What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-01-14 compared with 2020-10-15 · 463 added, 402 removed, 484 unchanged (64% of the section changed)

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Marketable securities

Accounts receivable (less allowance of $71,000)

Accounts receivable (less allowance of $56,000 and $71,000, respectively)

Inventories, net

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Total liabilities

Commitments and Contingencies –

Commitments and Contingencies (Note 10)

Stockholders’

Common stock, $.01 par value;

25,000,000 shares authorized, 15,435,935 and 15,348,180 shares issued and outstanding, respectively

25,000,000 shares authorized, 15,445,594 and 15,348,180 shares issued and outstanding, at November 30 and February 29, respectively

Additional paid-in capital

Accumulated earnings

Retained earnings

Total stockholders’

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SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Nine Months Ended

Three Months Ended

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SONO-TEK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

SIX AND THREE MONTHS ENDED AUGUST 31, 2020 AND 2019

Six Months Ended August 31, 2020 and 2019

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

NINE AND THREE MONTHS ENDED NOVEMBER 30, 2020 AND 2019

Nine Months Ended November 30, 2020 and 2019

Par Value $.01

Accumulated Earnings

Stockholders’

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Balance –

August 31, 2020 (Unaudited)

Par Value $.01

Total Stockholders’

November 30, 2020 (unaudited)

Balance –

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Balance –

August 31, 2019 (Unaudited)

Three Months Ended August 31, 2020 and 2019

November 30, 2019 (unaudited)

Three Months Ended November 30, 2020 and 2019

Par Value $.01

Total Stockholders’

Accumulated Earnings

Stockholders’

Balance –

August 31, 2020 (unaudited)

Cashless exercise of stock options

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Balance –

August 31, 2020 (Unaudited)

Par Value $.01

Total Stockholders’

November 30, 2020 (unaudited)

Balance –

August 31, 2019 (unaudited)

Cashless exercise of stock options

Stock based compensation expense

Balance –

August 31, 2019 (Unaudited)

November 30, 2019 (unaudited)

See notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

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Inventory reserve

Deferred tax benefit

Decrease (Increase) in:

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Prepaid expenses and other current assets

(Decrease) Increase in:

Accounts payable and accrued expenses

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Income taxes payable

Net Cash (Used In) Provided by Operating Activities

Net Cash Provided By Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES:

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Capital expenditure grant proceeds

Sale (purchase) of marketable securities

Sale (purchase) of marketable securities, net

Net Cash Provided By (Used In) Investing Activities

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED AUGUST 31, 2020 and 2019

NINE MONTHS ENDED NOVEMBER 30, 2020 and 2019

BUSINESS DESCRIPTION

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have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim

financial information.

Accordingly, the 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 Condensed Consolidated

Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal

year ended February 29, 2020 (“fiscal year 2020”) contained in the Company’s 2020 Annual Report on Form 10-K

filed with the SEC.

The Company’s current fiscal year ends on February 28, 2021 (“fiscal 2021”).

financial information with the instructions for Form 10-Q and Article 8 of Regulation S-X.

Accordingly, the condensed consolidated

financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.

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 29, 2020 (“fiscal year 2020”)

contained in the Company’s 2020 Annual Report on Form 10-K filed with the SEC on May 29, 2020.

The Company’s current

fiscal year ends on February 28, 2021 (“fiscal 2021”).

SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents - Cash and cash equivalents consist

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

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Concentration of Credit Risk –

The Company does not believe

that it is subject to any unusual or significant risks in the normal course of business.

The Company had three customers, which

accounted for 30% of sales during the six months ended August 31, 2020.

Three customers accounted for 47% of the outstanding accounts

receivables at August 31, 2020.

accounted for 30% of sales during the three months ended November 30, 2020 and four customers which accounted for 30% of sales

during the nine months ended November 30, 2020.

Three customers accounted for 45% of the outstanding accounts receivables at November

30, 2020 and three customers accounted for 67% of the outstanding accounts receivable at February 29, 2020.

Financial instruments and related items, which potentially subject the Company to

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with credit quality institutions.

At times, such amounts may be in excess of the FDIC insurance limit.

At August 31, 2020, deposits

in excess of the FDIC limits were $6,534,000.

Consolidation - The accompanying condensed consolidated financial

statements of the Company, include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC (“SIP”).

At times, such amounts may be in excess of FDIC insurance limits.

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”).

SIP operates as a real estate holding company for the Company’s real estate operations.

Earnings Per Share - Basic earnings per share (“EPS”)

All significant

intercompany transactions and balances 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.

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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 follows the guidance

in the “Fair Value Measurements and Disclosure Topic”

of the Accounting Standards Codification for assets and liabilities

measured at fair value on a recurring basis.

This guidance establishes a common definition for fair value to be applied to existing

generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring

fair value and expands disclosure about such fair value measurements.

The guidance defines fair value as the price that would be

received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement

Additionally, the guidance requires the use of valuation techniques that maximize the use of observable inputs and minimize

the use of unobservable inputs.

These inputs are prioritized below:

Quoted prices in active markets.

Observable market-based

inputs or unobservable inputs that are corroborated by market data.

Unobservable inputs for which

there is little or no market data, which require the use of the reporting entity’s own assumptions.

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, 2020 and February 29, 2020, respectively:

of the Company were determined using the following categories at November 30, 2020 and February 29, 2020, respectively:

Marketable Securities –

August 31, 2020

November 30, 2020

Marketable Securities –

February 29, 2020

Marketable Securities include mutual funds, certificates

of deposit and US Treasury securities, totaling $3,852,601 and $4,219,240 that are considered to be highly liquid and easily tradeable

as of August 31, 2020 and February 29, 2020, respectively.

Mutual funds & 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.

The Company’s marketable securities are considered to be available-for-sale

investments as defined under ASC 320 “Investments –

Marketable Securities include certificates of deposit and

US Treasury securities, totaling $3,225,516 and $4,219,240 that are considered to be highly liquid and easily tradeable as of November

30, 2020 and February 29, 2020, respectively.

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.

The Company’s marketable securities are considered to be trading securities as defined under ASC 320

“Investments –

Debt and Equity Securities.”

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improvements applicable to the grant, reducing the carrying value and the related depreciation expense going forward.

Income Taxes - The Company accounts for income taxes under the asset

Income Taxes –

The Company accounts for income taxes under the asset

and liability method.

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asset will not be realized, a valuation allowance is recognized.

Intangible Assets - Include costs of patent applications which

We use 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.

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 $176,566 and $171,210 at August 31, 2020 and February 29, 2020, respectively.

Annual amortization expense

of such intangible assets is expected to be approximately $11,000 per year for the next five years.

Interim Reporting - The attached summary condensed consolidated financial

information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity

with accounting principles generally accepted in the United States of America.

Such disclosures were included with the financial

statements of the Company at February 29, 2020, and included in its report on Form 10-K.

Such statements should be read in conjunction

with the data herein.

The financial information reflects all adjustments, normal and recurring, which,

in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented.

The preparation

of financial statements in conformity with generally accepted accounting principles 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

financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ

from those estimates.

The results for such interim periods are not necessarily indicative of the results to be expected for the

Inventories - Inventories are stated at the lower of cost or net

realized 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.

amortization of patents is $179,244 and $171,210 at November 30, 2020 and February 29, 2020, 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.

Land and Buildings –

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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

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.

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at a rate commensurate with the risk involved.

Management Estimates - The preparation of financial statements

No impairment losses were identified or recorded in the three or nine months ended

November 30, 2020 and 2019 on the Company’s long lived assets.

Management Estimates –

The preparation of financial statements

in conformity with accounting principles generally accepted in the United States of America requires management to make estimates

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could differ from those estimates.

Marketable Securities - The Company adopted ASU 2016-01, “Financial

Instruments –

Recognition and Measurement of Financial Assets and Financial Liabilities.”

ASU 2016-01 requires

equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of

the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities

to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate

presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates

the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value

that is required to be disclosed for financial instruments measured at amortized cost.

New Accounting Pronouncements -

In December 2019, the FASB issued ASU 2019-12, “

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 will be effective

for the Company on March 1, 2021, with early adoption permitted, and is not expected to have a significant impact on the Company’s

financial statements.

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 will be effective for the Company on March 1, 2021, with early adoption permitted, and is not expected

to have a significant impact on the Company’s financial statements.

Other than ASU 2019-12 discussed above, all new accounting pronouncements issued

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have been made to the prior period to conform to the presentations of the current period.

Research and Product Development Expenses - Research and product

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

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included in cost of sales in the accompanying consolidated statements of operations.

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 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.

REVENUE RECOGNITION

A majority of the Company’s sales revenue is derived

from short term contracts with customers, which, on average, 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, as defined by the contract terms.

Based on prior experience, the Company reasonably estimates its warranty

Sales are presented net of discounts and allowances.

A majority of the Company’s sales revenue is derived from short term contracts

with customers, which, on average, 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,

as defined by the contract terms.

Based on prior experience, the Company reasonably estimates its warranty reserves.

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 receives cash deposits for customer orders based upon contract

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 receives cash deposits for customer orders based upon contract terms.

Upon receipt, customer deposits are recorded as a short-term liability.

Cash deposits received from customers may not always

equal 100% of the contracted revenue for a given contract.

Cash deposits received from customers may not always equal

100% of the contracted revenue for a given contract.

In addition to cash deposits, the Company will accept irrevocable standby

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The Company also provides negotiated payment terms to its customers.

At February 29, 2020, the Company had received $1,649,000 in cash deposits from customers.

During the six months ended August 31,

2020, the Company applied 100% of these deposits against customer accounts receivable when the Company's performance obligations

At August 31, 2020, the Company had received $988,000 in cash

deposits for customer orders and had issued Letters of Credit in the amount of $1,271,000 to secure some of these cash deposits.

Subsequent to August 31, 2020, the Company received an additional $618,000 in cash deposits that is secured by the outstanding

Letters of Credit.

At February 29, 2020, the Company had received $1,649,000 in cash deposits

from customers.

During the nine months ended November 30, 2020, the Company applied 100% of these deposits against customer accounts

receivable when the Company's performance obligations were met.

At November 30, 2020, the Company had received $1,782,000 in cash deposits for customer

orders and had issued Letters of Credit in the amount of $941,000 to secure some of these cash deposits.

The Company’s sales revenue by product line, for the three and nine months

ended November 30, 2020 and 2019, is as follows:

Three Months Ended

Nine Months Ended

Fluxing Systems

Integrated Coating Systems

Multi-Axis Coating Systems

Inventories consist of the following:

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Under the 2013 Plan options expire ten years after the date of

As of August 31, 2020, there were 427,709 options outstanding under the 2013 Plan.

As of November 30, 2020, there were 433,084 options outstanding under the 2013 Plan.

Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"),

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to purchase up to 1,500,000 shares of the Company's common stock.

As of August 31, 2020, there were 47,500 options outstanding

As of November 30, 2020, there were 47,500 options outstanding

under the 2003 Plan, under which no additional options may be granted.

During the six months ended August 31, 2020, 136,458 options were exercised

During the nine months ended November 30, 2020, 151,083 options were exercised

on a cashless basis into 97,414 shares of common stock.

During the nine months ended November 30, 2020, the Company granted options

to acquire 22,500 shares to employees exercisable at $3.70, and options to acquire 20,000 shares to the non-employee members of

the board of directors with an exercise price of $3.70.

The options granted to employees and directors vest over three years and

expire in ten years.

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, 2020, the Company granted options

to acquire 22,500 shares to employees exercisable at $3.70.

The options granted to employees vest over three years and expire in

The options had a weighted average grant date fair value of $1.25 per share.

During the nine months ended November 30, 2020, the Company granted options to acquire

22,500 shares to employees exercisable at $3.70, and options to acquire 20,000 shares to the non-employee members of the board

of directors with an exercise price of $3.70.

The options granted to employees and directors vest over three years and expire in

All of the options granted by the Company during the nine months ended November 30, 2020 had a combined weighted average

grant date fair value of $1.03 per share.

The weighted-average fair value of options are estimated on the date of grant using

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The weighted-average Black-Scholes assumptions are as follows:

Six Months Ended

August 31, 2020

Nine Months Ended

November 30, 2020

Expected Life

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expense could be materially different in the future.

In addition, the Company is required to estimate the expected forfeiture rate

and only recognize expense for those shares expected to vest.

In estimating the Company’s forfeiture rate, the Company analyzed

its historical forfeiture rate, the remaining lives of unvested options, and the number of vested options as a percentage of total

options outstanding.

If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company

reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what

the Company has recorded in the current period.

For the three and six months ended August 31, 2020 and 2019, net income

The Company accounts for forfeitures as they occur.

For the three and nine months ended November 30, 2020 and 2019, net income

and earnings per share reflect the actual deduction for stock-based compensation expense.

The impact of applying ASC 718 approximated

$8,000 and $33,000 in additional compensation expense during the three months ended August 31, 2020 and 2019, respectively.

impact of applying ASC 718 approximated $16,000 and $44,000 in additional compensation expense during the six months ended August

31, 2020 and 2019, respectively.

Such amounts are included in general and administrative expenses on the statement of operations.

$11,000 and $38,000 in additional compensation expense during the three months ended November 30, 2020 and 2019, respectively.

The impact of applying ASC 718 approximated $27,000 and $82,000 in additional compensation expense during the nine months ended

November 30, 2020 and 2019, respectively.

Such amounts are included in general and administrative expenses on the statement of

The expense for stock-based compensation is a non-cash expense item.

EARNINGS PER SHARE

The denominators for the calculation of diluted earnings per share at August 31,

The denominators for the calculation of diluted earnings per share

for the three and nine months ended November 30,

2020 and 2019 are calculated as follows:

Six Months Ended

Nine Months Ended

Three Months Ended

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Note payable, bank, collateralized by land and buildings, payable in monthly installments of principal and interest of $16,358 through January 2024 with an interest rate of 4.15% and a 10-year term.

Note Payable, bank, unsecured, Paycheck Protection Program funding, payable in monthly installments of principal and interest of $56,370 through April 2022.

In December 2020, the Company paid $580,717 to the lender, representing the entire outstanding principal balance and a prepayment penalty of $14,000.

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, no repayments required for the first six months.

Under the terms of the CARE 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 has applied for forgiveness of this obligation.

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.

Total long term debt

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The Company has a $1,500,000 revolving line of credit at prime which was 3.25% at

August 31, 2020.

November 30, 2020.

The revolving credit line is collateralized by the Company’s accounts receivable and inventory.

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to a 36-month term note with payments including interest in 36 equal installments.

As of August 31, 2020, $1,271,000 of the Company’s credit line was being utilized

As of November 30, 2020, $941,000 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.

letters of credit expire at various times in the fiscal years ending February 28, 2021 and 2022.

As of August 31, 2020, there were

no outstanding borrowings under the line of credit and the unused portion of the credit line was $229,000 as of August 31, 2020.

As of November 30, 2020, there

were no outstanding borrowings under the line of credit and the unused portion of the credit line was $559,000 as of November 30,

COMMITMENTS AND CONTINGENCIES

Other than the letters of credit disclosed in Note 9, the Company did not have any

material commitments or contingencies as of August 31, 2020.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events for disclosure purposes.

material commitments or contingencies as of November 30, 2020.

ITEM 2 –

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FORWARD-LOOKING STATEMENTS

We discuss expectations regarding our future performance, such as our business

outlook, in our annual and quarterly reports, press releases, and other written and oral statements.

“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.

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

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;

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;

regulatory, tax, competitive and technological developments affecting our operations or the demand for our products;

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

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;

the forgiveness of our PPP loan;

maintenance of increased order backlog, including effects of any COVID-19

related cancellations;

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;

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;

capacity additions, the ability to enforce

maintenance of operating leverage;

maintenance of increased order backlog;

consummation of order proposals;

completion of large orders on schedule and on budget;

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 as forecasted.

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.

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

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We are a global business with approximately 62% of our sales generated from outside

the United States and Canada during the first six months of fiscal 2021.

the United States and Canada during the first nine months of fiscal 2021.

Our direct sales team and our distributor and sales representative

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order flow and shipments from quarter to quarter.

Second Quarter Fiscal 2021 Highlights (compared with the second

quarter of fiscal 2020 unless otherwise noted) We refer to the three-month periods ended August 31, 2020 and 2019 as the second

quarter of fiscal 2021 and fiscal 2020, respectively.

Net sales were $3,481,000, up 4% or $135,000, driven by increased sales of highly customized multi axis coating systems

and integrated coating systems;

with strong demand for our alternative energy products.

Gross profit margin remained constant at 46%.

Operating income increased to $201,000, compared with operating income of $92,000.

Growth in revenue and gross profit improved

operating income during the quarter.

Backlog on August 31, 2020 was up 45% to $5,106,000, compared with backlog of $3,517,000

on February 29, 2020.

Increase is due to two major orders.

First Half Fiscal 2021 Highlights (compared with the first

half of fiscal 2020 unless otherwise noted) We refer to the six-month periods ended August 31, 2020 and 2019 as the first half

of fiscal 2021 and fiscal 2020, respectively.

Net sales were $6,909,000, up 12% or $741,000, driven primarily by increased demand

from the Alternative Energy market, and strong sales of our integrated systems in the industrial market segment.

This was a result

of the effectiveness of our efforts to provide application engineering expertise and custom-designed complex coating solutions,

of high customer value and greater selling price and increased revenue.

Gross profit margin remained consistent at 46% for both periods, but on a dollar basis, improved due to increased sales.

Third Quarter Fiscal 2021 Highlights (compared with the third

quarter of fiscal 2020 unless otherwise noted) We refer to the three-month periods ended November 30, 2020 and 2019 as the

third quarter of fiscal 2021 and fiscal 2020, respectively.

Net sales were $3,827,000, up 4% or $155,000, primarily driven by increased sales of our integrated coating systems in the Industrial market segment and OEM systems.

Gross profit increased $134,000 or 7% to $1,931,000 compared with $1,797,000 in the prior year period.

Gross profit margin increased to 50.5% compared with 48.9%.

In the quarter, gross profit margin increased due to a change in the product mix for the quarter.

Operating income increased $177,000 to $447,000 or 66%, compared with operating income of $270,000 in the prior year period.

Growth in revenue, gross profit and decreased operating expenses improved operating income during the quarter.

Backlog on November 30, 2020 was up 29% to $4,549,000, compared with backlog

of $3,517,000 on February 29, 2020.

The increase in backlog is due to a large order for the textile industry valued at $1.1 million

scheduled to ship in the fourth quarter of fiscal 2021 or first quarter of fiscal 2022.

Nine Month Fiscal 2021 Highlights (compared with

the first nine months of fiscal 2020 unless otherwise noted) We refer to the nine-month periods ended November 30, 2020 and

2019 as the first nine months of fiscal 2021 and fiscal 2020, respectively.

Net sales were $10,736,000, up 9% or $895,000, led by strong sales of integrated coating systems to the Industrial market, and continued expansion of our customer base for the Alternative Energy sector.

Gross profit margin was consistent at 47% for both periods, but on a dollar basis, improved due to increased sales.

Operating income increased to $832,000 compared with $367,000.

Growth in revenue and gross profit were key factors in the improvement

of operating income during the first half of fiscal 2021.

Growth in revenue and gross profit were key factors in the improvement of operating income during the quarter.

RESULTS OF OPERATIONS

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Three Months Ended

Six Months Ended

Nine Months Ended

Fluxing Systems

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Multi-Axis Coating Systems

Sales growth during the first half of fiscal 2021 was driven by a significant shipment

of an integrated coating system for the Industrial Market valued at approximately $400,000 combined with a strong quarter for Multi-Axis

coating systems sold to the Alternative Energy markets.

The sales increase in these product lines more than offset the current

quarter’s sales decrease in fluxing systems and in the Other product category.

Sales growth in the third quarter and the first nine months of fiscal 2021 was driven

by several significant shipments of our Integrated Coating systems into the Industrial and Electronic markets.

The increase in

sales of Integrated Coating systems more than offset the decrease in sales of our Fluxing systems, Multi-Axis Coating systems and

the Other categories.

Market Sales:

Three Months Ended

Six Months Ended

Nine Months Ended

Electronics/Microelectronics

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Emerging R&D and Other

The Alternative Energy market showed significant growth, primarily driven by sales

to US - based companies for electrolyzer coating equipment used for fuel cell manufacturing and advanced carbon emission reduction

We also saw a strong quarter from the Industrial market resulting from our latest developed float glass coating platform,

shipping to a US-based customer.

The Electronics/ Microelectronics and Medical markets both declined with several potential orders

being put on hold due to COVID concerns.

We are optimistic that these orders will increase as countries come back online from COVID

Significant growth in the Industrial market in the third quarter and the first nine

months of fiscal 2021, was driven by a $463,000 shipment to the textile industry, which was part of a previously announced $1.6M

order received early this fiscal year.

The remaining balance of this order is scheduled to ship in the fourth quarter of fiscal

2021, or the first quarter of fiscal 2022.

As anticipated, the Alternative Energy market showed significant growth with the

expansion of fuel cell activities in the first nine months of fiscal 2021, as a global hydrogen energy infostructure continues

to gain acceptance in many countries.

The Medical and Emerging R&D markets both declined with several potential orders being

put on hold due to COVID-19 concerns.

We believe that these orders will increase as countries come back online from COVID-19 lockdowns.

Geographic Sales:

Three Months Ended

Six Months Ended

Nine Months Ended

Asia Pacific (APAC)

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Latin America

In the first half of fiscal 2021, approximately 58% of sales originated outside

In the third quarter of fiscal 2021, approximately 70% of sales originated outside

of the United States and Canada compared with 65% in the prior year period.

In the second quarter of fiscal 2021, approximately 38% of sales originated outside

In the first nine months of fiscal 2021, approximately 62% of sales originated outside

of the United States and Canada compared with 65% in the prior year period.

The increase in US and Canada based sales was influenced by the COVID-19 pandemic,

as we saw a decrease in orders from several geographic territories outside the US during COVID-19 peaks.

Sono-Tek has proven capable

at adapting to COVID-19 country wide lockdowns by quickly refocusing efforts to those countries that are operational.

This flexibility

has been helpful in softening the impact of the pandemic and will continue to be part of our strategy for the foreseeable future.

In the first nine months of fiscal 2021, the increase in US and Canada based sales

was influenced by the COVID-19 pandemic, as we saw several manufacturers transfer operations back to the US;

also resulting in

a decrease in orders from several geographic territories outside the US.

Timing and severity of overseas sales dips has varied

country to country, as each location has come in and out of lock downs.

Sales to China continued to show strong growth, however,

a majority of this revenue was for orders received prior to the COVID-19 pandemic.

Sales to Latin America decreased due to a decrease

in sales of our spray fluxer units to Mexico during the COVID-19 lockdowns, and due to a large medical system sold into Latin America

in the prior fiscal year.

Sono-Tek has proven capable at adapting to COVID-19 country wide lockdowns by quickly refocusing efforts

to those countries that are operational.

This flexibility has been helpful in softening the impact of the pandemic and will continue

to be part of our strategy for the foreseeable future.

Gross Profit:

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of Goods Sold

Gross Profit %

For the second quarter of fiscal 2021, gross profit increased $74,000, or 5%, compared

For the third quarter of fiscal 2021, gross profit increased $134,000, or 7%, compared

with the prior-year period due to increased revenue.

Gross profit margin remains strong at 46.6% compared with 46.2% for the prior

Gross profit increased $330,000, or 12%, to $3,182,000 for the first half of fiscal

2021 compared with $2,852,000 in the prior year period due to increased revenue.

Gross profit margin remains strong at 46.1% compared

with 46.2% for the prior year period.

Gross profit margin increased to 50.5% during the quarter compared with 48.9%

for the prior year period.

The current quarter’s increase in gross profit margin is due to a change in the product mix for the quarter.

Gross profit increased $463,000, or 10%, to $5,112,000 for the first nine months

of fiscal 2021 compared with $4,649,000 in the prior year period due to increased revenue.

Gross profit margin remains strong at

47.6% compared with 47.2% for the prior year period.

Operating Expenses:

Three Months Ended

Six Months Ended

Nine Months Ended

Research and product development

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Research and Product Development:

Research and product development costs increased in both the second quarter

and first half of fiscal 2021 due to increased salaries and related costs.

In the prior year period, some of our personnel were

assigned to specific customer sales orders and the associated research and development costs were recorded in inventory, as incurred.

Research and product development costs increased in both the third quarter and

the first nine months of fiscal 2021 due to increased salaries and related costs.

In the prior year periods, some of our

personnel were assigned to specific customer sales orders and the associated research and development costs were recorded in

inventory, as incurred.

Marketing and Selling:

Marketing and selling costs decreased in the second quarter of fiscal 2021 due to

Marketing and selling costs decreased in the third quarter of fiscal 2021 due to

decreases in commissions, travel and trade show expenses.

Marketing and selling costs decreased in the first half of fiscal 2021 due to decreases

in commissions, travel and trade show expenses.

These decreases were partially offset by increased salaries and related costs in

the first quarter of fiscal 2021.

In the second quarter of fiscal 2021, we expended approximately $117,000 for commissions

Marketing and selling costs decreased in the first nine months of fiscal

2021 due to decreases in commissions, travel and trade show expenses.

These decreases were partially offset by increased salaries

and related costs in the first quarter of fiscal 2021.

In the third quarter of fiscal 2021, we expended approximately $195,000 for commissions

as compared with $229,000 for the prior year fiscal period, a decrease of $34,000.

In the second quarter of fiscal 2021, our external

commission expense decreased by $77,000.

This decrease was partially offset by an increase in internal commission expense of $19,000.

In the first half of fiscal 2021, we expended approximately $247,000 for commissions as compared with $276,000 for the prior year

fiscal period, a decrease of $29,000.

For the first nine months of fiscal 2021, we

expended approximately $441,000 for commissions as compared with $505,000 for the prior year fiscal period, a decrease of $64,000.

The decrease in commission expense, in both periods, is primarily the result of a decrease in international sales being generated

by our external distributors, which are commissioned at a higher rate than our in-house sales team.

General and Administrative:

In the second quarter of fiscal 2021, we experienced decreases in professional fees

and stock-based compensation expense.

These decreases were partially offset by increased annual meeting and proxy expenses due

to the Covid-19 outbreak.

In the first half of fiscal 2021, we experienced decreases in salaries, professional

fees, travel, and stock based compensation.

These decreases were partially offset by increased health insurance premiums and annual

meeting expenses.

In the third quarter of fiscal 2021, we experienced decreases in professional fees,

corporate expenses, bank fees and stock-based compensation expense.

These decreases were partially offset by increased salaries.

In the first nine months of fiscal 2021, we experienced decreases in professional

fees, stock based compensation expense, travel and bank fees.

These decreases were partially offset by increased salaries, health

insurance premiums and annual meeting and proxy expenses related to the Covid-19 outbreak.

Health Insurance Premiums:

The Company’s health insurance program requires employee contributions.

the second quarter of fiscal 2020, the Company’s net health insurance expense was approximately $91,000 as compared with

the third quarter of fiscal 2021, the Company’s net health insurance expense was approximately $97,000 as compared with $94,000

for the prior year fiscal period, an increase of $3,000 or 3%.

In the first half of fiscal 2020, the Company’s

net health insurance expense was approximately $191,000 as compared with $146,000 for the prior year fiscal period, an increase

of $45,000 or 31%.

For the first nine months of fiscal 2021, the Company’s net health insurance

expense was approximately $288,000 as compared with $285,000 for the prior year fiscal period, an increase of $3,000 or 1%.

Operating Income:

Our operating income increased $109,000, to $201,000 in the second quarter of fiscal

2021 compared with $92,000 for the prior year period.

Growth in revenue and gross profit were key factors in the improvement of

operating income in the second quarter of fiscal 2021.

Operating margin for the quarter increased to 5.8% compared with 2.8% in

the prior year period.

For the first half of fiscal 2021, operating income increased $289,000, to $386,000

compared with $97,000 for the prior year period.

Growth in revenue and gross profit were key factors in the improvement of operating

income in the first half of fiscal 2021.

Operating margin for the first half of fiscal 2021 increased to 5.6% compared with 1.6%

Our operating income increased $177,000, to $447,000 in the third quarter

of fiscal 2021, compared with $270,000 for the prior year period.

This substantial improvement is the result of revenue growth

and cost constraints which generated significant operating leverage.

Operating margin for the third quarter increased to 11.7%

compared with 7.4% in the prior year period.

For the first nine months of fiscal 2021, operating income increased $465,000,

to $832,000 compared with $367,000 for the prior year period.

This improvement is the result of revenue growth and cost constraints

which generated operating leverage.

Operating margin for the first nine months of fiscal 2021 increased to 7.8% compared with 3.7%

in the prior year period.

Interest Expense:

Interest expense was $9,000 in the second fiscal quarter of 2020 compared with $8,000

Interest expense was $6,000 in the third fiscal quarter of 2021 compared with $8,000

for the prior-year period.

Interest expense was $18,000 in the first half of 2020 compared with $17,000 for the prior year period.

For the first nine months of fiscal 2021, interest expense was $24,000 compared with $25,000 for the

prior year period.

Interest and Dividend Income:

Interest and dividend income decreased $23,000 to $3,000 in the second quarter of

fiscal 2021 as compared with $26,000 for the second quarter of fiscal 2020.

In the first half of fiscal 2021 interest and dividend

income decreased $32,000 to $25,000 as compared with $57,000 for the first half of fiscal 2020.

The decrease in both periods is

due to the decline in market rates.

Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury

At August 31, 2020, the majority of our holdings are rated at or above investment grade.

Interest and dividend income decreased $19,000 to $2,000 in the third quarter of

fiscal 2021 as compared with $21,000 for the prior year period.

For the first nine months of fiscal 2021, interest and dividend

income decreased $50,000 to $27,000 as compared with $77,000 in the prior year period.

The decrease in both periods is due to the

decline in market rates.

Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities,

certificates of deposit and mutual funds.

At November 30, 2020, the majority of our holdings are rated at or above investment

Other Income:

Included in other income is the net revenue related to the rental of the Company’s

For the second quarter of fiscal 2021, the Company’s net rental income was $8,000.

This compares with the second

quarter of fiscal 2020 when net rental income was $7,000.

For the first half of fiscal 2021, the Company’s net rental income was $19,000.

This compares with the first half of fiscal 2020 when net rental income was $12,000.

For the third quarter of fiscal 2021, the Company’s net rental income was $11,000 compared to net rental income

of $7,000 for the third quarter of fiscal 2020.

For the first nine months of fiscal 2021, the Company’s net rental income

was $30,000 compared with net rental income of $19,000 for the first nine months of fiscal 2020.

Income Tax Expense:

We recorded income tax expense of $25,000 for the second quarter of fiscal 2021

compared with $7,000 for the prior year period.

We recorded income tax expense of $67,000 for the first half of fiscal 2021 compared

with $13,000 for the first half of fiscal 2020.

Net income increased by $63,000 to $178,000 for the second quarter of fiscal 2021

We recorded income tax expense of $132,000 for the third quarter

of fiscal 2021 compared with $10,000 for the prior year period and recorded income tax expense of $199,000 for the first nine months

of fiscal 2021 compared with $23,000 for the prior year period.

The increase in income tax expense in the third quarter and the first nine

months of fiscal 2021 is due to the current period’s increase in income before taxes and to provide for the estimated tax

liability associated with the first nine months of fiscal 2021.

Net income increased by $40,000 to $320,000 for the third quarter of fiscal 2021

compared with $280,000 for the prior fiscal period.

Net income increased by $246,000 to $666,000 for the first nine months of fiscal

2021 compared with $420,000 for the prior year period.

Net income increased by $206,000 to $346,000 for the first half of fiscal 2021 compared

with $140,000 for the prior year period.

Impact of Covid 19

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We have enhanced cleaning and sanitary procedures.

We temporarily eliminated domestic and international travel for the first quarter of fiscal 2021 and have maintained significantly reduced travel for the second fiscal quarter of 2021.

We temporarily eliminated domestic and international travel for the first quarter of fiscal 2021 and have maintained significantly reduced travel for the second and third fiscal quarters of 2021.

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

30 unchanged sentences

Our working capital increased $875,000 to

$7,920,000 at August 31, 2020 from $7,173,000 at February 29, 2020.

The increase in working capital was mostly the result of the

current period’s net income and noncash charges and the proceeds of a long term note payable partially offset by purchases

$8,048,000 at November 30, 2020 from $7,173,000 at February 29, 2020.

The increase in working capital was mostly the result

of the current period’s net income and noncash charges and the proceeds of a long term note payable partially offset by purchases

of equipment and the repayment of long-term debt.

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The following table summarizes the accounts and the major reasons for the $1,361,000

decrease in “Cash”:

increase in “Cash”:

Impact on Cash

Net income, adjusted for non-cash items

To reconcile increase in cash.

Accounts receivable increase

Timing of receipts.

Timing of cash receipts.

Inventories increase

Required to support backlog.

Prepaid expense decrease

Timing of disbursements.

Equipment purchases

Equipment upgrade for productivity.

Customer deposits decrease

Shipment of orders.

Accounts payable decrease

Customer deposits increase

Received for new orders.

Accounts payable and accrued expenses increase

Timing of disbursements.

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Receipt of grant proceeds.

Timing of disbursements and other miscellaneous items.

Net decrease in cash

Taxes payable increase

Timing of disbursements.

Net increase in cash

Stockholders’

1 unchanged sentence

Stockholders’

Equity increased

$362,000 from $9,782,000 at February 29, 2020 to $10,144,000 at August 31, 2020.

The increase is a result of the current period’s

net income of $346,000 and $16,000 in additional equity related to stock-based compensation awards.

increased $694,000 to $10,476,000 at November 30, 2020, from $9,782,000 at February 29, 2020.

The increase was a result of

the current period’s net income of $666,000 and $28,000 in additional equity related to stock based compensation awards.

Operating Activities –

Our operating activities used $782,000

of cash in the first half of fiscal 2021 compared with generating $589,000 in the first half of fiscal 2020.

The increased use

of cash in our operating activities was mostly the result of increases in accounts receivable and inventories and decreases in

customer deposits and accounts payable.

These uses of cash were partially offset by the current period’s net income and non-cash

We generated $713,000 of cash

in our operating activities in the first nine months of fiscal 2021 compared with $1,023,000 in the first nine months of fiscal

The decrease in cash generated by operating activities was mostly the result of decreased accounts payable, accrued expenses,

customer deposits and an increase in accounts receivable.

These uses of cash were partially offset by decreased spending on inventories

and an increase in income taxes payable, and an increase in income for the period.

Investing Activities –

For the first half of fiscal 2021, our

investing activities generated $176,000 of cash compared with using $1,371,000 in the first half of fiscal 2020.

For the first

halves of fiscal years 2021 and 2020, we used $290,000 and $319,000, respectively, for the purchase or manufacture of equipment,

furnishings and leasehold improvements.

For the first half of 2021, our marketable securities provided $367,000 compared with the

use of $1,052,000 for the purchase of marketable securities in the first half of fiscal 2020.

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.

For the nine months of fiscal 2021,

our investing activities generated $767,000 of cash compared with using $1,767,000 in the first nine months of fiscal 2020.

the first nine months of fiscal years 2021 and 2020, we used $327,000 and $392,000, respectively, for the purchase or manufacture

of equipment, furnishings and leasehold improvements.

For the first nine months of fiscal 2021, our marketable securities provided

$994,000 compared with the use of $1,374,000 for the purchase of marketable securities in the first nine months of fiscal 2020.

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 2021

In the first nine months of fiscal years

2021 and 2020, we used $127,000 and $122,000, respectively, for the repayment of our note payable.

Paycheck Protection Program Loan

During the first quarter of fiscal 2021, we borrowed $1,001,640 (the “PPP

Loan”) from a bank 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

During the first quarter of fiscal 2021, we borrowed $1,001,640 (the

“PPP Loan”) from a bank 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 has a two-year term, bears interest at the rate

of 1.0% per annum, and may be prepaid at any time without payment of any premium.

No payments of principal or interest are due

until November 2020, at which time we are required to make 18 monthly payments of principal and interest in the amount of $56,370.

The PPP Loan has a two-year

term, bears interest at the rate of 1.0% per annum, and may be prepaid at any time without payment of any premium.

payments of principal or interest were scheduled to be due until November 2020, at which time we were to have been 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

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any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.

We intend to use the entire PPP Loan proceeds for designated qualifying expenses

and to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP.

No assurance can be given that we will obtain

forgiveness of the PPP Loan in whole or in part.

With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan

will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other

things, payment defaults, breaches of the provisions of the PPP note and cross defaults.

As of the date of this Report, we have

incurred approximately $776,000 in payroll, payroll related costs and other qualifying expenses .

We have been informed

by the bank which made our PPP Loan that the SBA has not begun processing forgiveness applications as of the date of this Report.

Net Increase in Cash –

In the first half of fiscal 2021, our

cash balance increased by $312,000 as compared to a decrease of $863,000 in the first half of 2020.

In the first half of fiscal

2021, our operating activities used $782,000 of cash.

In addition, we used $290,000 for the purchase or manufacture of equipment,

furnishings and leasehold improvements, our marketable securities provided $367,000 of cash, and we used $84,000 for the repayment

of our notes payable.

In the first half of fiscal 2020, we received $1,002,000 in proceeds from a PPP Loan and $100,000

in grant proceeds from the utility which provides our electricity as a result of our completion of certain energy efficiency related

improvements.

We believe that we have used the entire PPP Loan proceeds for designated

qualifying expenses and have applied for forgiveness of the PPP Loan in accordance with the terms of the PPP.

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 PPP loan.

assurance can be given that we will obtain forgiveness of the PPP Loan in whole or in part.

With respect to any portion of

the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including

customary events of default relating to, among other things, payment defaults, breaches of the provisions of the PPP note and

cross defaults.

As of the date of this Report, we have incurred approximately $2,342,000 in payroll, payroll related costs

and other qualifying expenses.

Net Increase (Decrease) in Cash and Cash Equivalents –

first nine months of fiscal 2021 our cash balance increased by $2,354,000 compared with a decrease of $865,000 in the first nine

months of fiscal 2020.

In the first nine months of fiscal 2021, our operating activities generated $713,000 of cash.

we used $327,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements, our marketable securities

provided $994,000 of cash, and we used $127,000 for the repayment of our notes payable.

In the nine months of fiscal 2021, we received

$1,002,000 in proceeds from a PPP Loan and $100,000 in grant proceeds from

the utility which provides our electricity as a result of our completion of certain energy efficiency related improvements.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

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Accounting for Income Taxes

As part of the process of preparing the Company’s condensed consolidated financial

statements, the Company is required to estimate its income taxes.

Management judgment is required in determining the provision

for the deferred tax asset.

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 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.

Stock-Based Compensation

20 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis