What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-05-23 compared with 2023-05-25 · 223 added, 193 removed, 168 unchanged (71% of the section changed)

12 unchanged sentences

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

the recovery of the Electronics/Microelectronics and Medical markets;

maintenance of increased order backlog;

the imposition of tariffs;

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

of financing;

adequacy of financing;

capacity additions, the ability to enforce patents;

maintenance of operating leverage;

maintenance of increased order backlog;

consummation of order proposals;

completion of large orders on schedule and on budget;

continued sales growth in the medical and alternative

energy markets;

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

machine solutions and higher value subsystems;

continued sales growth in the medical and alternative energy markets;

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.

1 unchanged sentence

Highlights for fiscal 2024 include:

· 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.

Net sales for fiscal 2024 increased 31% to $19.7 million from $15.1 million, driven by strong shipments to the Alternative/Clean Energy, Industrial and Medical Markets.

The Alternative/Clean Energy Market grew by 96%, an increase of $2.94 million, in part due to a $766,000 shipment of a production scale system to a customer in the solar market;

with three additional systems valued at $730,000 each to be manufactured for the same customer remaining in backlog and all scheduled to ship in FY2025.

Gross profit margin for fiscal 2024 decreased to 50% compared to 50.8% in fiscal 2023.

Decreased profit margin was a result of product mix and a Q4 FY2024 realignment of our organizational framework as an outcome of completion of several successful R&D endeavors, which shifted some costs from R&D to cost of goods sold (COGS).

Operating income for fiscal 2024 increased 73% to $1.2 million compared to $683,000 in fiscal 2023, due to the current period’s increase in gross profit offset by an increase in operating expenses.

Despite record sales, equipment related backlog at February 29, 2024 reached a historical fiscal year end high of $9.1 million compared to the backlog at February 28, 2023 of $8.5 million, an increase of 7%.

The increase is due to continued strong orders in the second, third and fourth quarters of fiscal 2024 from the clean energy sector.

Net income was $1.4 million compared to $636k in the prior fiscal year.

The increase in net income in fiscal year 2024 is a result of an increase in operating income and interest and dividend income partially offset by an increase in operating expenses, an increase in income tax expense and the creation of a $138k reserve related to certain sales tax expenses.

As of February 29, 2024, we had no outstanding debt.

Cash, cash equivalents and marketable securities increased $400,000 to $11.8 million at February 29, 2024 compared to $11.4 million on February 28, 2023.

Interest income, dividend income and unrealized gain on marketable securities increased to $562,000 reflecting the high interest rate environment during fiscal 2024.

Market and Geographic Diversity

We have invested significant resources to enhance our market diversity.

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.

By leveraging our core ultrasonic coating technology, we have 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, industrial markets, and emerging research and development and other.

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

We are a geographically diverse company with a presence either directly

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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.

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

These laboratories

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Fiscal Year Ended

$ (2,075,000 )

Cost of Goods Sold

Gross Profit %

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

Gross profit increased $2,193,000, or 29% to $9,845,000 for fiscal

2024 compared with $7,652,000 in fiscal 2023.

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.

Gross profit margin decreased to 50.0% for fiscal 2024, compared to 50.8% for fiscal 2023.

Overall, the gross profit margin on our products remained relatively consistent when compared to fiscal 2023.

In fiscal 2024 the decrease in gross profit margin is due to increased

indirect salaries, an increase in transportation expenses, increased installation costs and increased warranty costs.

In fiscal 2023,

our warranty costs were lower than expected.

Warranty costs fluctuate year to year and are a function of product mix.

In addition, our

gross profit margin decreased due to the reallocation and recharacterization of specific labor expenses from the engineering department

to cost of goods sold.

In light of the successful culmination of several innovative R&D endeavors, we have

strategically realigned our operational structure.

Historically, certain salary expenditures associated with these initiatives were classified

under the R&D category during the developmental phase.

However, following the recent successful completion of several of these development

projects, we have transitioned some of these expenses to the manufacturing labor category.

This transition necessitated a change in our

organizational framework, where a select group of individuals now fall under the purview of the manufacturing organization rather than

the engineering team.

Effective December 1, 2023, coinciding with the commencement of the fourth quarter of fiscal 2024, we shifted the

cost allocation associated with these individuals to Cost of Goods Sold.

This realignment of labor allocation carries no discernible

impact on our overarching financial performance;

however, it does yield noteworthy adjustments to our cost structure.

Notably, while our

R&D expenses experienced a modest reduction, our direct labor costs underwent a commensurate increase, resulting in an approximate

2% decline in gross margin for the fourth quarter of fiscal 2024.

This trend is anticipated to continue, with a similar annual impact

anticipated for fiscal 2025.

Product Sales:

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Multi-Axis Coating Systems

$ (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.

Total sales for the fiscal 2024 grew by 31%, propelled by heightened demand for our Multi-Axis

Coating systems which are commonly used in the clean energy sector.

Integrated Coating System sales accelerated by 159%, or $1.8M, to

$2.9M due to continued success with our newly developed float glass coating platform and a newly completed custom-built system tailored

for a key strategic partner within the solar energy market.

Following uncharacteristically high revenue for Printed Circuit Board “PCB”

Fluxing systems for our fiscal year ended February 28, 2023, PCB Fluxing sales dipped by 39% for fiscal 2024.

Also, sales to our OEM Printed

Circuit Board customers that integrate our ultrasonic nozzles into their own spray fluxers declined, causing OEM sales to decrease by

We believe the slowdown in sales to the PCB spray fluxer market has returned us to what is closer to our historical revenue norms.

The dip in OEM sales was largely mitigated by an increase in spare parts and service-related revenue, which is a growing revenue stream,

categorized in the ”Other” product category.

Market Sales:

Twelve Months Ended

Electronics/Microelectronics

$ (1,625,000 )

Alternative Energy

Emerging R&D and Other

$ (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.

Sales to the Alternative/Clean Energy market recorded growth of 96% in fiscal 2024, which

were positively impacted by a growing number of our customers transitioning from our R&D systems to production scale systems that

carry much higher average selling prices.

Electronics market revenue experienced a modest uptick in fiscal year 2024.

was strongly influenced by three significant orders totaling $497,000, from the semiconductor market.

However, this positive momentum

was partially tempered by a $455,000 decrease in sales from our PCB spray fluxers.

Medical sales rebounded strongly in the second half of Fiscal 2024 and ended with 13% growth

for fiscal 2024.

Industrial sales remain very strong, showing growth of 48% for fiscal 2024, influenced

by shipment of two next-gen float glass coating systems totaling approximately $700,000, and the last two machines of a multi-system order

to a US based customer for $432,000.

Geographic Sales:

Twelve Months Ended

Asia Pacific (APAC)

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Latin America

$ (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.

In fiscal 2024, approximately 55% of our sales were to US and Canadian

This is compared to 45% in fiscal 2023.

We continue to record strong sales from the U.S.

and Canada, growing 60% for fiscal 2024.

This achievement can be attributed to various factors, including proactive governmental

initiatives such as the CHIPS ACT and the Inflation Reduction Act.

Additionally, the ongoing trend of onshoring for high-technology products

has significantly bolstered our sales performance in these regions.

Asia sales remained flat for fiscal 2024.

While robust sales from the clean energy sector

were shown from India, South Korea and Singapore, China sales continue a downward trajectory amidst the uncertain economic landscape prevailing

in the region.

In Latin America,

we encountered a discernible decline of 21%, representing a reduction of $325,000.

This decrease can be largely attributed to the sluggish

performance in the spray fluxer segment, a market segment commonly associated with our customer base in this region.

In fiscal 2024, EMEA sales experienced a notable surge, marking

a 26% increase equivalent to $885,000.

This upward trajectory was driven by robust sales in Ireland, where we secured orders and shipments

for two unique machines catering to separate customers within the medical sector.

These systems are designed for the specialized coating

of unique implantable devices, reflecting our commitment to innovation in thin film coatings on next gen healthcare devices.

Germany had continued sales growth of our electrolysis membrane coating systems, impacted by government initiatives aimed at fostering

expansion of the clean energy sector.

Operating Expenses:

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Research and product development costs increased $737,000 to $2,886,000

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.

for fiscal 2024 due to increased salaries and related costs and an increase in research and development materials and supplies, which

are used in the focused growth initiatives we continue to implement.

Marketing and Selling:

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 $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.

Marketing and selling costs increased $526,000 to $3,696,000 for fiscal

2024 due to increased salaries and increased travel and trade show expenses.

During fiscal 2024, we expended approximately $505,000 for travel

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The increased travel and trade show

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

expenses are a result of the global lifting of COVID-19 restrictions aligning closely with pre-pandemic levels.

General and Administrative:

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.

General and Administrative (G&A) costs increased $430,000 to $2,080,000

for fiscal 2024 due to an increase in salaries, professional fees and corporate expenses.

These increases were partially offset by a decrease

in stock-based compensation expense.

Effective January 1, 2024, Steve Harshbarger became our Chief Executive Officer and President,

having previously served as Chief Operating Officer and President prior to such date.

We have implemented adjustments to the allocation

of certain expenses in fiscal 2024 associated with this transition.

Specifically, we reclassified the expenses related to Mr.

Harshbarger's

compensation in connection with this positional change.

Prior to January 1, 2024, we categorized Mr.

Harshbarger’s salary under

sales expenses due to his instrumental involvement in nurturing strategic accounts.

In connection with Mr.

Harshbarger's assumption of

the principal executive officer role, the costs associated with his compensation have been reallocated to the G&A category ensuring

a more precise representation of resource allocation in our financial statements.

In the fourth quarter of fiscal 2024, we were notified by the State of California that

we were required to collect sales tax on our shipments to customers in California.

According to California, we have both physical and

economic nexus in the state and are required to collect sales tax.

We have taken the position that we do not have physical nexus, but

that we are subject to the economic nexus filing requirements.

The California economic nexus requirements have a look back period that

began on April 1, 2019.

We are in the process of reviewing our sales to California for the period beginning April

For taxable sales, we are in the process of trying to collect any sales tax due from our customers.

As of February 29, 2024,

on the basis of a preliminary analysis of our sales to our California customers since April 1, 2019, we have recorded an accrual in the

amount of $138,000 for the estimated sales tax, penalties and interest that we may be required to remit to the State of California.

Operating Income:

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.

Our operating income increased $499,000 or 73%, to $1,182,000 in fiscal

2024 compared with $683,000 for the prior fiscal year.

In fiscal 2024, the increase in operating margin is a result of an increase in

revenue and gross profit offset by an increase in operating expenses.

Operating margin for fiscal 2024 increased to 6% compared with 5%

in the prior fiscal year.

As a percentage of net sales, operating expenses decreased 200 basis points to 44% in fiscal 2024 compared with

46% in fiscal 2023.

Interest and Dividend Income:

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with $154,000 for the prior fiscal year.

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

in operating profit.

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

The increase in income tax expense in fiscal 2024 is due to the increase in income before income

taxes offset by the application of available research and development tax credits.

Net income increased $805,000 or 127%, to $1,441,000 for fiscal 2024

compared with $636,000 for the prior fiscal year.

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 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

in additional costs and may adversely impact our business and financial performance.

As our response to the pandemic evolves, we may incur

additional costs and will potentially experience adverse impacts to our business, each of which may be significant.

In addition, an extended

period of remote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks,

including, but not limited to, cybersecurity risks and increased vulnerability to security breaches, cyber-attacks, computer viruses,

ransomware, or other similar events and intrusions.

We may experience, decreases in demand and customer orders for our products

in all sales channels, as well as temporary disruptions and closures of our facilities due to decreased demand and government mandates.

COVID-19 has also impacted various aspects of the supply chain as

our suppliers experience similar business disruptions due to operating restrictions from government mandates.

We continue to monitor procurement

of raw materials and components used in the manufacturing, distribution and sale of our products, but continued disruptions in the supply

chain due to COVID-19 may cause difficulty in sourcing materials or unexpected shortages or delays in delivery of raw materials and components,

and may result in increased costs in our supply chain.

We have implemented plans to reduce spending in certain areas of our

business, including reductions or delays in capital expenditures, reduced trade show participation costs, reduced travel expenditures

and may need to take additional actions to reduce spending in the future.

We are closely monitoring and assessing the impact of the pandemic

on our business.

The extent of the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our

ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments,

which are highly uncertain and cannot be reasonably predicted.

Given the inherent uncertainty surrounding COVID-19, the pandemic

may continue to have an adverse impact on our business in the near term.

Should these conditions persist for a prolonged period, the COVID-19

pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business,

results of operations, cash flow, liquidity, and financial condition.

The increase in net income in fiscal 2024 is a result of an increase in operating income

and interest and dividend income partially offset by an increase in operating expenses and an increase income tax expense.

Liquidity and Capital Resources

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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.

result of the current year’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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for the $402,000 increase in “Cash”:

Impact on Cash

Net income, adjusted for non-cash items

To reconcile increase in cash.

Accounts receivable increase

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

Accounts receivable decrease

Decrease due to timing of receipts.

Inventories increase

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

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

Customer deposits increase

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Decreased prepaid expenses.

Income taxes payable increase

Income taxes payable decrease

Timing of disbursements.

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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.

by operating activities was the result of an increase in inventories.

This use of cash was partially offset by increases in customer deposits,

increases in accounts payable and accrued expenses and decreases in accounts receivable and prepaid expenses.

In fiscal 2024, we used $2,027,000 of cash compared with using $875,000

in fiscal 2023 for the purchase of inventories, a 132% increase.

Approximately half of this increase aligns with Sono-Tek's 31% revenue

growth, necessitating additional inventory to fulfill order demand efficiently.

Of the remaining half of the inventory increase, approximately

$730,000, stems from finished goods and work-in-progress items associated with three substantial orders associated with high-volume production

These systems boast high average selling prices and lengthy lead times, with all three scheduled for shipment in fiscal year

In addition, approximately $220,000 of finished goods comprise buy-ahead

modules designed to mitigate supply chain challenges.

It's anticipated that this figure will decrease to $110,000 by Q3 FY2025, reflecting

improved supply chain conditions.

Investing Activities – In fiscal 2024, we used

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

This compares with $327,000

for the purchase of equipment and furnishings in fiscal 2022.

This compares with $556,000 for

the purchase of equipment and furnishings in fiscal 2023.

In fiscal 2024, we used $1,589,000 of cash compared with using $2,255,000

for the purchase of marketable securities in fiscal 2023.

Financing Activities – In fiscal years 2023 and

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

Bank Credit Facilities:

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The letters of credit expire in fiscal year 2024.

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 Company applied for forgiveness of the PPP Loan in December 2020.

On April 1, 2021, the Company received notice from the Bank that the Bank had received confirmation from the SBA that the application

for forgiveness of the PPP Loan had been approved.

The loan forgiveness request in the amount of $1,001,640 was applied to the Company’s

entire outstanding PPP Loan balance with the Bank.

During 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.

We typically disclose our equipment-related backlog at the close of each

fiscal quarter.

However, we have not previously included our services-related backlog, encompassing repair parts, contract coating,

paid applications development time in our laboratories, and purchase orders for planned paid installation commitments, in our reported

backlog figures.

While historically the services-related backlog has represented an insignificant portion of our total backlog in

dollar terms, our strategic focus is aimed at growing this aspect of our business to become significant in the future.

Accordingly, beginning with our fiscal 2024 year-end figures included in

this discussion, we will incorporate service-related backlog into our reported total backlog number and present it separately.

its current size, we believe that service-related backlog holds potential for considerable growth.

At the end of fiscal year 2024,

our total backlog amounted to $9,277,168, comprised of $9,079,422 in equipment backlog and $197,746 in services-related backlog.

Off - Balance Sheet Arrangements

We do not have any Off - Balance Sheet Arrangements as of February

Critical Accounting Policies

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition

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under different assumptions and conditions.

Critical accounting policies are defined as those that are reflective

Management’s estimates and judgements are continually evaluated and are based

on historial experience and expectations regarding future events that are believed to be reasonable under the specific circumstances.

Critical accounting estimates are defined as those that are reflective

of significant judgments and uncertainties and may potentially result in materially different results under different assumptions and

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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, 2023 and February 28, 2022, there were no uncertain

tax provisions.

The Company accounts for income taxes under the asset and

liability method.

Under this method, deferred income taxes are recognized for the tax consequences of “temporary

differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement

carrying amounts and the tax basis of existing assets and liabilities.

Based on management’s estimate, 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.

evaluates the valuation allowance based on current estimates and historical experience.

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.

benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.

February 29, 2024 and February 28, 2023, there were no uncertain tax provisions.

Stock-Based Compensation

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Revenue Recognition

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.

Judgement is required when determining at what point in time

control of the Company’s manufactured equipment is transferred to its customers.

Management’s judgement is based on each

customer contract and the transfer of control of the equipment to the customer.

The sales revenue to be recorded is based on each contract.

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 December 2023, the FASB issued ASU 2023-09, Improvements to

Income Tax Disclosures.

This ASU requires greater disaggregation of information about a reporting entity’s effective tax rate

reconciliation as well as information on income taxes paid.

This ASU applies to all entities subject to income taxes and is intended to

help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and assess income tax

information that affects cash flow forecasts and capital allocation decisions.

This ASU is effective for annual periods beginning after

December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact the adoption of this ASU will have on

its consolidated financial statements and related disclosures.

Other than ASU 2023-09 discussed above, 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