What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-05-25 compared with 2022-05-24 · 155 added, 194 removed, 206 unchanged (63% of the section changed)

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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;

These factors include, among other considerations, general economic and business conditions;

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

inflationary and

supply chain pressures;

the continued abatement 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

the recovery of the Electronics/Microelectronics and Medical markets following COVID-19 related slowdowns;

and further adverse

effects to our supply chain;

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

the imposition of tariffs;

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;

the imposition

timely development and market acceptance of new products and continued customer validation of our coating technologies;

of financing;

capacity additions, the ability to enforce patents;

maintenance of operating leverage;

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consummation of order proposals;

of large orders on schedule and on budget;

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.

completion of large orders on schedule and on budget;

continued sales growth in the medical and alternative

energy markets;

successful transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete

machine solutions and higher value subsystems;

and realization of quarterly and annual revenues within the forecasted range of sales guidance.

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

Highlights for fiscal 2023 include:

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.

· Net sales for fiscal 2023 decreased 12% from

$17.1 million to $15.1 million, due to supply chain challenges which delayed the receipt of necessary parts to complete several customer

Our customized complex coating systems, which typically require longer than average delivery lead times, were especially impacted

by these remaining supply chain issues.

· Gross profit margin for fiscal 2023 increased

to 50.8% compared to 50.3% in fiscal 2022.

· Operating income for fiscal 2023 decreased 64%

to $683,000 compared to $1.9 million in fiscal 2022, due to the current period’s decrease in net sales combined with an increase

in operating expenses.

· Backlog at February 28, 2023

reached a historical high of $8.5 million compared to the backlog at February 28, 2022 of $5.3 million, an increase of 60%.

The large increase in backlog resulted

from the receipt of several large, complex system orders with longer than typical build delivery time frames and higher than average selling prices from the clean

energy sector during the year and from ongoing supply chain issues which slowed the rate at which we completed our backlog of orders.

· Cash, cash equivalents and marketable securities increased to $11.4 million on February

28, 2023 from $10.7 million on February 28, 2022.

Market and Geographic Diversity

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Fiscal Year Ended

$ (2,075,000 )

Cost of Goods Sold

Gross Profit %

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

Gross profit decreased $961,000, or 11% to $7,652,000 for fiscal 2023

compared with $8,613,000 in fiscal 2022.

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

Gross profit margin increased to 50.8% for fiscal 2023, compared to 50.3% for fiscal 2022.

improvement in the gross profit margin is due to a sales product mix with higher sales margins combined with lower than expected warranty

and installation costs.

In fiscal 2023, our sales included approximately $2,120,000 for orders

that were delivered to two customers.

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Multi-Axis Coating Systems

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.

$ (2,075,000 )

Sales of Multi-Axis coating systems recorded a 32% decrease due

to lingering supply chain challenges, resulting in several large system orders being pushed from planned fiscal 2023 shipments into

planned fiscal 2024 shipments, and are included in our year end fiscal 2023 backlog.

Fluxing Systems sales showed an increase of

71%, due to the continued adoption of a newly released spray fluxing platform, SonoFlux X2, which continues to be implemented with

several large printed circuit board contract manufacturers.

Sales of the “Other” product basket increased by 29%, or

$869,000, in large part due to increased sales of high value spare parts packages to support our high ASP multi-axis machines

already in the field.

Market Sales:

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Electronics/Microelectronics

$ (1,625,000 )

Alternative Energy

Emerging R&D and Other

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.

$ (2,075,000 )

Sales to the Alternative Energy, Electronics, and Medical markets decreased by 17%, 23%

and 15% respectively.

Large portions of all these markets use our multi-axis systems which experienced delayed deliveries due to supply

chain challenges, and moving several planned fiscal 2023 orders into fiscal 2024.

The industrial market grew by 131% due to a large multi-system

order valued at $1,540,000, $1,080,000 of this order was shipped in fiscal 2023 and the remaining $460,000 of the order shipped after the completion of fiscal 2023.

Geographic Sales:

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Latin America

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

This compares with 65% in fiscal 2021.

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.

$ (2,075,000 )

In fiscal 2023, approximately 45% of our sales were to US and Canadian customers.

is compared to 32% in fiscal 2022.

The increased sales to the US and Canada were positively impacted by several US Government initiatives

to invest in the green energy sector and advanced research markets.

APAC revenue decreased by 39% in fiscal 2023, impacted by reduced

sales in China due to several China-based manufacturing sites moving operations back to the US and Mexico.

Also, the currently strong

US Dollar has made Sono-Tek products more expensive in Japan and South Korea, resulting in several delayed purchases.

Operating Expenses:

Twelve Months Ended

Research and product development

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Research and product development costs increased $419,000 to $2,149,000

for fiscal 2022 due to increased salaries and related costs.

for fiscal 2023 due to increased salaries and related costs and an increase in research and development materials and supplies as we continue

the development of new products for new and existing markets.

Marketing and Selling:

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.

Marketing and selling costs decreased $197,000 to $3,170,000 for fiscal 2023 primarily

due to a decrease in commission expense.

This decrease was partially offset by increased travel and trade show expenses.

During fiscal 2023, we expended approximately $623,000 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.

as compared with $974,000 for the prior fiscal year, a decrease of $351,000.

The decrease in commission expense is due to 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 2023, we expended approximately $398,000 for travel

and trade show expenses compared with $205,000 for the prior fiscal year, an increase of $193,000.

The increased travel and trade show

expenses are a result of the global lifting of COVID-19 restrictions.

General and Administrative:

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.

General and Administrative costs increased $24,000 to $1,650,000 for

fiscal 2023 due to an increase in stock-based compensation expense.

This increase was partially offset by decreases in corporate expenses

and bad debt expense.

In fiscal 2023 stock-based compensation expense increased $78,000

to $257,000 compared with $179,000 in fiscal 2022.

The increase in stock-based compensation expense in fiscal 2023 is due to option awards

that were issued in the prior fiscal year.

Option awards are expensed over three years based on vesting terms.

Operating Income:

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.

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.

Our operating income decreased $1,206,000 or 64%, to $683,000 in fiscal

2023 compared with $1,889,000 for the prior fiscal year due to the current period’s decrease in gross profit.

Operating margin for

fiscal 2023 decreased to 5% compared with 11% in the prior fiscal year.

As a percentage of net sales, operating expenses increased 700

basis points to 46% in fiscal 2023 compared with 39% in fiscal 2022.

Interest and Dividend Income:

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

Interest and dividend income increased $131,000 to $140,000 for fiscal

2023 as compared with $9,000 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.

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

investments into US Treasury securities and certificates of deposit combined with the increase in current interest rates.

investment policy is to invest excess cash in highly liquid, low risk US Treasury securities and certificates of deposit.

28, 2023, the majority of our holdings are rated at or above investment grade.

Income Tax Expense:

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with $362,000 for the prior fiscal year.

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

The decrease in income tax expense in fiscal 2023 is due to the current period’s decrease

in operating profit.

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

Net income decreased by $1,907,000 or 75%, to $636,000 for fiscal

2023 compared with $2,543,000 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.

The decrease in net income in fiscal 2023 is a result of a decrease in operating

income and income tax expense combined with the PPP Loan forgiveness recorded in the prior year.

Impact of COVID-19

In December 2019, the COVID-19 outbreak occurred in China and has

since spread to other parts of the world.

On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic and

recommended containment and mitigation measures.

On March 13, 2020, the United States declared a national emergency concerning the outbreak.

Along with these declarations, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public

health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and

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.

In response to the COVID-19 pandemic and related government 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

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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

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

We aggregate cash and cash equivalents and marketable securities in

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Cash and cash equivalents

$ (1,486,000 )

Marketable securities

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To reconcile increase in cash.

Accounts receivable decrease

Timing of cash receipts.

Inventories decrease

Increased sales.

Accounts payable and accrued expenses decrease

Accounts receivable increase

Increase primarily due to shipments in the last month of the fiscal year.

Inventories increase

Additional inventory purchases and increase in work in process due to supply chain delays in receipt of required components.

Customer deposits increase

Received for new orders.

Accounts payable

Timing of disbursements.

Prepaid and Other Assets increase

Increased prepaid expenses and deposits.

Accrued expenses

Timing of disbursements.

Prepaid and Other Assets decrease

Decreased prepaid expenses.

Income taxes payable increase

Timing of disbursements.

Equipment purchases

Equipment and facilities upgrade.

Timing of disbursements.

Net increase in cash

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.

Stockholders’ Equity – Stockholders’

equity increased $893,000 from $13,741,000 at February 28, 2022 to $14,634,000 at February 28, 2023.

The increase was a result of the

current year’s net income of $636,000 and $257,000 in additional equity related to stock-based compensation awards.

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

Operating Activities – We generated $1,325,000

of cash in our operating activities in fiscal 2023 compared with generating $2,319,000 in fiscal 2022.

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.

The decrease in cash generated

by operating activities was the result of increases in accounts receivable and inventories, a decrease in accrued expenses combined with

the current period’s decrease in net income.

These uses of cash were partially offset by increases in customer deposits, income

taxes payable, an increase in accounts payable and a decrease in prepaid expenses.

Investing Activities – In fiscal 2023, we used

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

$2,811,000 in our investing activities compared with using $1,631,000 of cash in fiscal 2022.

Capital spending in fiscal 2023 was

4 unchanged sentences

for the purchase of marketable securities in fiscal 2022.

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 2023 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.

2022, we received $0 and $69,000 from the exercise of stock options.

Bank Credit Facilities:

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As of February 28, 2023, $145,000 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

was being utilized to collateralize letters of credit issued to customers that have remitted cash deposits to the Company on existing

The unused portion of the credit line was $1,355,000 as of February 28, 2023.

The letter of credit expires in fiscal year 2023.

The letters of credit expire in fiscal year 2024.

Paycheck Protection Program Loan Forgiveness:

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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.

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

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

years, beginning after December 15, 2019.

For SEC filers that meet the criteria of a smaller reporting company (including this Company)

and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim

periods within those fiscal years, beginning after December 15, 2022.

Early adoption will be permitted for all organizations for fiscal

years, and interim periods within those fiscal years, beginning after December 15, 2019.

The Company is currently in the process of its

analysis of the impact of this guidance on its consolidated financial statements and does not expect

the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

Other than Accounting Standards Update (“ASU”) ASU 2016-13

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

Hence, the adoption of these new accounting pronouncements, once effective, is not expected to have an impact on the Company.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK – Not Required for Smaller Reporting Companies.

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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-K

Item 7. Management’s Discussion and Analysis