UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: August 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 000-16035

(Exact name of registrant as specified in its charter)

New York	14-1568099
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

2012 Rt. 9W, Milton, NY 12547

(Address of Principal Executive Offices) (Zip Code)

Issuer's telephone no., including area code: (845) 795-2020

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	SOTK	NASDAQ

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 ☑ No ☐

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes ☐ 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 ☑	Smaller reporting company ☑
	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 ☑

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

	Outstanding as of October 12, 2021
Class
Common Stock, par value $.01 per share	15,543,133

SONO-TEK CORPORATION

INDEX

	Page
Part I - Financial Information

Item 1 – Condensed Consolidated Financial Statements:	1 - 4

Condensed Consolidated Balance Sheets – August 31, 2021 (Unaudited) and February 28, 2021	1

Condensed Consolidated Statements of Income – Six and Three Months Ended August 31, 2021 and 2020 (Unaudited)	2

Condensed Consolidated Statements of Stockholders’ Equity – Six and Three Months Ended August 31, 2021 and 2020 (Unaudited)	3

Condensed Consolidated Statements of Cash Flows – Six Months Ended August 31, 2021 and 2020 (Unaudited)	4

Notes to Unaudited Condensed Consolidated Financial Statements	5 - 11

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	12 –19

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	19

Item 4 – Controls and Procedures	19

Part II - Other Information	20

Signatures and Certifications	21

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	August 31, 2021		February 28,
	(Unaudited)		2021
ASSETS

Current Assets:
Cash and cash equivalents	$	6,143,106	$	4,084,078
Marketable securities		3,554,124		4,563,470
Accounts receivable (less allowance of $56,123)		1,482,334		1,757,802
Inventories, net		2,923,855		2,611,106
Prepaid expenses and other current assets		124,214		151,316
Total current assets		14,227,633		13,167,772

Land		250,000		250,000
Buildings, net		1,525,958		1,575,135
Equipment, furnishings and building improvements, net		1,057,084		1,075,190
Intangible assets, net		85,736		95,456
Deferred tax asset		236,120		259,838

TOTAL ASSETS	$	17,382,531	$	16,423,391

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	1,080,255	$	1,294,483
Accrued expenses		1,398,318		1,750,916
Customer deposits		1,916,784		1,166,541
Income taxes payable		202,188		53,567
Total current liabilities		4,597,545		4,265,507

Deferred tax liability		183,011		205,562
Long term debt, less current maturities		—		1,001,640
Total liabilities		4,780,556		5,472,709

Stockholders’ Equity
Common stock, $.01 par value; 25,000,000 shares authorized, 15,531,285 and 15,452,656 shares issued and outstanding, respectively		155,313		154,527
Additional paid-in capital		9,104,925		9,064,994
Accumulated earnings		3,341,737		1,731,161
Total stockholders’ equity		12,601,975		10,950,682

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	17,382,531	$	16,423,391

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Six Months Ended August 31,					Three Months Ended August 31,
	2021		2020			2021		2020

Net Sales	$	7,714,935	$	6,909,185		$	4,070,467	$	3,480,641
Cost of Goods Sold		3,816,771		3,727,486			1,996,468		1,859,675
Gross Profit		3,898,164		3,181,699			2,073,999		1,620,966

Operating Expenses
Research and product development costs		826,213		834,940			412,397		423,516
Marketing and selling expenses		1,504,245		1,388,987			739,603		682,270
General and administrative costs		776,222		572,254			473,423		313,852
Total Operating Expenses		3,106,680		2,796,181			1,625,423		1,419,638

Operating Income		791,484		385,518			448,576		201,328

Interest Expense		—		(17,704	)		—		(9,287	)
Interest and Dividend Income		11,000		25,483			7,640		2,837
Other Income		—		19,519			—		8,084
Paycheck Protection Program Loan Forgiveness		1,005,372		—			—		—

Income Before Income Taxes		1,807,856		412,816			456,216		202,962

Income Tax Expense		197,280		67,125			112,392		25,199

Net Income	$	1,610,576	$	345,691		$	343,824	$	177,763

Basic Earnings Per Share	$	0.10	$	0.02		$	0.02	$	0.01

Diluted Earnings Per Share	$	0.10	$	0.02		$	0.02	$	0.01

Weighted Average Shares - Basic		15,500,952		15,410,952			15,507,484		15,424,126

Weighted Average Shares - Diluted		15,613,930		15,530,910			15,602,359		15,533,010

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Six Months Ended August 31, 2021


	Common Stock				Additional			Accumulated Earnings		Total
	Par Value $.01				Paid – In			Accumulated		Stockholders’
	Shares		Amount		Capital			Earnings		Equity
Balance, February 28, 2021		15,452,656	$	154,527	$	9,064,994		$	1,731,161	$	10,950,682
Stock based compensation expense						21,637					21,637
Cashless exercise of stock options		49,901		499		(499	)				—
Net Income									1,266,752		1,266,752
Balance, May 31, 2021(Unaudited)		15,502,557	$	155,026	$	9,086,132		$	2,997,913	$	12,239,071
Stock based compensation expense						19,080					19,080
Cashless exercise of stock options		28,728		287		(287	)				—
Net Income									343,824		343,824
Balance, August 31, 2021 (Unaudited)		15,531,285	$	155,313	$	9,104,925		$	3,341,737	$	12,601,975
Common Stock Par Value $.01Additional Paid-In Capital
Three and Six Months Ended August 31, 2020

	Common Stock Par Value $.01				Additional Paid – In			Accumulated		Total Stockholders’
	Shares		Amount		Capital			Earnings		Equity
Balance, February 29, 2020		15,348,180	$	153,482	$	9,018,406		$	610,519	$	9,782,407
Stock based compensation expense						8,097					8,097
Cashless exercise of stock options		74,805		748		(748	)				—
Net Income									167,928		167,928
Balance, May 31, 2020 (Unaudited)		15,422,985	$	154,230	$	9,025,755		$	778,447	$	9,958,432
Stock based compensation expense						7,906					7,906
Cashless exercise of stock options		12,950		130		(130	)				—
Net Income									177,763		177,763
Balance, August 31, 2020 (Unaudited)		15,435,935	$	154,360	$	9,033,531		$	956,210	$	10,144,101

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended August 31,
	2021			2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,610,576		$	345,691
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		224,233			214,280
Stock based compensation expense		40,717			16,003
Inventory reserve		(24,919	)		36,000
Paycheck Protection Program Loan Forgiveness		(1,005,372	)		—
Deferred tax expense		1,167			—
Decrease (Increase) in:
Accounts receivable		275,468			(418,947	)
Inventories		(287,830	)		(116,157	)
Prepaid expenses and other current assets		27,101			58,863
(Decrease) Increase in:
Accounts payable and accrued expenses		(563,094	)		(250,099	)
Customer deposits		750,243			(660,588	)
Income taxes payable		148,622			(6,878	)
Net Cash Provided by (Used in) Operating Activities		1,196,912			(781,832	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, furnishings and leasehold improvements		(147,230	)		(290,347	)
Capital expenditure grant proceeds		—			100,000
Sale (purchase) of marketable securities		1,009,346			366,639
Net Cash Provided by Investing Activities		862,116			176,292

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable		—			1,001,640
Repayment of long term debt		—			(84,040	)
Net Cash Provided by Financing Activities		—			917,600

NET INCREASE IN CASH AND CASH EQUIVALENTS		2,059,028			312,060

CASH AND CASH EQUIVALENTS
Beginning of period		4,084,078			3,659,551
End of period	$	6,143,106		$	3,971,611

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid	$	—		$	13,972
Income Taxes Paid	$	47,488		$	74,004

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED AUGUST 31, 2021 and 2020

NOTE 1: BUSINESS DESCRIPTION

Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporated in New York on March 21, 1975. We are the world leader in the design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to add functional properties, protect or strengthen surfaces on parts and components for the microelectronics/electronics, alternative energy, medical, industrial and emerging research & development/other markets. We design and manufacture custom-engineered ultrasonic coating systems incorporating our patented technology, in combination with strong applications engineering knowledge, to assist our customers in achieving their desired coating solutions.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended February 28, 2021 (“fiscal year 2021”) contained in the Company’s 2021 Annual Report on Form 10-K filed with the SEC on May 28, 2021. The Company’s current fiscal year ends on February 28, 2022 (“fiscal 2022”).

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable, net - In the normal course of business, the Company extends credit to customers. Accounts receivable, less the allowance for doubtful accounts, reflect the net realizable value of receivables and approximate fair value. The Company records a bad debt expense/allowance based on management’s estimate of uncollectible accounts. All outstanding accounts receivable accounts are reviewed for collectability on an individual basis.

Cash and Cash Equivalents - Cash and cash equivalents consist of money market mutual funds, short term commercial paper and short-term certificates of deposit with original maturities of 90 days or less.

Consolidation - The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC (“SIP”) in conformity with generally accepted accounting principles in the United States (“GAAP”). SIP operates as a real estate holding company for the Company’s real estate operations. All intercompany accounts and transactions have been eliminated in consolidation.

Earnings Per Share - Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method.

Equipment, Furnishings and Leasehold Improvements - Equipment, furnishings and leasehold improvements are stated at cost. Depreciation of equipment and furnishings is computed by use of the straight-line method based on the estimated useful lives of the assets, which range from three to five years.

Fair Value of Financial Instruments - The Company applies Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best information available in the circumstances.

The carrying amounts of financial instruments reported in the accompanying unaudited condensed consolidated financial statements for current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of the financial instruments.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:

Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.

The fair values of financial assets of the Company were determined using the following categories at August 31, 2021 and February 28, 2021, respectively:

	Level 1		Level 2		Level 3		Total
	Level 1		Level 2
Marketable Securities – August 31, 2021	$	3,554,124	$	—	$	—	$	3,554,124

Marketable Securities – February 28, 2021	$	4,261,927		301,543	$	—	$	4,563,470

Marketable Securities include mutual funds, certificates of deposit and US Treasury securities, totaling $3,554,124 and $4,563,470 that are considered to be highly liquid and easily tradeable as of August 31, 2021 and February 28, 2021, respectively. Mutual funds and US Treasury securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 and certificates of deposit are classified as Level 2 within the Company’s fair value hierarchy.

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. 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. The Company uses a recognition threshold and a measurement attribute for financial statement recognition and measurement of 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 August 31, 2021 and February 28, 2021, there were no uncertain tax positions.

Intangible Assets - Include costs of patent applications which are deferred and charged to operations over seventeen years for domestic patents and twelve years for foreign patents. The accumulated amortization of patents is $187,206 and $181,922 at August 31, 2021 and February 28, 2021, respectively. Annual amortization expense of such intangible assets is expected to be approximately $11,000 per year for the next five years.

Inventories - Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method for raw materials, subassemblies and work-in-progress and the specific identification method for finished goods. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market conditions.

Land and Buildings - Land and buildings are stated at cost. Buildings are being depreciated by use of the straight-line method based on an estimated useful life of forty years.

Long-Lived Assets - The Company periodically evaluates the carrying value of long-lived assets, including intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment losses were identified or recorded in the six months ended August 31, 2021 and August 31, 2020 on the Company’s long-lived assets.

Management Estimates - The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements - In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU became effective for the Company on March 1, 2021 and is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently in the process of its analysis of the impact of this guidance on its consolidated financial statements and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

Other than Accounting Standards Update (“ASU”) 2019-12 and ASU 2016-13 discussed above, all new accounting pronouncements issued but not yet effective have been deemed to be not applicable to the Company. Hence, the adoption of these new accounting pronouncements, once effective, is not expected to have an impact on the Company.

Product Warranty - Expected future product warranty expense is recorded when the product is sold.

Reclassifications – Where appropriate, certain reclassifications have been made to the prior period to conform to the presentations of the current period.

Research and Product Development Expenses - Research and product development expenses represent engineering and other expenditures incurred for developing new products, for refining the Company's existing products and for developing systems to meet unique customer specifications for potential orders or for new industry applications and are expensed as incurred.

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.

Shipping and Handling Costs - Shipping and handling costs are included in cost of sales in the accompanying unaudited consolidated statements of income.

Stock-Based Compensation - The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment.

ASC 718 requires the recognition of the fair value of stock compensation expense on a straight line basis over the requite service period, based on the terms of the award in net income. The Company accounts for forfeitures as they occur. Although every effort is made to ensure the accuracy of the Company’s estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact the Company’s financial statements for each respective reporting period.

Uncertainties - Since early 2020, when the World Health Organization established the transmissible and pathogenic coronavirus a global pandemic, there have been business slowdowns. The outbreak of such a communicable disease has resulted in a widespread health crisis which has adversely affected general commercial activity and the economies and financial markets of many countries, including the United States. As the outbreak of the disease has continued through fiscal 2022, the measures taken by the governments of countries affected have adversely affected the Company’s business, financial condition, and results of operations. The pandemic had a slight adverse impact on sales and the demand for products in fiscal 2021, resulting in sales that were less than expected at the beginning of fiscal 2021.

NOTE 3: REVENUE RECOGNITION

A majority of the Company’s sales revenue is derived primarily from short term contracts with customers, which, primarily, are in effect for less than twelve months. Sales revenue from manufactured equipment transferred at a single point in time accounts for a majority of the Company’s revenue.

Sales revenue is recognized when control of the Company’s manufactured equipment is transferred to its customers, in an amount that reflects the consideration the Company expects to receive based upon the agreed transaction price. The Company’s performance obligations are satisfied when its customers take control of the purchased equipment, which is based on the contract terms. Based on prior experience, the Company reasonably estimates its sales returns and warranty reserves. Sales are presented net of discounts and allowances. Discounts and allowances are determined when a sale is negotiated. The Company does not grant its customers or independent representatives, the ability to return equipment nor does it grant price adjustments after a sale is complete.

The Company does not capitalize any sales commission costs related to the acquisition of a contract. All commissions related to a performance obligation that are satisfied at a point in time are expensed when the customer takes control of the purchased equipment.

The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one-year or less. The Company applies the transition practical expedient in paragraph ASC 606-10-65-1(f)(3) and does not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue.

At August 31, 2021, the Company had received $1,917,000 in cash deposits, and had issued Letters of Credit in the amount of $618,000 to secure these cash deposits. At August 31, 2021, the Company was utilizing $618,000 of its available credit line to collateralize these letters of credit.

At February 28, 2021, the Company had received $1,167,000 in cash deposits for customer orders. During the six months ended August 31, 2021, the Company recognized $457,000 of these deposits as revenue.

The Company’s sales revenue, by product line is as follows:

	Three Months Ended August 31,						Six Months Ended August 31,
	2021		% of total	2020		% of total	2021		% of total	2020		% of total
Fluxing Systems	$	117,000	3%	$	94,000	3%	$	476,000	6%	$	438,000	6%
Integrated Coating Systems		565,000	14%		673,000	19%		720,000	9%		1,849,000	27%
Multi-Axis Coating Systems		1,891,000	46%		1,985,000	57%		3,970,000	52%		2,898,000	42%
OEM Systems		845,000	21%		232,000	7%		1,171,000	15%		654,000	9%
Other		652,000	16%		497,000	14%		1,378,000	18%		1,070,000	16%
TOTAL	$	4,070,000		$	3,481,000		$	7,715,000		$	6,909,000

NOTE 4: INVENTORIES

Inventories consist of the following:

	August 31,			February 28,
	2021			2021
Raw materials and subassemblies	$	1,299,693		$	1,081,591
Finished goods		580,383			786,785
Work in process		1,303,140			1,027,010
Total		3,183,216			2,895,386
Less: Allowance		(259,361	)		(284,280	)
Net inventories	$	2,923,855		$	2,611,106

NOTE 5: STOCK OPTIONS

Under the 2013 Stock Incentive Plan ("2013 Plan"), options can be granted to officers, directors, consultants and employees of the Company and its subsidiaries to purchase up to 2,500,000 shares of the Company's common stock. Under the 2013 Plan options expire ten years after the date of grant. As of August 31, 2021, there were 442,625 options outstanding under the 2013 Plan, of which 306,500 are vested.

Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"), until May 2013, options were available to be granted to officers, directors, consultants and employees of the Company and its subsidiaries to purchase up to 1,500,000 shares of the Company's common stock. As of August 31, 2021, there were 15,000 options outstanding and vested under the 2003 Plan, under which no additional options may be granted.

During the three months ended August 31, 2021, 38,500 options were exercised on a net cashless basis, which resulted in 28,728 shares of common stock being issued. During the six months ended August 31, 2021, 101,834 options were exercised on a net cashless basis, which resulted in 78,629 shares of common stock being issued.

NOTE 6: STOCK BASED COMPENSATION

The Company adopted ASC 718, “Share Based Payments.” which requires companies to expense the value of employee stock options and similar awards.

During the three and six months ended August 31, 2021, the Company granted options to acquire 62,750 shares to employees and directors exercisable at $3.19. The options granted to employees and directors vest over three years and expire in ten years. The options had a weighted average grant date fair value of $1.60 per share.

The weighted-average fair value of options are estimated on the date of grant using the Black-Scholes options-pricing model. The weighted-average Black-Scholes assumptions are as follows:

		Six Months Ended August 31, 2021
Expected Life		5 - 8 years
Risk free interest rate		0.78% - 1.04%
Expected volatility		50.73% - 52.1%
Expected dividend yield		0%

Total compensation related to non-vested options not yet recognized as of August 31, 2021 was $243,000 and will be recognized on a straight line basis over the next 2.5 years.

For the three and six months ended August 31, 2021 and 2020, net income and earnings per share reflect the actual deduction for stock-based compensation expense. The impact of applying ASC 718 approximated $19,000 and $8,000 in additional compensation expense during the three months ended August 31, 2021 and 2020, respectively. The impact of applying ASC 718 approximated $41,000 and $16,000 in additional compensation expense during the six months ended August 31, 2021 and 2020, respectively. Such amounts are included in general and administrative expenses on the unaudited consolidated statements of income.

NOTE 7: EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:


	Six Months Ended August 31,				Three Months Ended August 31,
	2021		2020		2021		2020

Numerator for basic and diluted earnings per share	$	1,610,576	$	345,691	$	343,824	$	177,763

Denominator for basic earnings per share – weighted average		15,500,952		15,410,952		15,507,484		15,424,126

Effects of dilutive securities
Stock options for employees, directors and outside consultants		112,978		119,958		94,875		108,884

Denominator for diluted earnings per share		15,613,930		15,530,910		15,602,359		15,533,010

Basic Earnings Per Share	$	0.10	$	0.02	$	0.02	$	0.01
Diluted Earnings Per Share	$	0.10	$	0.02	$	0.02	$	0.01

NOTE 8: LONG TERM DEBT

Long-term debt consists of the following:

	August 31,		February 28,
	2021		2021
Note Payable, bank, unsecured, Paycheck Protection Program funding, initially scheduled to be payable in monthly installments of principal and interest of $56,370 through April 2022. Interest rate 1%. 2-year term. Under the terms of the CARES Act, forgiveness for all or a portion of the loan may be granted based upon use of the loan proceeds for eligible payroll and related payroll costs and other qualified expenses. The Company applied for forgiveness of this obligation in December 2020. Under the Paycheck Protection Program Flexibility Act, payments of principal and interest shall be deferred until the date that the Small Business Administration remits the forgiveness amount to the Company’s lender or determines that some or all of the PPP loan is not eligible for forgiveness. If all or a portion of the loan is not forgiven, the unforgiven balance and accrued interest shall be payable during the remainder of the term of the loan. The SBA forgave this loan in its entirety in April 2021. During the six months ended August 31, 2021, the Company recorded a gain on the forgiveness of the PPP Loan and accrued interest in the amount of $1,005,372. The gain on the forgiveness of the PPP Loan is a non-taxable event.		—		1,001,640

Total long-term debt	$	—	$	1,001,640

NOTE 9: REVOLVING LINE OF CREDIT

The Company has a $1,500,000 revolving line of credit at prime which was 3.25% at August 31, 2021 and February 28, 2021. The revolving credit line is collateralized by the Company’s accounts receivable and inventory. The revolving credit line is payable on demand and must be retired for a 30-day period, once annually. If the Company fails to perform the 30-day annual pay down or if the bank elects to terminate the credit line, the bank may, at its option, convert the outstanding balance to a 36-month term note with payments including interest in 36 equal installments.

As of August 31, 2021, $618,000 of the Company’s credit line was being utilized to collateralize letters of credit issued to customers that have remitted cash deposits to the Company on existing orders. The letters of credit expire in 2022. As of August 31, 2021, there were no outstanding borrowings under the line of credit and the unused portion of the credit line was $882,000 as of August 31, 2021.

NOTE 10: CUSTOMER CONCENTRATIONS AND FOREIGN SALES

Export sales to customers located outside the United States and Canada were approximately as follows:

	Six Months Ended August 31,				Three Months Ended August 31,
	2021		2020		2021		2020

Asia Pacific (APAC) Asia Pacific (APAC)	$	2,853,000	$	2,377,000	$	1,631,000	$	455,000
Europe, Middle East, Asia (EMEA) Europe, Middle East, Asia (EMEA)		1,436,000		1,198,000		593,000		767,000
Latin AmericaLatin America		645,000		423,000		293,000		103,000
	$	4,934,000	$	3,998,000	$	2,517,000	$	1,325,000

During first half of fiscal 2022 and fiscal 2021, sales to foreign customers accounted for approximately $4,934,000 and $3,998,000, or 64% and 58% respectively, of total revenues.

During second quarter of fiscal 2022 and fiscal 2021, sales to foreign customers accounted for approximately $2,517,000 and $1,325,000, or 62% and 38% respectively, of total revenues.

The Company had two customers which accounted for 26% of sales during the first half of fiscal 2022. The Company had five customers which accounted for 47% of sales during the second quarter of fiscal 2022. Two customers accounted for 55% of the outstanding accounts receivables at August 31, 2021.

The Company had six customers which accounted for 47% of sales during the first half of fiscal 2021.The Company had six customers which accounted for 54% of sales during the second quarter of fiscal 2021. Two customers accounted for 64% of the outstanding accounts receivables at February 28, 2021 .

Foreign CustomersSales RevenueAccounts ReceivablesTwo CustomersFive CustomersSix Customers

ITEM 2 – 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; the duration and scope of the COVID-19 pandemic; the extent and duration of the pandemic’s adverse effect on economic and social activity, consumer confidence, discretionary spending and preferences, labor and healthcare costs, and unemployment rates, any of which may reduce demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us; our ability to sell and provide our services and products, including as a result of continued pandemic related travel restrictions, mandatory business closures, and stay-at home or similar orders; any temporary reduction in our workforce, closures of our offices and facilities and our ability to adequately staff and maintain our operations resulting from the pandemic; the ability of our customers and suppliers to continue their operations as result of the pandemic, which could result in terminations of contracts, losses of revenue; the recovery of the Electronics/ Microelectronics and Medical markets following COVID-19 related slowdowns; and further adverse effects to our supply chain; maintenance of increased order backlog, including effects of any COVID-19 related cancellations; 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; maintenance of increased order backlog; 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 forecasted range of sales guidance.

We undertake no obligation to update any forward-looking statement.

Overview

Founded in 1975, Sono-Tek Corporation designs and manufactures ultrasonic coating systems that apply precise, thin film coatings to a multitude of products for the microelectronics/electronics, alternative energy, medical and industrial markets, including specialized glass applications in construction and automotive. We also sell our products to emerging research and development and other markets. We have invested significant resources to enhance our market diversity by leveraging our core ultrasonic coating technology. As a result, we have increased our portfolio of products, the industries we serve and the countries in which we sell our products.

Our ultrasonic nozzle systems use high frequency, ultrasonic vibrations that atomize liquids into minute drops that can be applied to surfaces at low velocity providing thin layers of functional or protective materials over a surface such as glass or metals. Our solutions are environmentally-friendly, efficient and highly reliable. They enable dramatic reductions in overspray, savings in raw materials, water and energy usage and provide improved process repeatability, transfer efficiency, high uniformity and reduced emissions.

We believe product superiority is imperative and that it is attained through the extensive experience we have in the coatings industry, our proprietary manufacturing know-how and skills and the unique work force we have built over the years. Our growth strategy is to leverage our innovative technologies, proprietary know-how, unique talent and experience, and global reach to further advance the use of ultrasonic coating technologies for the microscopic coating of surfaces in a broader array of applications that enable better outcomes for our customers’ products and processes.

We are a global business with approximately 64% of our sales generated from outside the United States and Canada in the first six months of fiscal 2022. Our direct sales team and our distributor and sales representative network are located in North America, Latin America, Europe and Asia. We continue to expand our sales capabilities by increasing the size of our direct sales force and adding new distributors and sales representatives (”reps”). In addition, we have established testing labs at our distribution partner sites in China, Taiwan, Germany, Turkey, Korea and Japan, while also expanding our first testing lab that is co-located with our manufacturing facilities in New York. These labs provide significant value for demonstrating to prospective customers the capabilities of our equipment and enabling us to develop custom solutions to meet their needs. Providing customers visiting our labs with a high level of application engineering expertise to develop their unique coating processes is our focus, as we continually expand Sono-Tek’s services to best support the needs of our customers.

Over the last decade, we have shifted our business from primarily selling our ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems to original equipment manufacturers (“OEMs”). This strategy has resulted in significant growth of our average unit selling price; with our larger machines often selling for over $300,000 and system prices sometimes reaching over $1,000,000. As a result of this transition, we have broadened our addressable market and we believe that we can grow sales on a larger scale. We expect that we will experience wide variations in both order flow and shipments from quarter to quarter.

Second Quarter Fiscal 2022 Highlights (compared with the second quarter of fiscal 2021 unless otherwise noted) We refer to the three-month periods ended August 31, 2021 and 2020 as the second quarter of fiscal 2022 and fiscal 2021, respectively.

Net sales were $4,070,000, up 17% or $589,000, driven by increased sales of OEM systems to the China market.

Gross Profit increased 28% to $2,074,000 due to higher sales and product mix.

Gross Margin expanded 440 basis points to 51.0% primarily due to product mix.

Operating income increased 123% to $449,000 due to the increase in gross profit, partially offset by increases in operating expenses.

Income before taxes increased 125% to $456,000.

Backlog on August 31, 2021 reached a record high of $6,332,000, an increase of 45% compared with backlog of $4,380,000 on May 31, 2021 (the end of the fiscal Q1) and increased 64% compared to backlog of $3,851,000 on February 28, 2021.

First Half Fiscal 2022 Highlights (compared with the first half of fiscal 2021 unless otherwise noted) We refer to the six-month periods ended August 31, 2021 and 2020 as the first half of fiscal 2022 and fiscal 2021, respectively.

Net Sales were $7,715,000, an increase of 12%, primarily driven by strength in the semiconductor and electronic diagnostic coating markets.

Gross Profit increased 23% to $3,898,000 due to higher sales and product mix.

Gross Margin expanded 440 basis points to 50.5% primarily due to product mix and lower than expected warranty and installation costs.

Operating Income increased 105% to $791,000 due to the increase in gross profit, partially offset by increases in operating expenses.

Income before taxes increased 94% to $802,000, excluding the benefit from PPP loan forgiveness of $1.0 million.

As of August 31, 2021, the Company had no outstanding debt.

RESULTS OF OPERATIONS

Sales:

Product Sales

	Three Months Ended August 31,				Change						Six Months Ended August 31,				Change
	2021		2020		$			%			2021		2020		$			%
Fluxing Systems	$	117,000	$	94,000		23,000			24%		$	476,000	$	438,000		38,000			9%
Integrated Coating Systems		565,000		673,000		(108,000	)		(16%	)		720,000		1,849,000		(1,129,000	)		(61%	)
Multi-Axis Coating Systems		1,891,000		1,985,000		(94,000	)		(5%	)		3,970,000		2,898,000		1,072,000			37%
OEM Systems		845,000		232,000		613,000			264%			1,171,000		654,000		517,000			79%
Other		652,000		497,000		155,000			31%			1,378,000		1,070,000		308,000			29%
TOTAL	$	4,070,000	$	3,481,000		589,000			17%		$	7,715,000	$	6,909,000		806,000			12%

Sales growth of 17% during the second quarter of fiscal 2022 was primarily driven by a significant shipment of multi-axis coating systems used to coat electronic diagnostic devices for rapid COVID-19 test kits, as well as strong sales of OEM systems used in the Semiconductor and Spray Fluxing markets. The sales increases in these product lines more than offset the decrease in Integrated Coating Systems sales, which were lower due to the shipment of a large integrated coating machine in last year’s first quarter.

Market Sales

	Three Months Ended August 31,				Change						Six Months Ended August 31,				Change
	2021		2020		$			%			2021		2020		$			%
Electronics/Microelectronics	$	1,448,000	$	811,000		637,000			79%		$	3,707,000	$	3,051,000		656,000			22%
Medical		1,097,000		961,000		136,000			14%			1,814,000		1,653,000		161,000			10%
Alternative Energy		957,000		826,000		131,000			16%			1,389,000		1,221,000		168,000			14%
Emerging R&D and Other		269,000		479,000		(210,000	)		(44%	)		435,000		516,000		(81,000	)		(16%	)
Industrial		299,000		404,000		(105,000	)		(26%	)		370,000		468,000		(98,000	)		(21%	)
TOTAL	$	4,070,000	$	3,481,000		589,000			17%		$	7,715,000	$	6,909,000		806,000			12%

Sales to the Electronics market recorded significant growth of 79% in the second quarter, primarily driven by strong sales to China for our OEM systems which are used in the semiconductor market, and continued acceleration of Sono-Tek products for coating electronic diagnostic devices used in rapid COVID-19 test kits. The Alternative Energy market was also strong with growing investments in the clean energy sector from both government and private industry driving demand for Sono-Tek machines for coating membranes used in fuel cells and carbon capture applications.

Geographic Sales

	Three Months Ended August 31,				Change						Six Months Ended August 31,				Change
	2021		2020		$			%			2021		2020		$			%
U.S. & Canada	$	1,553,000	$	2,156,000		(603,000	)		(28%	)	$	2,781,000	$	2,911,000		(130,000	)		(4%	)
Asia Pacific (APAC)		1,631,000		455,000		1,176,000			258%			2,853,000		2,377,000		476,000			20%
Europe, Middle East, Asia (EMEA)		593,000		767,000		(174,000	)		(23%	)		1,436,000		1,198,000		238,000			20%
Latin America		293,000		103,000		190,000			184%			645,000		423,000		222,000			52%
TOTAL	$	4,070,000	$	3,481,000		589,000			17%		$	7,715,000	$	6,909,000		806,000			12%

In the first half of fiscal 2022, approximately 64% of sales originated outside of the United States and Canada compared with 58% in the first half of fiscal 2021.

In the second quarter of fiscal 2022, approximately 62% of sales originated outside of the United States and Canada compared with 38% in the second quarter of fiscal 2021.

Strong sales in Q2 FY2022 were primarily driven from APAC, reflecting the transition of several countries emerging from COVID-19 lockdowns to bring their manufacturing operations back online. APAC shipments during the second quarter included both a newly developed medical device coating machine for implantable devices and several stent coating machines to China, a newly developed EMI coating system to Singapore, and a repeat order for our latest balloon catheter coating machine that was shipped to Japan.

Sales to the U.S. & Canada dipped in Q2 FY2022, primarily due to the shipment of a large float glass coating line in Q2 FY2021, which did not repeat in Q2 FY2022. Sales of large industrial float glass machines typically varies from period to period.

Sono-Tek continues to adapt and refocus its sales efforts to those countries that are operational during COVID-19 peaks and dips. This strategy has been helpful in softening the impact of the pandemic on the Company’s operations and will continue to be part of Sono-Tek’s go-to-market strategy for the foreseeable future.

Gross Profit:

	Three Months Ended August 31,				Change				Six Months Ended August 31,				Change
	2021		2020		$		%		2021		2020		$		%
Net Sales	$	4,070,000	$	3,481,000		589,000		17%	$	7,715,000	$	6,909,000		806,000		12%
Cost of Goods Sold		1,996,000		1,860,000		136,000		7%		3,817,000		3,727,000		90,000		2%
Gross Profit	$	2,074,000	$	1,621,000		453,000		28%	$	3,898,000	$	3,182,000		716,000		23%

Gross Profit %		51.0%		46.6%						50.5%		46.1%

For the second quarter of fiscal 2022, gross profit increased $453,000, or 28%, compared with the second quarter of fiscal 2021. The gross profit margin was 51.0% compared with 46.6% for the prior year period. The improvement in the gross profit margin is due to increased sales combined with higher sales margins.

Gross profit increased $716,000, or 23%, to $3,898,000 for the first half of fiscal 2022 compared with $3,182,000 in the first half of fiscal 2021. The gross profit margin was 50.5% compared with 46.1% for the prior year period. The improvement in the gross profit margin is due to increased sales combined with higher sales margins.

Operating Expenses:

	Three Months Ended August 31,				Change						Six Months Ended August 31,				Change
	2021		2020		$			%			2021		2020		$			%
Research and product development	$	412,000	$	424,000		(12,000	)		(3%	)	$	827,000	$	835,000		(8,000	)		(1%	)
Marketing and selling		740,000		682,000		58,000			9%			1,504,000		1,389,000		115,000			8%
General and administrative		473,000		314,000		159,000			51%			776,000		572,000		204,000			36%
Total Operating Expenses	$	1,625,000	$	1,420,000		205,000			14%		$	3,107,000	$	2,796,000		311,000			11%

Research and Product Development:

Research and product development costs decreased in the second quarter of fiscal 2022 due to decreased salaries and related costs. In the second quarter of fiscal 2022, some of our personnel, previously assigned to research and development projects, were assigned to specific customer sales orders and the associated costs were recorded in inventory, as incurred.

Marketing and Selling:

Marketing and selling costs increased in the second quarter of fiscal 2022 due to increases in commissions, salaries and travel expenses. These increases were partially offset by decreased trade show expenses as a result of the COVID-19 outbreak.

Marketing and selling costs increased in the first half of fiscal 2022 due to increased commission expense. This increase was partially offset by decreased trade show expenses in the first half of fiscal 2022.

In the second quarter of fiscal 2022, we expended approximately $163,000 for commissions as compared with $117,000 for the second quarter of fiscal 2021, an increase of $46,000. In the first half of fiscal 2022, we expended approximately $387,000 for commissions as compared with $247,000 for the first half of fiscal 2021, an increase of $140,000. The increase in commission expense in the first quarter and second half of fiscal 2022 is due to an increase in external commission expense.

General and Administrative:

In the second quarter of fiscal 2022 and first half of fiscal 2022 we experienced increases in salaries, professional fees, corporate expenses and stock- based compensation expense. In August 2021, the Company’s stock was approved for listing on the Nasdaq Capital Market. In the second quarter of fiscal 2022, the Company expensed $75,000 in application and entry fees related to its listing on the Nasdaq Capital Market.

Operating Income:

Our operating income increased $248,000, to $449,000 in the second quarter of fiscal 2022 compared with $201,000 for the second quarter of fiscal 2021. Growth in revenue and gross profit were key factors in the improvement of operating income partially offset by increases in operating expenses in the second quarter of fiscal 2022. Operating margin for the quarter increased to 11% compared with 5.8% in the prior year period.

For the first half of fiscal 2022, operating income increased $405,000, to $791,000 compared with $386,000 for the first half of fiscal 2021. Growth in revenue and gross profit were key factors in the improvement of operating income partially offset by increases in operating expenses income in the first half of fiscal 2022. Operating margin for the first half of fiscal 2022 increased to 10.3% compared with 5.6% in the first half of fiscal 2021.

Interest and Dividend Income:

Interest and dividend income increased $5,000 to $8,000 in the second quarter of fiscal 2022 as compared with $3,000 for the second quarter of fiscal 2021. In the first half of fiscal 2022 interest and dividend income decreased $14,000 to $11,000 as compared with $25,000 for the first half of fiscal 2021. The decrease in the first half of fiscal 2022 is due to the decline in market rates. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At August 31, 2021, the majority of our holdings are rated at or above investment grade.

Income Tax Expense:

We recorded income tax expense of $112,000 for the second quarter of fiscal 2022 compared with $25,000 for the second quarter of fiscal 2021. For the first half of fiscal 2022 we recorded income tax expense of $197,000 compared with $67,000 for the first half of fiscal 2021.

The increase in income tax expense in the second quarter and first half of fiscal 2022 is due to a decrease in available research and development tax credits combined with the increase in income before taxes.

Paycheck Protection Program Loan Forgiveness:

During fiscal 2021, we entered into a loan transaction pursuant to which we received proceeds of $1,001,640 (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying companies and is administered by the U.S. Small Business Administration (the “SBA”).

The PPP Loan was evidenced by a promissory note (the “Note”), between the Company and M&T Bank, (the “Bank”). The Note had a two-year term, accrued interest at the rate of 1.0% per annum, and was prepayable at any time without payment of any premium. No payments of principal or interest were due during the six-month period beginning on the date of the Note. Beginning on the seventh month following the date of the Note, we were required to make 18 monthly payments of principal and interest in the amount of $56,370.

Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, at least 75 percent of the PPP Loan proceeds must be used for eligible payroll costs. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.

The Company applied for forgiveness of the PPP Loan in December 2020. On April 1, 2021, the Company received notice from the Bank that the Bank had received confirmation from the SBA that the application for forgiveness of the PPP Loan had been approved. The loan forgiveness request in the amount of $1,001,640 was applied to the Company’s entire outstanding PPP Loan balance with the Bank.

During the six months ended August 31, 2021, the Company recorded a gain on the forgiveness of the PPP Loan and accrued interest in the amount of $1,005,372. The gain on the forgiveness of the PPP Loan is a non-taxable event.

Net Income:

Net income increased by $166,000 to $344,000 for the second quarter of fiscal 2022 compared with $178,000 for the second quarter of fiscal 2021. The increase in net income during the second quarter is a result of an increase in operating income offset by an increase in income taxes.

Net income increased by $1,265,000 to $1,611,000 for the first half of fiscal 2022 compared with $346,000 for the first half of fiscal 2021. The increase in net income in the first half of fiscal 2022 is a result of an increase in operating income combined with the PPP Loan forgiveness offset by an increase in income taxes.

Impact of COVID-19

In December 2019, the COVID-19 outbreak occurred in China and has since spread to other parts of the world. On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak. Along with these declarations, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world. These actions include quarantines, social distancing and “stay-at-home” orders, travel restrictions, mandatory business closures and other mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations.

In response to the pandemic and these actions, we began implementing changes in our business in March 2020 to protect our employees and customers:

We implemented social distancing and other health and safety protocols.

We have flexed the workforce in our manufacturing operations based on business needs, including the addition of a second shift and the implementation of remote, alternative and flexible work arrangements.

We have enhanced cleaning and sanitary procedures.

We temporarily eliminated domestic and international travel.

We restricted access to our facilities to only employees and essential non-employees with strict protocols.

While all of these measures have been necessary and appropriate, they may result in additional costs and may adversely impact our business and financial performance. As our response to the pandemic evolves, we may incur additional costs and will potentially experience adverse impacts to our business, each of which may be significant. In addition, an extended period of remote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks, including, but not limited to, cybersecurity risks and increased vulnerability to security breaches, cyber-attacks, computer viruses, ransomware, or other similar events and intrusions. We may experience, decreases in demand and customer orders for our products in all sales channels, as well as temporary disruptions and closures of our facilities due to decreased demand and government mandates.

COVID-19 has also impacted various aspects of the supply chain as our suppliers experience similar business disruptions due to operating restrictions from government mandates. We continue to monitor procurement of raw materials and components used in the manufacturing, distribution and sale of our products, but continued disruptions in the supply chain due to COVID-19 may cause difficulty in sourcing materials or unexpected shortages or delays in delivery of raw materials and components, and may result in increased costs in our supply chain.

We have implemented plans to reduce spending in certain areas of our business, including reductions or delays in capital expenditures, reduced trade show participation costs, reduced travel expenditures and may need to take additional actions to reduce spending in the future.

We are closely monitoring and assessing the impact of the pandemic on our business. The extent of the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted.

Given the inherent uncertainty surrounding COVID-19, the pandemic may continue to have an adverse impact on our business in the near term. Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, results of operations, cash flow, liquidity, and financial condition.

Liquidity and Capital Resources

Working Capital – Our working capital increased $728,000 to $9,630,000 at August 31, 2021 from $8,902,000 at February 28, 2021. The increase in working capital was mostly the result of the current period’s net income and noncash charges partially offset by purchases of equipment.

The Company aggregates cash and cash equivalents and marketable securities in managing its balance sheet and liquidity. For purposes of the following analysis, the total is referred to as “Cash.” At August 31, 2021 and February 28, 2021, our working capital included:

	August 31, 2021		February 28, 2021		Cash Increase (Decrease)
Cash and cash equivalents	$	6,143,000	$	4,084,000	$	2,059,000
Marketable securities		3,554,000		4,563,000		(1,009,000	)
Total	$	9,697,000	$	8,647,000	$	1,050,000

The following table summarizes the accounts and the major reasons for the $1,050,000 increase in “Cash”:

	Impact on Cash			Reason
Net income, adjusted for non-cash items	$	845,000
Accounts receivable decrease		276,000		Timing of cash receipts.
Inventories increase		(288,000	)	Required to support backlog.
Equipment purchases		(147,000	)	Equipment and facilities upgrade.
Customer deposits increase		750,000		Received for new orders.
Accounts payable and accrued expenses decrease		(563,000	)	Timing of disbursements.
Taxes payable increase		150,000		Timing of disbursements.
Other - net		27,000		Timing of disbursements.
Net increase in cash	$	1,050,000

Stockholders’ Equity – Stockholders’ Equity increased $1,651,000 from $10,951,000 at February 28, 2021 to $12,602,000 at August 31, 2021. The increase is a result of the current period’s net income of $1,610,000 and $41,000 in additional equity related to stock-based compensation awards.

Operating Activities – We generated $1,197,000 of cash in our operating activities in the first half of fiscal 2022 compared with using $782,000 of cash in the first half of fiscal 2021. The increase in cash generated by operating activities was mostly the result of a decrease in accounts receivable and increases in customer deposits and income taxes payable. These sources of cash were partially offset by an increase in inventories and decreases in accounts payable and accrued expenses.

Investing Activities – For the first half of fiscal 2022, our investing activities generated $862,000 of cash compared with $176,000 in the first half of fiscal 2021. For the first halves of fiscal years 2022 and 2021, we used $147,000 and $290,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first half of 2022, our marketable securities provided $1,009,000 compared with $367,000 in the first half of fiscal 2021.

In the second quarter of fiscal 2021, we received $100,000 in grant proceeds from the utility which provides our electricity as a result of our completion of certain energy efficiency related improvements.

Financing Activities – In the first halves of fiscal years 2022 and 2021, we used $0 and $84,000, respectively, for the repayment of our note payable.

During the first half of fiscal 2021, we borrowed $1,001,640 from a bank under the Paycheck Protection Program.

Net Increase in Cash and Cash Equivalents – In the first half of fiscal 2022, our cash balance increased by $2,059,000 as compared to $312,000 in the first half of 2021. In the first half of fiscal 2022, our operating activities generated $1,197,000 of cash and our marketable securities generated $1,009,000 of cash. In addition, we used $147,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations are based upon the unaudited condensed 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.

Critical accounting policies 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. The Company believes that critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to the Company’s consolidated financial statements included in Form 10-K for the year ended February 28, 2021.

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. 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. 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.

Stock-Based Compensation

The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 is a complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. ASC 718 requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.

Impact of New Accounting Pronouncements

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.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company does not issue or invest in financial instruments or derivatives for trading or speculative purposes. Substantially all of the operations of the Company are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk. All of our sales transactions are completed in US dollars.

Although the Company's assets included $6,143,000 in cash and $3,554,000 in marketable securities, the market rate risk associated with changing interest rates in the United States is not material.

ITEM 4 – Controls and Procedures

The Company has established and maintains “disclosure controls and procedures” (as those terms are defined in Rules 13a –15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”). Christopher L. Coccio, Chief Executive Officer (principal executive) and Stephen J. Bagley, Chief Financial Officer (principal accounting officer) of the Company, have evaluated the Company’s disclosure controls and procedures as of August 31, 2021. Based on this evaluation, they have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to Management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding timely disclosure.

In addition, there were no changes in the Company’s internal controls over financial reporting during the second fiscal quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None

Item 1A.

Risk Factors

Note Required for Smaller Reporting Companies

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

None

Item 5.

Other Information

None

Item 6.

Exhibits and Reports

31.1 – 31.2 – Rule 13a - 14(a)/15d – 14(a) Certification

32.1 – 32.2 – Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

101 – The financial information from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2021 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

104 – Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: October 13, 2021

		SONO-TEK CORPORATION
		(Registrant)


	By:	/s/ Christopher L. Coccio
		Christopher L. Coccio
		Chief Executive Officer


	By:	/s/ Stephen J. Bagley
		Stephen J. Bagley
		Chief Financial Officer

SEC Form 10-Q filed by Sono-Tek Corporation