SONO TEK CORP 10-K

ITEM 1 BUSINESS Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) is the world leader in the design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to protect, strengthen, smooth or create 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 system solutions and also provide smaller sub-systems containing our patented nozzles and generators for manufacturers to incorporate into their own equipment. 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 microscopic layers of protective and other useful materials over a wide variety of surfaces, including glass and metals. Our equipment 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 serve a variety of industries and applications and have a broad base of customers. Our largest customer accounted for 12% of revenue in fiscal 2021. The applications that are employing our unique coating technology and expertise have been expanding as the advantages of ultrasonic coatings are more broadly recognized. The original application of our technology was to coat the inner surface of blood collection tubes used for medical diagnostic testing. Our products enable the application of a thin and uniform coating of material that prevents coagulation of blood. Following that initial breakthrough, our technology was then used for applying uniform flux coatings to printed circuit boards, a critical part of the fabrication process for all electronic devices. A later application for much larger surfaces was to address the many challenges that glass manufacturers faced. They needed a solution for specialized glass applications in the construction and automotive industries. Among other things, our ultrasonic nozzles are used to provide coatings that improve durability, create filters, increase clarity, reduce reflection, enable conductivity, and enhance safety. 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. We were founded by the inventor of the ultrasonic nozzle, Dr. Harvey Berger, and incorporated in New York on March 21, 1975. We became a public company in 1987 and our stock is traded on the OTCQX U.S. tier of the OTC exchange under the ticker symbol “SOTK”. Our corporate offices are located in Milton, New York where our production facilities are co-located. We also have a sales and service office in Singapore and an application process development laboratory in Guangzhou, China. We are ISO 9001 qualified since registering in September 1998 and have been recertified annually since then. Our fiscal year ends on February 28. We refer to the fiscal year ended February 28, 2021 as “fiscal 2021” and use similar protocol for previous fiscal years. Our Products, Markets and Customers Our products are used in a wide range of applications. We provide our customers a broad offering of ultrasonic spray coating equipment solutions custom suited for their requirements and we continually expand our offerings to address new applications. Our products include fully-integrated Multi-Axis Coating Systems, Integrated Coating Systems, Fluxing Systems, OEM Systems and other related systems. We invest heavily in research and development to continually bring to market new solutions for our customers, to increase our market share and to solve high value problems in manufacturing. 1 Our Multi-Axis Coating Systems, Integrated Coating Systems and Fluxing Systems provide complete fully-integrated solutions for our customers, while we created the Universal Align to offer our customers subsystems that integrate our nozzles and generators that they can then incorporate into their original equipment. We have built our brand and reputation on providing high quality, highly reliable products that provide consistent performance for critical applications in demanding operating environments. Our surface coating solutions are used in 24/7 work schedules, under harsh and challenging manufacturing environments, where they provide value in a continuous and dependable fashion. We target the following markets where our product quality and consistency and application knowledge are valued by our customers: • Micro-Electronics/Electronics: o Printed circuit boards: Ultrasonic flux application removes oxidation and is more efficient than standard, historic processes o Semiconductors: Applications of micron-thin photo-resist layers onto complex wafers o Sensors: Application of chemical, biological or other detection coatings as well as physical photoelectric elements for conversion of input and output signals o Display/panel glass on personal electronic devices: for sensitivity to temperature, imprint, pressure and for physical protection • Medical: Our systems are used in this industry to apply micron layers of polymers and drugs, biomedical materials and anti-coagulants. o Implanted medical devices such as: ▪ Stents and balloons ▪ Artificial joints o Blood collection tubes o Diagnostic devices o Bandages/protective wraps o Lenses • Industrial o Flat (“float”) glass used for windows in buildings and vehicles o Textiles: high performance value adding coatings such as anti-microbial, anti-stain, flame retardant and moisture barriers o Food packaging and food safety: anti-microbial coatings o Food: coatings of flavors, ingredients and other additives • Alternative Energy : Our systems provide coatings of chemicals and other materials that act as catalysts, barriers, symbiosis or other interactions between surfaces. o Fuel cells o Solar cells • Emerging Research and Development / Other Markets o Research and development efforts at universities, research institutions and government agencies that are not part of our already established markets o A variety of other small industries using our coating technology, that have not yet matured into a developed marketplace for our ultrasonic coating machines 2 Our principal customers include original equipment manufacturers, distributors and end users of our products in the industries that we serve. Our products are sold primarily through our direct sales personnel, select independent distributors and through sales representatives around the world that are trained on our technologies and products. Our distributors are typically experts in their industries and recognize the significant value that our technology provides their customers. We provide extensive training and on-site support with our direct sales force and application engineers, who also respond to leads generated by our web site and the trade shows in which we participate. To grow sales, we continue to strengthen our laboratory and applications engineering personnel and support our worldwide process development labs with additional ultrasonic coating equipment, in conjunction with sponsoring various technical training seminars for our distribution network. We also provide application consulting services enabling our customers to rely on our surface coating expertise and specific customer process optimization. We offer these services both in our application process development laboratory and at our customers’ sites where we can assist in the design and development of customized coating systems. We are a global business and our geographical sales mix can vary from year to year depending on the timing of orders from customers. In fiscal 2021, 65% of our sales were from outside the U.S. and Canada. Our Strengths From our core strengths and capabilities we: • Have built a strong reputation in the industry based on our ability to solve our customers’ complex problems and provide custom engineered, value-added solutions. • Are renowned for our product quality, customer service and responsiveness and critical thinking that enables a strong problem-solving culture throughout our organization. • Have expanded our ability to provide coating services for low to mid-volume demand to support our customers’ product development and testing. • Are continually developing new technologies and solutions to address an ever-changing marketplace. Our Strategy Our strategy is to further advance the use of ultrasonic coating technologies for the microscopic coating of surfaces in a broader array of applications which enable better outcomes for our customers’ products and processes. We believe product superiority is imperative and that it is attained through the extensive experience that we have in the coatings industry, our proprietary manufacturing know-how and skills, and our unique work force that we have built over the years. We intend to leverage our innovative technologies, proprietary know-how, unique talent and experience, and global reach to: • Grow the business globally by reaching new markets and further penetrating the markets and customers we currently serve; • Increase our earnings power through lean manufacturing processes, automation and continuous improvement; • Develop new and unique technologies that solve our customers’ most challenging problems; 3 • Meet or exceed our customers’ expectations; and • Provide an acceptable return to our shareholders. To accomplish these objectives, we believe that we must judiciously deploy our monetary and human capital in order to expand our presence in our targeted markets and create broader offerings for our customers. Availability of Raw Materials and Working Capital Practices Historically, we have not been adversely impacted by the availability of raw materials or components used in the manufacture of our products. All raw materials used in our products are readily available from many different domestic suppliers. We purchase circuit board assemblies and sheet metal components from a wide range of suppliers throughout the world. We carefully manage our inventory using lean manufacturing processes. We provide a limited warranty on all of our products that covers parts and labor for a period of one year from the date of sale. Research and Development We believe that our long-term growth is dependent upon the development and commercialization of ultrasonic coating technologies to solve customers’ high value problems across a wide spectrum of applications in various industries, while also advancing the utility of our core technology. During fiscal 2021 and fiscal 2020, we spent $1,645,000 and $1,428,000, respectively, on research and development activities related to new products and services and the ongoing improvement of existing products and services. As a percentage of sales, research and development expenses were 11.1% and 9.3% in fiscal 2021 and 2020, respectively. Intellectual Property Our business is based in part on the technology covered by our U.S. patents. We also rely on unpatented know-how in the design and production of our nozzle systems, subsystems and complete solutions. We have executed non-disclosure and non-compete agreements with all of our employees to safeguard our intellectual property. We execute reciprocal non-disclosure agreements with our key customers to safeguard any jointly developed intellectual property. Competition We operate in competitive markets in many of our industry segments. We compete against alternative coating technologies, as well as global and regional manufacturers of nozzles and other products based on price, quality, product features, application engineering and follow up service. We maintain our competitive position by providing highly effective solutions that meet our customers’ requirements and needs. In several emerging markets, we encounter less competition compared to more established markets based on the uniqueness of our ultrasonic technology in these applications. Information Regarding Sales Outside the United States and Canada During fiscal 2021 and fiscal 2020, sales to customers outside the U.S. and Canada accounted for approximately $9,678,000, or 65% of total revenue, and $10,849,000, or 71% of total revenue, respectively. 4 Employees As of February 28, 2021, we employed 66 full-time and 3 part-time employees. We believe that relations with our employees are generally good. Available Information We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. Therefore, we file “reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The SEC maintains a website at www.sec.gov that contains the reports, proxy statements and other information for registrants that file electronically, as we do. Additionally, these reports may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, DC 20549. Information regarding the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. We maintain a website at http://www.sono-tek.com. On our site, we provide copies of our Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge as soon as reasonably practicable after filing electronically such material with the SEC. Copies are also available, without charge, from Sono-Tek Corporation, 2012 Route 9W, Milton, NY 12547. ITEM 1A RISK FACTORS – Not Required for Smaller Reporting Companies.