net Income:
Net income increased $533,000 or 42%, to $1,806,000 for fiscal 2026 compared with $1,273,000 for the prior fiscal year. The increase in net income in fiscal 2026 is a result of an increase in gross profit offset by a slight increase in operating expenses and partially offset by an increase in income tax expense.
Liquidity and Capital Resources
Working Capital – Our working capital increased $2,735,000 to $16,236,000 at February 28, 2026 from $13,501,000 at February 28, 2025. The increase in working capital was primarily the result of the current year’s net income and non-cash charges partially offset by purchases of equipment and redemptions of the Company’s stock.
We aggregate cash and cash equivalents and marketable securities in managing our balance sheet and liquidity. For purposes of the following analysis, the total is referred to as “Cash.” At February 28, 2026 and February 28, 2025, our working capital included:
February 28,
February 28,
Cash
Increase
Cash and cash equivalents
Marketable securities
Total
The following table summarizes the accounts and the major reasons for the $2,879,000 increase in “Cash”:
Impact
on Cash
Reason
Net income, after adjustments to reconcile to net cash
To reconcile increase in cash.
Accounts receivable increase
Decrease due to timing of receipts.
Inventories decrease
Decrease due to strong shipments in the fourth quarter of fiscal 2026.
Customer deposits increase
Received for new orders.
Accounts payable
Timing of disbursements.
Accrued expenses
Timing of disbursements.
Prepaid and Other Assets increase
Increase in prepaid expenses.
Income taxes payable decrease
Timing of disbursements.
Equipment purchases
Equipment and facilities upgrade.
Proceeds from exercise of stock options
Received from exercise of stock options.
Treasury stock purchase
Purchase of treasury stock.
Net increase in cash
During fiscal 2026 the net increase in our marketable securities was $742,000. This increase is included in the net increase in cash in the table above.
Stockholders’ Equity – Stockholders’ Equity increased $1,982,000 from $17,792,000 at February 28, 2025 to $19,774,000 at February 28, 2026. The increase is a result of the current year’s net income of $1,806,000, proceeds from exercise of stock options of $11,000, and $317,000 in additional equity related to stock-based compensation awards. These increases were partially offset by treasury stock purchases of $151,000. The details of stock-based compensation awards are explained in Note 4 in our financial statements .
During fiscal 2025 and fiscal 2026, we acquired a total of 44,091 shares of our common stock pursuant to a Stock Repurchase Plan which terminated in January 2026. Such shares were held as treasury stock until February 2026 when they were canceled, becoming authorized but unissued.
Operating Activities – We generated $3,246,000 of cash in our operating activities in fiscal 2026 compared with generating $525,000 in fiscal 2025, an increase of $2,721,000. The increase in cash generated by operating activities was the result of increases in accounts payable, accrued expenses, an increase in customer deposits and a decrease in inventories. These sources of cash were partially offset by an increase in accounts receivable, an increase in prepaid expenses and an increase in income taxes payable.
In fiscal 2026, our accounts receivable increased $1,003,000 when compared to the prior year. The increase in accounts receivable is primarily due to a large number of sales occurring in the fourth quarter of fiscal 2026.
In fiscal 2026, customer deposit balances increased $657,000 when compared to the prior year. The increase in customer deposits is primarily due to a large number of shipments occurring in the fourth quarter of fiscal 2026.
Investing Activities – In fiscal 2026, our investing activities used $968,000 of cash compared with providing $2,550,000 in fiscal 2025. Capital spending in fiscal 2026 was $225,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements. This compares with $469,000 for the prior year period.
In fiscal 2026, we used $743,000 of cash for the purchase of marketable securities compared with $3,019,000 being generated in fiscal 2025.
Bank Credit Facilities:
We currently have a revolving credit line of $1,500,000 and a $750,000 equipment purchase facility, both of which are with a bank. The revolving credit line is collateralized by the Company’s accounts receivable and inventory. The revolving line of credit is payable on demand and must be retired for a 30-day period, once annually. As of February 28, 2026, there were no outstanding borrowings under the line of credit.
Backlog
At the end of fiscal year 2026, our total backlog amounted to $9,117,000, comprised of $8,968,000 in equipment backlog and $149,000 in services-related backlog.
Off - Balance Sheet Arrangements
We do not have any Off - Balance Sheet Arrangements as of February 28, 2026.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions and conditions.
Management’s estimates and judgements are continually evaluated and are based on historical experience and expectations regarding future events that are believed to be reasonable under the specific circumstances.
Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and may potentially result in materially different results under different assumptions and conditions.
Accounting for Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Based on management’s estimate, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Management evaluates the valuation allowance based on current estimates and historical experience. We use a recognition threshold and a measurement attribute for financial statement recognition and measurement tax positions taken or expected to be taken in a return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of February 28, 2026 and February 28, 2025, there were no uncertain tax provisions.
On July 4, 2025, the One Big Beautiful Bill Act (the “Act” or “OBBBA”) was signed into law. The Act introduces significant changes to the Internal Revenue Code, including the permanent extension of many provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) and various new tax incentives and adjustments. The financial reporting implications of the Act were recorded in the income tax provision for the quarter and year to date periods ended November 30, 2025, in accordance with ASC 740, Income Taxes.
The OBBBA did not change the statutory U.S. federal tax rate. Accordingly, the OBBBA did not compel the Company to remeasure its deferred tax assets and liabilities solely because of a rate change. However, the various changes in tax law did impact the Company’s current and deferred tax calculations.
The most significant tax provisions impacting the Company include:
Bonus Depreciation – The Act permanently restores 100% bonus depreciation for qualified property acquired and placed into service after January 19, 2025.
Research and Development Costs – The Act reinstates the ability for entities to immediately expense domestic research and development costs for tax years beginning after December 31, 2024. Certain small businesses may also retroactively expense research and development costs, which were capitalized under the TCJA during the calendar years 2022 – 2024.
In accordance with the Act, for the fiscal year ended February 28, 2026, the Company has expensed the R&D costs incurred for the current calendar year end. Pursuant to the Act, R&D costs amounts previously capitalized and recorded as a deferred tax asset now are eligible to be expensed in full verses being amortized periodically over a five year term. Any prior year R&D amounts capitalized and not utilized in the current year will be carried over as a deferred tax asset. Some states have decoupled from the federal tax provisions of the Act and continue to follow the prior tax laws per the 2017 Tax Cuts and Jobs Act for capitalizing and amortizing R&D costs. The expensing of these costs is subject to taxable income limitations.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which 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 to receive in exchange for those goods or services.
Judgement is required when determining at what point in time control of the Company’s manufactured equipment is transferred to its customers. Management’s judgement is based on each customer contract and the transfer of control of the equipment to the customer. The sales revenue to be recorded is based on each contract.
Impact of New Accounting Pronouncements
In November 2024, the FASB issued ASU 2024-03 – Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which is intended to provide more detailed information about specified about specified categories of expenses (purchases of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the consolidated statement of operations. The guidance in this ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements and related disclosures.
Other than ASU 2023-09 discussed above, accounting pronouncements issued but not yet effective have been deemed to be not applicable or the adoption of such accounting pronouncements is not expected to have a material impact on the financial statements of the Company.
