What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-05-24 compared with 2021-05-28 · 308 added, 378 removed, 92 unchanged (88% of the section changed)

1 unchanged sentence

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;

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, including

inflationary pressures;

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

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;

and further adverse effects to our supply chain;

maintenance of increased order

backlog, including effects of any COVID-19 related cancellations;

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;

the continued strong sales of the multi-axis coatings systems;

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 patents;

maintenance of operating leverage;

2 unchanged sentences

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

and realization of quarterly and annual revenues within forecasted range.

continued sales growth in the clean energy, diagnostic test and next generation semiconductor

chip manufacturing markets;

successful implementation of initiatives advanced energy, medical device applications and next generation

high precision semiconductor coating applications;

successful transition from primarily selling ultrasonic nozzles and components to a

more complex business providing complete machine solutions and higher value subsystems;

and realization of quarterly and annual revenues

within the forecasted range of sales guidance.

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

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 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 material, water and energy usage and provide improved process repeatability, transfer efficiency, high uniformity and reduced

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 our 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 65% of our sales generated from outside the

United States and Canada.

Our direct sales team and our distributor and sales representative network is located in North America, Latin

America, Europe and Asia.

Over the last few years, we have expanded our sales capabilities by increasing the size of our direct sales

force, adding new distributors and sales representatives.

In addition, we have established testing labs at our distribution partner sites

in China, Taiwan, Germany, Turkey, Korea and Japan, while also recently 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.

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.

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

Highlights for fiscal 2022 include:

During the unprecedented year of the Covid-19 pandemic, our net sales for fiscal 2021 dipped only slightly to $14,833,000, down 3% compared with $15,355,000 for fiscal 2020.

We achieved this despite numerous COVID-19 related delays and cancellations from our customers, that we estimate amounted to 20% or more of lost potential business.

We attribute these strong results to the continuing success of our ongoing growth initiatives.

Gross profit margin for fiscal 2021 remained strong at 47.2% compared to 47.6% in fiscal 2020;

due to the strength in sales and good cost control.

Operating margin for fiscal 2021 increased to 9.04% compared to 7.3% in fiscal 2020, due to decreased costs in sales related travel and trade shows during the Covid-19 pandemic.

Backlog on February 28, 2021

was up 9.5% compared to the backlog on February 29, 2020.

We attribute this to our ongoing strategy for product line expansion with

further customization and automation, which delivers increased value to our customer, and a higher average selling price to

Operating activities generated an increase of $725,000 in fiscal 2021, as cash, cash equivalents and short-term investments climbed from $7,879,000 on February 29, 2020 to $8,648,000 on February 28, 2021.

We repaid our mortgage debt in its entirety during fiscal 2021.

We applied for forgiveness of our Payroll Protection Program funding in December 2020.

Our forgiveness application was approved in April 2021.

We have a strong balance sheet with no debt.

We believe that this provides us with the financial flexibility to pursue our business strategy for growth.

We believe that our strong, debt free balance sheet will allow us to aggressively pursue organic or other growth opportunities as they arise.

The Covid-19 pandemic accelerated sales and broadened our customer base for diagnostic coating machines, which supports the manufacturing of Covid-19 testing kits, with approximately $770,000 of equipment sold in fiscal year 2021.

Net sales for fiscal 2022 increased 16%, from $14.8M to $17.1 million, Sono-Tek’s highest revenue ever.

Gross profit margin for fiscal 2022 increased to 50.3% compared to 47.2% in fiscal 2021, driven by the strength in sales, increased efficiencies, and a favorable product mix.

Operating profit for fiscal 2022 increased 41.0% to $1.9M compared to $1.3M in fiscal 2021, due to less than expected increases in costs associated with sales related travel and trade shows resulting from lingering Covid restrictions.

Backlog at February 28, 2022 was $5.3M compared to the backlog at February 28, 2021 of $3.8M, an increase of 38%.

This growth is attributed to the Company’s strategy for product line and system sales expansion with further customization and automation, which delivers increased value to our customer, and higher average selling prices to Sono-Tek.

Operating activities generated an increase of $2.3M in cash, cash equivalents and short-term investments which climbed to $10.7M on February 28, 2022 from $8.6M on February 28, 2021.

Sono-Tek was approved for listing on the Nasdaq Capital Market, which was completed in August 2021.

This uplisting from our previous OTCQX platform brought both increased liquidity and a higher appreciation of SOTK’s inherent value in the months since, as we became visible to a wider number of investment entities.

We applied for forgiveness of our Payroll Protection Program funding and our forgiveness application was approved in April 2021.

Market and Geographic Diversity

We have invested significant resources to enhance our market diversity.

Leveraging our

core ultrasonic coating technology, we expanded our portfolio of products, the industries we serve, and the countries in which we sell

our products.

By leveraging our core ultrasonic coating technology, we’ve expanded our portfolio of products, the industries we serve, and the

countries in which we sell our products.

Today, we serve five industries:

microelectronics/electronics, medical, alternative energy,

emerging research and development and other, as well as the industrial markets.

We are a geographically diverse company with a presence directly and through distributors

and trade representatives, in the United States and Canada, EMEA (Europe, Middle East and Africa), APAC (Asia Pacific) and Latin America

(including Mexico).

microelectronics/electronics, medical,

alternative energy, industrial markets and emerging research and development and other.

We are a geographically diverse company with a presence either directly

or through distributors and trade representatives in the United States and Canada, EMEA (Europe, Middle East and Africa), APAC (Asia Pacific)

and Latin America (including Mexico).

In fiscal 2022, approximately 68% of sales originated outside of the United States and Canada.

We established an infrastructure

to drive our geographic diversity including a newly equipped application process development laboratory in APAC, a strengthened sales

organization of application engineers, expanded talent on our engineering team, the latest, most sophisticated design software tools,

as well as an expanded, highly trained installation and service organization.

We believe that the new products we have introduced, the new markets we have

penetrated, and the expanded regions in which we now sell our products, are a strong foundation for our future sales growth and

We have an established infrastructure of application process development

laboratories located at our distributor sites in Japan, China, Germany, Taiwan, Korea and our home office in New York, USA.

These laboratories

are equipped with Sono-Tek systems and technical personnel to conduct customer demonstrations and process development for new coating

applications that our customers bring to us.

Our engineering, service and sales teams all continue to grow as we expand our addressable

markets and enhance our product line to include larger more sophisticated machinery and systems with increased capabilities.

We believe that the new products we have introduced, the new markets

we have penetrated, and the expanded regions in which we now sell our products, are a strong foundation for our future sales growth and

enhanced profitability.

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Gross Profit %

The Covid-19 pandemic reached the US in full force only two weeks into our fiscal year,

resulting in our application process development labs coming to a grinding halt, and all trade shows and customer visits being canceled.

Fortunately, we had been creating strong digital connections with our customers before the pandemic, enabling Sono-Tek to quickly shift

our customers from in person interactions to virtual experiences in our lab, remote virtual sales meetings, and virtual machine installations.

Many of our customers canceled or delayed orders during the pandemic, but our growth initiatives offset most of these cancelations, and

we only experienced a 3% dip in sales.

Gross profit remained stable at 47.2%.

In fiscal 2021, our sales include approximately $4,100,000 for orders that were delivered

to three customers.

Throughout the COVID-19 pandemic, Sono-Tek has been successful

offering virtual, in person, and a hybrid mix of both virtual and in person, customer interactions.

Our strong digital connections

made this a smooth transition for our customer base and allowed us to remain highly flexible to support the worldwide demand for the

full system solutions we provide, and to effectively reach our customers anywhere in the world.

Sono-Tek’s ability to rapidly

adapt to these changing conditions, and the strong demand for our products in the markets we serve, resulted in 16% revenue growth

for fiscal 2022.

Gross profit increased $1,616,000, or 23% to $8,613,000 for fiscal

2022 compared with $6,997,000 in fiscal 2021.

Gross profit margin increased by 310 basis points, reaching 50.3% for fiscal 2022, compared

to 47.2% for fiscal 2021.

The improvement in the gross profit margin is due to increased sales and a sales mix with higher sales margins

combined with lower than expected warranty and installation costs.

In fiscal 2022, our sales include approximately $4,130,000 for orders

that were delivered to two customers.

Product Sales:

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Multi-Axis Coating Systems

Integrated coating systems showed 17% growth due to a significant shipment of

customized machinery to apply nano-coatings in the textile industry.

A 12% sales dip occurred in fluxing systems in fiscal 2021 as

many of these customers remained in lockdown for a significant amount of time due to Covid.

Multi-Axis coating systems dropped 18%

in fiscal 2021, which was impacted greatly by a $1.6 million multi-axis robot sold in fiscal 2020.

Although we did receive an order

for another multi-axis robot of similar value in fiscal 2021, this is not scheduled to ship until fiscal 2022.

Multi-Axis coating systems showed 77% growth due to a significant

shipment of a six-axis robot machine sold to the Semiconductor industry for over $1,700,000, and strong sales of machines used in the

clean energy sector and medical diagnostic markets, both of which use highly sophisticated multi-axis platforms.

OEM sales also generated

excellent growth in fiscal 2022 increasing by 51% when compared to fiscal 2021.

This was a result of several new OEM relationships gaining

momentum to incorporate Sono-Tek OEM packages into their new product designs.

Integrated coating systems saw a decline of 72%, which was

greatly impacted by a large textile machine sold in fiscal 2021, which did not repeat in fiscal 2022.

Market Sales:

1 unchanged sentence

Electronics/Microelectronics

$ (2,489,000 )

Alternative Energy

Emerging R&D and Other

The Industrial market showed 402% growth, primarily a result of an order for large multi-nozzle

coating systems sold to an overseas textile manufacturer.

Alternative Energy customers had several Covid lockdowns throughout the year

negatively affecting fuel cell system sales, however, an increase in sales to the carbon capture market offset this dip and resulted in

a 12% overall increase for the Alternative energy market.

The Electronics / Microelectronics market dipped 29% due to several of our PCB

fluxing customers in this market halting operations during Covid lockdowns, and a large 6-axis robot system that sold in fiscal 2020,

that did not repeat in fiscal 2021.

The Alternative Energy market delivered 72% growth, due to strong investments from governments

and private industries focused on the clean energy sector, and the goal for a net zero carbon society.

These clean energy customers use

Sono-Tek machinery to create catalyst coated membranes used in fuel cells, carbon capture, and hydrogen generation applications.

market grew to $4,338,000, an increase of 29%, primarily driven by strong sales to China for customized medical device solutions and a

significant new North America based customer in the dental device industry.

The electronics market grew by 19%, which was driven by a

significant sale of a six-axis robot into the semiconductor market.

The industrial market saw a 53% dip due to a large fiscal 2021 shipment

in the textile market, that did not repeat in fiscal 2022.

Geographic Sales:

5 unchanged sentences

This compares with 65% in fiscal 2021.

The increased sales to US and Canada are a result of many US companies shifting manufacturing

operations back to the US, due to the operational challenges of manufacturing in foreign countries during the Covid-19 pandemic.

sales to Latin America of 20% were driven by a drop in PCB fluxer sales during Covid lockdowns in Mexico and Brazil.

The increased sales to our international customer base are a result of many overseas customers

bringing manufacturing operations back online, with fewer COVID-19 restrictions.

South Korea contributed significantly to increased APAC

sales, led by solid growth for Sono-Tek machines used in the clean energy sector.

Operating Expenses:

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Research and Product Development:

Research and product development costs increased $217,000 to $1,645,000 for fiscal 2021

due to increased salaries and related costs.

In the prior fiscal year, 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 $85,000 to $1,730,000

for fiscal 2022 due to increased salaries and related costs.

Marketing and Selling:

Marketing and selling costs decreased $613,000 to $2,790,000 for fiscal 2021 due to decreases

in commissions, travel and trade show expenses.

During fiscal 2021, we expended approximately $621,000 for commissions as compared with

$865,000 for the prior fiscal year, a decrease of $244,000.

The decrease in commission expense 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.

During fiscal 2021, we expended approximately $78,000 for advertising and trade show expense

compared with $297,000 for the prior fiscal year, a decrease of $219,000.

During fiscal 2021, we expended approximately $9,000 for travel expense compared with $153,000

for the prior fiscal year, a decrease of $144,000.

Marketing and selling costs increased $577,000 to $3,367,000 for fiscal

2022 due to increases in salaries, commissions, travel and trade show expenses.

During fiscal 2022, we expended approximately $974,000 for commissions

as compared with $621,000 for the prior fiscal year, an increase of $353,000.

The increase in commission expense is due to an increase

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

During fiscal 2022, we expended approximately $70,000 for travel and

trade show expense compared with $9,000 for the prior fiscal year, an increase of $61,000.

We anticipate that travel and trade show expenses

will increase when sales and marketing activities re open when COVID-19 conditions improve.

General and Administrative:

General and Administrative costs decreased $145,000 to $1,222,000 for fiscal 2021 due to

decreases in stock based compensation expense, bank fees, bad debt expense and accrued Covid-19 mandated sick time.

These decreases were

partially offset by increased health insurance premiums and annual meeting and proxy expenses related to the Covid-19 outbreak.

General and Administrative costs increased $404,000 to $1,626,000

for fiscal 2022 due to increases in professional fees, corporate expenses, and stock-based compensation expense.

In fiscal 2022 stock

based compensation expense increased $131,000 to $179,000 compared with $48,000 in fiscal 2021.

In fiscal 2022 professional fees expense increased $112,000 to $237,000

compared with $125,000 in fiscal 2021.

In fiscal 2022 corporate expense increased $129,000 to $347,000 compared with $218,000 in fiscal

In August 2021, our stock was approved for listing on the Nasdaq Capital Market.

The expenses associated with obtaining the Nasdaq

listing are primarily responsible for the increases in professional fees and corporate expenses in fiscal 2022.

In the current fiscal

year, we expensed $88,000 in application and entry fees related to procuring our Nasdaq listing.

Operating Income:

Our operating income increased $225,000, to $1,340,000 in fiscal 2021 compared with $1,115,000

for the prior fiscal year.

Decreased gross profit offset by a larger decrease in operating expenses were key factors in the improvement

of operating income in fiscal 2021.

Our operating income increased $549,000 or 41%, to $1,889,000 in fiscal

2022 compared with $1,340,000 for the prior fiscal year.

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

income in fiscal 2022.

Operating margin for fiscal 2022 increased to 11% compared with 9% in the prior fiscal year.

a percentage of net sales, operating expenses were down 200 basis points to 38% in fiscal 2021 compared with 40% in fiscal 2020.

conditions improve, many of these costs are expected to increase when sales and marketing related activities re-open for travel

and trade shows.

Interest Expense:

Interest expense increased to $40,000 for fiscal 2021 as compared with $33,000 for the

prior fiscal year.

The current year’s interest expense of $40,000 includes a mortgage prepayment penalty of $14,000.

2020, the Company paid the entire outstanding principal balance due on its mortgage.

As a percentage of

net sales, operating expenses increased 100 basis points to 39% in fiscal 2022 compared with 38% in fiscal 2021.

As Covid-19 conditions

improve, many of these costs are expected to increase when sales and marketing related activities reopen for travel and trade shows.

Interest and Dividend Income:

Interest and dividend income decreased $79,000 to $23,000 for fiscal 2021 as compared with

$102,000 for the prior fiscal year.

The decrease in interest and dividend income is due to the reallocation of our investments into US

Treasury securities and certificates of deposit.

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

Treasury securities and certificates of deposit.

At February 28, 2021, the majority of our holdings are rated at or above investment grade.

Interest and dividend income decreased $14,000 to $9,000 for fiscal

2022 as compared with $23,000 for the prior fiscal year.

The decrease in interest and dividend income is due to the reallocation of our

investments into US Treasury securities and certificates of deposit.

Our present investment policy is to invest excess cash in highly

liquid, low risk US Treasury securities and certificates of deposit.

At February 28, 2022, the majority of our holdings are rated at or

above investment grade.

Income Tax Expense:

We recorded income tax expense of $227,000 for fiscal 2021 compared with $106,000 for the

prior fiscal year.

The increase in income tax expense in fiscal 2021 is due to a decrease in available research and development credits.

Net income increased by $14,000 to $1,121,000 for fiscal 2021 compared with $1,107,000

for the prior fiscal year.

For fiscal 2021 and 2020, we do not believe that our sales revenue or net income has been

affected by the impact of inflation or changing prices.

We recorded income tax expense of $362,000 for fiscal 2022 compared

with $227,000 for the prior fiscal year.

The increase in income tax expense in fiscal 2022 is due to the current period’s increase

in operating profit.

Net income increased by $1,422,000 or 127%, to $2,543,000 for fiscal

2022 compared with $1,121,000 for the prior fiscal year.

The increase in net income in 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.

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

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,

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

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.

These changes include adjusting our policies on social distancing,

flexing our workforce hours, enhanced cleaning and sanitary procedures, limiting travel when appropriate, and restricting access of non-employees

to our facility when necessary.

These policies continue to be modified and adjusted dependent upon government regulations and CDC guidelines.

While these measures are 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.

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, we expect 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.

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 $1,729,000 to $8,902,000

at February 28, 2021 from $7,173,000 at February 29, 2020.

The increase in working capital was primarily the result of the current period’s

net income and non-cash charges partially offset by purchases of equipment and repayment of long-term debt.

We aggregate cash and cash equivalents and marketable securities in managing our balance

sheet and liquidity.

For purposes of the following analysis, the total is referred to as “Cash.” At February 28, 2021 and

February 29, 2020, our working capital included:

Working Capital – Our working capital increased

$1,880,000 to $10,782,000 at February 28, 2022 from $8,902,000 at February 28, 2021.

The increase in working capital was primarily the

result of the current period’s net income and non-cash charges partially offset by purchases of equipment and repayment of long-term

We aggregate cash and cash equivalents and marketable securities in

managing our balance sheet and liquidity.

For purposes of the following analysis, the total is referred to as “Cash.” At February

28, 2022 and February 28, 2021, our working capital included:

Cash and cash equivalents

Marketable securities

The following table summarizes the accounts and the major reasons for the $769,000 increase

The following table summarizes the accounts and the major reasons

for the $2,061,000 increase in “Cash”:

Impact on Cash

1 unchanged sentence

To reconcile increase in cash.

Accounts receivable increase

Accounts receivable decrease

Timing of cash receipts.

Inventories increase

Required to support backlog.

Accounts payable and accrued expenses increase

Inventories decrease

Increased sales.

Accounts payable and accrued expenses decrease

Timing of disbursements.

Customer deposits decrease

Timing of shipments.

Repayment of long term debt

Repayment of debt.

Note payable proceeds

Paycheck Protection Program loan proceeds.

Prepaid and Other Assets increase

Increased prepaid expenses and deposits.

Equipment purchases

Equipment and facilities upgrade.

Capital expenditure grant proceeds

Receipt of grant proceeds.

Timing of disbursements.

Net increase in cash

Stockholders’ Equity - Stockholders' equity increased $1,169,000 from

$9,782,000 at February 28, 2020 to $10,951,000 at February 28, 2021.

The increase was a result of the current year’s net income

of $1,121,000 and $48,000 in additional equity related to stock based compensation awards.

The details of stock based compensation are

explained in Note 4 in our financial statements.

Operating Activities –

We generated $725,000 of cash in our operating

activities in fiscal 2021 compared with generating $3,254,000 in fiscal 2020.

The decrease in cash generated by operating activities was

mostly the result of increased accounts receivable, inventories, and decreased customer deposits.

These uses of cash were partially offset

by increased accounts payable and accrued expenses.

Investing Activities –

In fiscal 2021, cash used in investing activities

was $595,000 compared with their using $2,576,000 of cash in fiscal 2020.

Capital spending in fiscal 2021 was $344,000 for the purchase

or manufacture of equipment, furnishings and leasehold improvements and patent costs.

This compares with $722,000 for the purchase of

equipment and furnishings in fiscal 2020.

In fiscal 2021 we used $344,000 for the purchase of marketable securities compared with

Stockholders’ Equity - Stockholders' equity increased

$2,790,000 from $10,951,000 at February 28, 2021 to $13,741,000 at February 28, 2022.

The increase was a result of the current year’s

net income of $2,543,000, proceeds from the exercise of stock options of $68,000 and $179,000 in additional equity related to stock-based

compensation awards.

The details of stock-based compensation are explained in Note 4 in our financial statements.

Operating Activities – We generated $2,319,000

of cash in our operating activities in fiscal 2022 compared with generating $725,000 in fiscal 2021.

The increase in cash generated by

operating activities was mostly the result of a decrease accounts receivable and inventories.

These sources of cash were partially offset

by decreases in accounts payable and accrued expenses and an increase in prepaid and other assets.

Investing Activities – In fiscal 2022, we used

$1,631,000 in our investing activities compared with their using $595,000 of cash in fiscal 2021.

Capital spending in fiscal 2022 was

$327,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements and patent costs.

This compares with $344,000

for the purchase of equipment and furnishings in fiscal 2021.

In fiscal 2022, we used $1,304,000 of cash compared with using $344,000

for the purchase of marketable securities in fiscal 2021.

In 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 fiscal years 2021 and 2020, we used $708,000

and $163,000 in cash, respectively, for the principal payments on our mortgage.

In 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 fiscal years 2022 and

2021, we used $0 and $708,000 in cash, respectively, for the principal payments on our mortgage.

In fiscal 2021, we borrowed $1,001,640 from a bank under the Paycheck

Protection Program.

In fiscal 2022, we received $69,000 from the exercise of stock options.

Bank Credit Facilities:

We currently have a revolving credit line of $1,500,000 and a $750,000 equipment purchase

facility, both of which are with a bank.

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

We currently have a revolving credit line of $1,500,000 and a $750,000

equipment purchase facility, both of which are with a bank.

The revolving credit line is collateralized by the Company’s accounts

receivable and inventory.

The revolving line of credit is payable on demand and must be retired for a 30-day period, once annually.

As of February 28, 2021, there

were no outstanding borrowings under the line of credit.

As of February 28, 2021, $849,000 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.

portion of the credit line was $651,000 as of February 28, 2021.

The letters of credit expire at various times in the fiscal year ending

February 28, 2022.

Paycheck Protection Program Loan

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

of February 28, 2022, there were no outstanding borrowings under the line of credit.

As of February 28, 2022, $5,000 of the Company’s credit line

was being utilized to collateralize a letter of credit issued to a customer that has remitted a cash deposit to the Company on an existing

The unused portion of the credit line was $1,495,000 as of February 28, 2022.

The letter of credit expires in fiscal year 2023.

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”).

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.

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 fiscal 2022, 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.

Off - Balance Sheet Arrangements

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Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations

are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles

generally accepted in the United States of America.

The preparation of these financial statements requires the Company to make estimates

and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets

and liabilities at the date of the financial statements.

Actual results may differ from these estimates under different assumptions and

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.

As of February

28, 2021, management believes that there are no critical accounting policies applicable to the Company that are reflective of significant

judgments and or uncertainties.

The Company accounts for income taxes under the asset and liability method.

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 February 28, 2021 and February 29, 2020, there were no accruals for

uncertain tax positions.

The discussion and analysis of the Company’s financial condition

and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance

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

The preparation of these financial statements requires

the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related

disclosure on contingent assets and liabilities at the date of the financial statements.

Actual results may differ from these estimates

under different assumptions and conditions.

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

As of February 28, 2022, management believes that there are no critical accounting policies applicable to the Company that

are reflective of significant judgments and or uncertainties.

Accounting for Income Taxes

The Company accounts for income taxes under the asset and liability

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.

As of February 28, 2022 and February 28, 2021, there were no uncertain

tax provisions.

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 and expected option lives to value equity-based

compensation.

We currently use a Black-Scholes option pricing model to calculate the fair value of stock options.

We primarily use historical

data to determine the assumptions to be used in the Black-Scholes model and have 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.

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.

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

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.

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.

Impact of 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.

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.

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.

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

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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.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820):

Framework-Changes to the Disclosure Requirements for Fair Value Measurement.

ASU 2018-13 removes certain disclosures, modifies certain

disclosures and adds additional disclosures.

The ASU is effective for annual periods, including interim periods within those annual periods,

beginning after December 15, 2019.

Early adoption is permitted.

The Company adopted the new standard on March 1, 2020, and the adoption

did not have a material impact on its consolidated financial statements.

Other than Accounting Standards Update (“ASU”) 2019-12, ASU 2016-13 and ASU

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”) ASU 2016-13

discussed above, all new accounting pronouncements issued but not yet effective have been deemed to be not applicable to the Company.

5 unchanged sentences

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What changed 10-K

Item 7. Management’s Discussion and Analysis