Sono-Tek Corporation Annual Report 2017

FY2017 Annual Report · Sono-Tek Corporation

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2017 Annual Report

Full Coating Solutions

2017 Annual ReportR&D, Lab Environment, Pilot Scale, and High Volume Production Coating Machines

On the Cover: Sono-Tek’s application and engineering expertise have enabled the development of a mature
line of customizable motion controlled coating systems, unparalleled in their range of capabilities. Full integration
of our patented ultrasonic nozzles into highly automated, programmable coating machines offers customers full
turnkey solutions that ensure the best quality, and most repeatable manufacturing processes.

Sono-Tek’s customer base is expanding into one that requires unique custom solutions, application expertise,
and industry knowledge. We have been able to leverage our engineering resources to meet this demand, resulting
in larger, more sophisticated systems, offered in conjunction with coating services. This is an area where other
competitive technologies lack depth of experience and know-how.

Corporate Highlights

◘ Challenging year with 18% sales decrease

worldwide.

◘ Positive net income, even after significant drop

in sales due to uncertain economic environment.

◘ Cash and cash equivalents grew substantially

due to LEAN program implementation.

Contents
BUSINESS FOCUS .....................................................................IFC

CORPORATE HIGHLIGHTS .......................................................... 1

OVERVIEW .................................................................................. 1-4

CHAIRMAN’S MESSAGE .............................................................. 5

MANAGEMENT’S DISCUSSION .............................................. 6-10

INDEPENDENT AUDITOR’S REPORT ......................................... 11

CONSOLIDATED FINANCIAL STATEMENTS ........................ 12-24

COMMON STOCK ....................................................................... 24

CORPORATE DIRECTORY. ......................................................... 25

Significant Press Releases

Interview in “MEMS Journal” - Published October 7, 2016
Excerpt: “Bennett Bruntil, Director of Electronics and Advanced Energy, was recently interviewed by ‘MEMS Journal’ to discuss ultrasonic
spray in comparison to high speed spin coating for MEMS and other precision semiconductor wafers with difficult to coat aspect ratios.
The interview discusses market trends as well as the unique challenges Sono-Tek has overcome in depositing uniform photoresist for these
applications in the development of the SPT200, a spray deposition tool designed specifically for these challenging photoresist applications.”

Sono-Tek Coating Equipment Enables Research & Development in Production Feasibility of Thin Film Solar Cells at TOBB University of
Economics and Technology (TOBB ETU) in Ankara, Turkey - Published August 12, 2016
Excerpt: “The main research interest of (the TOBB) group is focused on environmentally friendly, cost-efficient and solution processed chalco-
pyrite based thin film solar cells on both rigid and flexible substrates. For this topic, we have published numerous papers in different scientific
journals. In these studies, we employed Sono-Tek’s FlexiCoat spray pyrolysis system with ultrasonic impact nozzles. Sono-Tek’s technology
provided us remarkably high deposition yield (up to 40 times) with the same solution amount.”

Sono-Tek Unveils New Photoresist Deposition System - Published June 28, 2016
Excerpt: “SPT200 is designed specifically to meet the unique challenges of coating high aspect ratios and deep well topographies such
as MEMS wafers with photoresist. The SPT200 replaces traditional spin coating equipment, providing more uniform coverage of side walls
in difficult to coat applications. Ultrasonic spray has been used for photoresist deposition for years, and is a well-proven method for
semiconductor lithography manufacturing.”

Sono-Tek Corp. and Branson to Highlight Laser Welding Solution at MD&M East - Published June 9, 2016
Excerpt: “(Sono-Tek and Branson’s) collaborative solution for superior clear on clear laser welds using Clearweld 100, 200 and 900 Series
coating materials (is) perfect for diagnostic devices, cell culture flasks, and other plastic welded medical components.”

Overview

Sono-Tek has developed a unique and proprietary series of ultrasonic atomizing nozzles and systems which are
being used in an increasing variety of electronics, advanced energy (solar and fuel cells), medical device, glass,
textiles and food applications. These nozzles are electrically driven and create a fine, uniform, low velocity spray
of atomized liquid particles, in contrast to common pressure nozzles. These characteristics create a series of
commercial applications that benefit from the precise, uniform, thin coatings that can be achieved. When
combined with significant reductions in liquid waste and less overspray than can be achieved with ordinary
pressure nozzle systems, there is lower environmental impact and lower energy use.

In addition, over half of our sales come from outside the United States, and we are geographically present directly
and through distributors and trade representatives in North and Latin America, Europe and Asia.

2017 Annual ReportOverview of Fiscal Year (March 1, 2016 - February 28, 2017)

This past fiscal year was a challenging one, with economic and political uncertainty in several of our major
geographical markets. Europe, parts of Asia, and Latin America were affected as investment decisions were
postponed or in some cases cancelled. Two of our industrial market segments were more affected than others,
glass line installations and medical device coating installations. As a result, our sales for the past year declined
by 18% to $9.7 million.

Normally, such a decline in sales would mean cutting back on R&D and product development, experiencing a loss
for the year, and a reduction in cash reserves. However, none of these things occurred at Sono-Tek this past year.
What did happen was that we recognized our very strong cash position and decided to continue our investment in
R&D and product development at the same level as the previous year. We believe that our future is dependent on
organic technology development, which in turn will drive our business forward as it has done in the past.

Furthermore, we did not show a loss, but rather managed to have a profitable year and also substantially
increased our cash and marketable securities position. Most of these welcome results can be attributed to the
implementation of a LEAN manufacturing program at Sono-Tek over the past two years. We have found that we
can operate the business more efficiently and with less inventory on hand by changing our manufacturing and
engineering processes. The changes come from the engagement and contributions of our team members
combined with the application of more computerized work station interfaces.

The result is that we had a much better than expected year and have positioned ourselves for recovery and
growth as the global economic conditions improve. The charts on this page and the next tell the story in
graphical terms.

CASH & MARKETABLE SECURITIES

$5,000,000
$5,000,000

$4,000,000
$4,000,000

$3,000,000
$3,000,000

$2,000,000
$2,000,000

$1,000,000
$1,000,000

$0
$0

R&D SPENDING

$2,000,000
$2,000,000

$1,500,000
$1,500,000

$1,000,000
$1,000,000

$500,000
$500,000

2013
2013

2014
2014

2015
2015
Fiscal Year
Fiscal Year

2016
2016

2017
2017

2016
2016
Fiscal Year
Fiscal Year

2013

2014

2015

2016

2017

Fiscal Year

2013

2014

2015

2016

2017

Fiscal Year

Stock Price

Sono-Tek has demonstrated the ability to grow revenues, profits, and cash reserves over the past decade.
Today, we have a strong balance sheet, which provides us the ability to choose investments in our future
growth either organically or in terms of possible strategic additions from outside. The Company has a relatively
small public float, and thus has not been adequately followed by public market investors. Therefore, the
Company’s public market valuation at times does not necessarily reflect the value associated with its proprie-
tary technology, unique products and substantial growth potential. We do take steps to bring our story to new
investors, and will continue to do so in the future. We believe that the market responds over time to companies
like ours that demonstrate sound financial results coupled with the proven ability to grow profitably.

Our Products

Sono-Tek’s product line has evolved from selling a variety of ultrasonic atomizing nozzle configurations to
providing complete, full coating solutions. New products are added to the Company’s portfolio of offerings
every year, in response to market demand, as well as improvements and next generation technologies for
existing products. The wide range of capabilities and automated features offered are a result of the Company’s
seasoned and knowledgable engineering, applications engineering, and New Product Development (NPD)
teams. Our products find markets in research and development laboratories and universities, low-volume and
pilot scale manufacturing, mid-volume, and continuous high-volume manufacturing.

We expect to continue this culture of innovation and customer-oriented solutions as we find new markets and
expand existing ones.

SALES

NET INCOME

2013

2014

2016

2017

2015
2014
Fiscal Year

2016
2015
Fiscal Year

2013

2014

2016

2017

2015
2014
Fiscal Year

2016
2015
Fiscal Year

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$2,000,000

$1,500,000

$1,000,000

$500,000

2013

2014

2015

2016

2017

Fiscal Year

2016

2017

Fiscal Year

2017 Annual ReportOur Markets

We follow our markets in two dimensions–geographically and by application segment. The first chart below shows
our sales distribution by geographical area in the past fiscal year. Most areas were affected by economic or political
uncertainty which affected investment decisions. Europe and Latin America were most affected, and instability in
Brazil and the Mexican peso also contributed to sales weakness. However, the problems seen last year seem to be
diminishing as we enter our new fiscal year.

The other dimension of our markets is by application. Each application requires an understanding of the customer’s
processes and a design that helps them solve a manufacturing problem or improve their process efficiency. Each of
these areas has required an investment of our time and resources to develop hardware and application knowledge that
wins repeat business over time. In the past year, the Fuel Cell and Semiconductor segments performed well, while the
others suffered from deferred investment decisions, as seen in the chart below. The Solar industry continued to decline
in 2016, as we’ve seen in the past few fiscal years, due to a reduction in government spending. At this point, Solar
manufacturing is no longer a significant market segment for the Company. However, we are seeing a shift in some of
the government funded research from Solar to Fuel Cell development, resulting in positive sales in the Fuel Cell sector.
We are seeing a rebound from several other market segments as well, in conjunction with growing sales from newly
introduced products. We are optimistic that the new fiscal year will continue in this direction.

GEOGRAPHIC DIVERSIFICATION
Sales by Territory Fiscal Year 2017

MARKETS
Sales by Market Fiscal Year 2017

Compared to FY2016

39%

14%

18%

13%

16%

Compared
to FY2016

39% US & Canada

18% Asia (Excluding China)

13% China

14% Mexico & Latin America

16% Europe (Including Russia)

Semiconductor

Fuel Cell

Fluxing

Textiles

Stents

Float Glass

2017 Chairman’s Message

Every year has its own story, and this past year has been one of challenges: how to maintain the future
growth of the business while sales are in a down cycle, how to protect the financial strength of the
business, and whether to maintain our investment in R&D and product development in a lean year.
Coincidentally, it was the implementation of our LEAN program that helped us to square the circle this
past year. We were able to maintain our R&D and product development at the same pace as last year,
and we were able to grow the financial strength of the business at the same time. In fact, we grew our
cash and marketable securities to the highest level in our history this past year. The LEAN program has
engaged most of our team members in new ways as they helped to define more streamlined workflow
procedures and handoffs. We have made extensive use of computerized interfaces between work stations
and our financial tracking system, which gives more control and ownership to individual team
members as they execute orders

We have introduced and sold several new products such as SonoBraze, SimCoat, and ALIGN, and we
have prepared several product upgrades for the new year such as Auto PCB Recognition and a new com-
bined platform for our SPT200 coater for the semiconductor market. SonoBraze is our first attempt to enter
the automobile heat exchanger industry, and the first application has been successful. SimCoat is a small
XYZ robotic coating platform that has already appealed to R&D customers as a lower cost, first entry unit.
ALIGN is a LEAN product that combines four previous product designs and a variety of applications into
one unit that can be tailored to the requisite application at the time of order, saving both time and money.

A challenging year can bring out the best in people, and that is true too of organizations such as
Sono-Tek. We look forward to the new year and to a greater awareness in this country of the importance
of government policies supporting and encouraging businesses to succeed in global competition and
the resulting job creation here.

Sincerely,

Christopher L. Coccio, Ph.D.
Chairman and CEO

July 25, 2017

Dr. Christopher Coccio
CEO

Stephen Harshbarger
President

2017 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports,
press releases, and other written and oral statements. 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. These factors include, among other considerations,
general economic and business conditions; political, regulatory, competitive and technological developments affecting our
operations or the demand for our products; timely development and market acceptance of new products; adequacy of financing;
capacity additions, the ability to enforce patents and the ability to achieve increased sales volume and continued profitability.

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

Overview

We have developed a unique and proprietary series of ultrasonic atomizing nozzles and systems, which are being used in an
increasing variety of electronics, advanced energy (solar and fuel cells), medical device, glass, textiles and food applications.
These nozzles are electrically driven and create a fine, uniform, low velocity spray of atomized liquid particles, in contrast to
common pressure nozzles. These characteristics create a series of commercial applications that benefit from the precise,
uniform, thin coatings that can be achieved. When combined with significant reductions in liquid waste and less overspray than
can be achieved with ordinary pressure nozzle systems, there is lower environmental impact and lower energy use.

Market Diversity

During the past several years we have invested significant time, monies and efforts to enhance our market diversity. Based on our
core ultrasonic coating technology, we increased our portfolio of products, the industries we serve and the countries in which we
sell our products.

Today we serve six major industries: electronics, advanced energy (solar and fuel cells), medical device, glass, textiles and food.

In recent years, a substantial portion of our sales originated outside the United States, and we are geographically present directly
and through distributors and trade representatives in North and Latin America, Europe and Asia. The infrastructure upon which
this diversified market approach is based, includes a newly equipped process development laboratory, a strengthened sales
organization with application engineers, an engineering team with additional talent and the latest, most sophisticated design
software tools, as well as an expanded, highly trained installation and service organization.

The new products which we have introduced, the new markets that we have penetrated, and the regions in which we now sell our
products, are a strong foundation for our future sales growth and enhanced profitability.

Liquidity and Capital Resources

Working Capital – Our working capital increased $530,000 from $5,855,000 at February 29, 2016 to $6,385,000 at February 28,
2017. The increase in working capital is due to net income of $96,000 and our non-cash expenses of $440,000 for depreciation
and amortization, $47,000 for stock based compensation, $112,000 for an increase in the market values of our Available-For-Sale
Investments and $161,000 for an increase in our deferred tax asset. These non-cash expenses were offset by cash outflows of
$183,000 for the purchase of equipment and furnishings and $143,000 for the repayment of notes payable. The Company’s
current ratio was 5.4 to 1 at February 28, 2017 as compared to 4.5 to 1 at February 29, 2016.

At February 28, 2017, our working capital includes $2,557,000 of cash and $2,342,000 of marketable securities, a total of
$4,899,000. At February 29, 2016, our working capital included $2,388,000 of cash and $1,696,000 of marketable securities, a
total of $4,084,000. The aggregate balance of cash and marketable securities increased $815,000 during the twelve-month
period ended February 28, 2017.

Stockholders’ Equity – Stockholders’ equity increased $255,000 from $7,668,000 at February 29, 2016 to $7,923,000 at
February 28, 2017. The increase in stockholders’ equity is the result of the current year’s net income of $96,000, stock based
compensation of $47,000 and an increase in our accumulated comprehensive income of $112,000.

Operating Activities – Our operating activities provided $1,029,000 of cash for the year ended February 28, 2017 as
compared to providing $629,000 for the year ended February 29, 2016. For the year ended February 28, 2017, we had net
income of $96,000, accounts receivable decreased $64,000, inventories decreased $525,000, prepaid expenses and other
assets increased $17,000, accounts payable and accrued expenses decreased $16,000, customer deposits decreased $123,000
and income taxes payable decreased $73,000. In addition, we incurred non-cash expenses of $440,000 for depreciation and
amortization, $47,000 for stock based compensation expense, $6,000 for an increase in deferred taxes and an increase in our
inventory reserve of $80,000.

Investing Activities – For the year ended February 28, 2017, we used $716,000 of cash in our investing activities as compared
to using $648,000 for the year ended February 29, 2016. In 2017 and 2016, we used $183,000 and $465,000, respectively, for
the purchase or manufacture of equipment, furnishings and leasehold improvements. In 2017 and 2016, we used $534,000 and
$165,000, respectively, for the purchase of marketable securities. In 2016, we used $18,000 for patent application costs
compared to none in 2017.

Financing Activities – For the year ended February 28, 2017, we used $143,000 of cash in our financing activities as compared
to using $155,000 for the year ended February 29, 2016. In 2017 and 2016, we used $143,000 and $158,000, respectively, for the
repayments of notes payable. In 2016, we received $3,000 for the exercise of stock options.

Net Increase in Cash – For the year ended February 28, 2017, our cash balance increased by $169,000 as compared to a
decrease of $174,000 for the year ended February 29, 2016. During the year ended February 28, 2017, our operations provided
$1,029,000 of cash, we used $717,000 in our investing activities and used $143,000 in our financing activities.

Bank Credit Facilities – We currently have a revolving credit line of $750,000 and a $250,000 equipment purchase facility, both
of which are with a bank. The revolving credit line is collateralized by all of the assets of the Company, except for the land and
buildings. The line of credit is payable on demand and must be retired for a 30 day period once annually. As of February 28,
2017, there were no outstanding borrowings under the line of credit.

We had outstanding borrowings under a note payable of $1,176,000 at February 28, 2017. The note is payable over seven years
and accrues interest at 4.15%. The note payable is secured by a mortgage on our land and buildings.

Results of Operations

Ultrasonic Spraying Systems Segment:

Sales:

Twelve Months Ended

February 28, February 29,

Increase (Decrease)

2017

2016

Net Sales ..................................................................................
Cost of Goods Sold ..................................................................
Gross Profit ...............................................................................

$ 9,635,000 $ 11,739,000
5,231,000
6,196,000
$ 4,404,000 $ 5,543,000

$(2,104,000)
(965,000)
$ (1,139,000)

(18)%
(16)%
(21)%

Gross Profit % ...........................................................................

46%

47%

For the year ended February 28, 2017, our sales decreased $2,104,000 to $9,635,000 as compared to $11,739,000 for the year
ended February 29, 2016, a decrease of 18%. During the year ended February 28, 2017, we experienced decreases in sales of
our WideTrack Glass Coating Units, Nozzles and Ultrasonic Generators, PCB Fluxing Units, Servo PCB Fluxing Units and Stent
Coating Units. These decreases were partially offset by an increase in sales of our XYZ Platform Units and Spray Brazing Units.

For the year ended February 28, 2017, sales of our WideTrack Glass Coating Units decreased $1,615,000 when compared to the
prior fiscal year. The decrease in sales of these units was primarily driven by lower demand from individual customers.

For the year ended February 28, 2017, sales of our XYZ Platform Units increased $509,000 when compared to the prior fiscal year.

Gross Profit:
Our gross profit decreased $1,139,000 or 21%, to $4,404,000 for the year ended February 28, 2017 from $5,543,000 for the year
ended February 29, 2016. Our gross profit margin percentage was 46% for the year ended February 28, 2017 compared to 47%
for the year ended February 29, 2016.

The decrease in the current year’s gross profit is primarily due to the decrease in sales of our higher gross profit margin
WideTrack Glass Coating Units, Stent Coating Units and Nozzles and Ultrasonic Generators. In addition, our fixed overhead
costs remained constant during the current fiscal year.

2017 Annual Report

Export Sales:

Twelve Months Ended

February 28, February 29,

2017

2016

Change

Western Europe ........................................................................
Far East ....................................................................................
Middle East ...............................................................................
South America ..........................................................................
Mexico ......................................................................................
Other .........................................................................................
Total Export Sales .....................................................................

$ 1,695,000
2,702,000
232,000
208,000
275,000
249,000

$ 2,643,000
2,947,000
247,000
208,000
421,000
111,000
$ 5,361,000 $ 6,577,000

$ (948,000) (36)%
(8)%
(245,000)
(6)%
(15,000)
-
-
(146,000) (35)%
138,000 100%
$ (1,216,000) (18)%

Percentage of Total Sales .........................................................

56%

For the year ended February 28, 2017, sales to customers located in European countries decreased by $948,000 or 36%, sales to
customers located in Asian countries decreased by $245,000 or 8%, sales to Mexico decreased by $146,000 or 35% and sales to
other non-US based customers increased by $138,000 or 100%.

Operating Expenses:

Research and product development .......................................
Marketing and selling ...............................................................
General and administrative ......................................................

Twelve Months Ended

February 28, February 29,

Change

2017

2016

$ 1,250,000 $ 1,268,000
$ 2,198,000 $ 2,371,000
$ 1,034,000 $ 1,100,000

$
$ (18,000)
$ (173,000)
$ (66,000)

%
(1)%
(7)%
(6)%

Research and Product Development:
Research and product development costs decreased $18,000 to $1,250,000 for the year ended February 28, 2017 as compared
to $1,268,000 for the year ended February 29, 2016. For the year ended February 28, 2017, we experienced decreases in
engineering materials and supplies expense. These decreases were partially offset by increases in engineering salaries,
insurance and depreciation.

Marketing and Selling:
Marketing and selling costs decreased $173,000 to $2,198,000 for the year ended February 28, 2017 as compared to $2,371,000
for the year ended February 29, 2016. For the year ended February 28, 2017, we experienced decreases in international
commission expense and depreciation expense. In addition, in the prior year period we incurred expenses related to our
international distributor training. We did not provide distributor training in the fiscal year ended February 28, 2017. These
decreases were partially offset by increased sales salaries, insurance expense and advertising and trade show expenses.

During the year ended February 28, 2017, we expended approximately $417,000 for commissions as compared to $590,000 for
the year ended February 29, 2016, a decrease of $173,000.

During the year ended February 28, 2017, we expended approximately $286,000 for advertising and trade show expense
compared to $228,000 for the year ended February 29, 2016, an increase of $58,000.

General and Administrative:
General and administrative costs decreased $66,000 to $1,034,000 for the year ended February 28, 2017 as compared to $1,100,000,
for the year ended February 29, 2016. For the year ended February 28, 2017, we experienced decreases in insurance expense, salary
expense and corporate and other miscellaneous expenses. These decreases were partially offset by an increase in professional fees.

Operating (Loss) Income – Ultrasonic Spraying:
We incurred an operating loss of $78,000 for the year ended February 28, 2017, compared to operating income of $804,000 for
the year ended February 29, 2016, a decrease of $882,000. During the current year, our gross profit decreased by $1,139,000
when compared to the prior year. The decrease in gross profit was offset by decreases in Research and Development costs,
Marketing and Selling expenses and General and Administrative expenses, which collectively decreased by $257,000 when
compared to the prior year.

Rental Real Estate Operations:

For the year ended February 28, 2017, our real estate operations generated $90,000 in rental income from unrelated third parties
as compared to $95,000 for the year ended February 29, 2016. Our real estate operations incurred $34,000 in operating expenses
compared to $35,000 for the prior year period, real estate taxes of $53,000 compared to $51,000 for the prior year period,
depreciation expense of $74,000 compared to $73,000 for the prior year period and $52,000 in interest expense compared
to $58,000 for the prior year period. For the year ended February 28, 2017, our real estate operations reported a net loss of
$123,000 compared to a net loss of $122,000 for the prior year period. The reported losses exclude any inter-company rent.

A summary of our real estate operations is as follows:

Twelve Months Ended
February 28, February 29,

2017

2016

Change

Statements of Operations
Rental Income ..........................................................................

$ 90,000

$ 95,000

(5,000) (5)%

Real Estate Taxes .....................................................................
Interest Expense .......................................................................
Depreciating Expense ..............................................................
Operating Expenses .................................................................

53,000
52,000
74,000
34,000

51,000
58,000
73,000
35,000

4%
2,000
(6,000) (10)%
1%
1,000
(1,000) (1)%

Net Loss From Real Estate Operations ....................................

$ (123,000)

$ (122,000)

(1,000) (1)%

Per Square Foot Cost Based on 50,000 sq. feet .....................

2.46

2.44

Statements of Cash Flows
Net Loss ...................................................................................
Adjustments to reconcile net loss to net cash used in
real estate operations:
Depreciation .............................................................................

Twelve Months Ended

February 28, February 29,

2017

2016

$ (123,000)

$ (122,000)

74,000

73,000

Repayment of long term debt ..................................................

(143,000)

(138,000)

Net Cash (Used) in Real Estate Operations.............................

$ (192,000)

$ (187,000)

Cash Used Per Square Foot Cost Based on 50,000 sq. feet ..

3.84

3.74

For the years ended February 28, 2017 and February 29, 2016, net cash outflows related to the industrial park were $192,000 and
$187,000, respectively. These cash outflows are net of rental income and depreciation expense and include the principal payments
on the industrial park’s mortgage and the costs of capital improvements. Prior to purchasing the industrial park in December
2010, our annual rental expense was approximately $136,000 or $7.14 per square foot. If we are able to lease additional vacant
space, it will provide positive cash flow for the industrial park when compared to our prior rental payments of $136,000.

Our rental income was approximately $6.00 per square foot, based on 15,600 square feet leased to third parties for the years
ended February 28, 2017 and February 29, 2016.

Interest Expense:
Interest expense decreased to $52,000 for the year ended February 28, 2017 as compared to $58,000 for the year ended
February 29, 2016.

Interest and Dividend Income:
Interest and dividend income increased to $71,000 for the year ended February 28, 2017 as compared to $55,000 for the year
ended February 29, 2016. Our present investment policy is to invest excess cash in highly liquid mutual funds. Our holdings are
rated at or above investment grade.

Other Income:
During the year ended February 28, 2017, we received a payout of $200,000 in life insurance proceeds from the death of a
former employee.

2017 Annual Report

Income Tax (Benefit) Expense:
We recorded an income tax benefit of $19,000 for the year ended February 28, 2017 as compared to an expense of $195,000 for the
year ended February 29, 2016. The details of the current year’s tax benefit are explained in Note 12 in our financial statements.

Net Income:

For the year ended February 28, 2017, we had net income of $96,000 as compared to $548,000 for the year ended February 29, 2016.
The decrease in our net income is due to a decrease in our revenues and gross profit which was partially offset by a decrease in
operating expenses. In addition, in the current year period, we received a payout of $200,000 in life insurance proceeds from the
death of a former employee.

For the years ended February 28, 2017 and February 29, 2016, we do not believe that our sales revenue or net income has been
adversely affected by the impact of inflation or changing prices.

Other Comprehensive Income (Loss)

Net unrealized income (loss) on marketable securities:

As of February 28, 2017, certain of our marketable securities were in an unrealized gain position. Unrealized gains (losses) are
principally due to changes in the fair value of our investments held as available-for-sale. Because we have the ability and intent to
hold the securities until maturity, or for the foreseeable future as classified as available-for-sale, we do not deem the gain or decline
to be other-than-temporary.

For the year ended February 28, 2017, the unrealized gain on our available-for-sale marketable securities was $112,000 compared
to a loss of $70,140 for the year ended February 29, 2016.

Off - Balance Sheet Arrangements

We do not have any Off - Balance Sheet Arrangements as of February 28, 2017.

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 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 conditions. As of February 28, 2017, management believes there are no
critical accounting policies applicable to the Company that are reflective of significant judgments and or uncertainties.

Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 is a
complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly
surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates,
to value equity-based compensation. 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. ASC 718 requires the recognition
of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of 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 period.

Impact of New Accounting Pronouncements

All accounting pronouncements issued but not yet effective have been deemed to be not applicable or the adoption of such
accounting pronouncement is not expected to have a material impact on the financials.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Sono-Tek Corporation

We have audited the accompanying consolidated balance sheets of Sono-Tek Corporation as of February 28, 2017 and February
29, 2016 and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash
flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of February 28, 2017 and February 29, 2016, and the results of its operations and cash flows for each of the years
then ended, in conformity with generally accepted accounting principles in the United States.

LIGGETT & WEBB, P.A.
Certified Public Accountants
New York, New York 10016
May 26, 2017

2017 Annual Report

SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS

February 28,
2017

February 29,
2016

ASSETS
Current Assets:
Cash and cash equivalents ....................................................................... $ 2,557,223
2,342,184
Marketable securities ................................................................................
1,150,801
Accounts receivable (less allowance of $46,000) .............................................
1,340,684
Inventories, net .........................................................................................
127,276
Prepaid expenses and other current assets .............................................
315,171
Deferred tax asset .....................................................................................
7,833,339
Total current assets ........................................................................

Land ...............................................................................................................
Buildings, net .................................................................................................
Equipment, furnishings and leasehold improvements, net ..........................
Intangible assets, net ....................................................................................

250,000
1,875,074
624,197
153,326

$ 2,388,355
1,695,689
1,214,713
1,945,383
109,954
154,914
7,509,008

250,000
1,939,714
796,788
174,027

TOTAL ASSETS ............................................................................................. $ 10,735,936

$ 10,669,537

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable ...................................................................................... $ 336,561
868,755
Accrued expenses ....................................................................................
78,902
Customer deposits ....................................................................................
149,698
Current maturities of long term debt .........................................................
14,619
Income taxes payable ...............................................................................

475,297
746,036
201,478
143,388
87,660

Total current liabilities.....................................................................

1,448,535

1,653,859

Deferred tax liability .......................................................................................
Long term debt, less current maturities ........................................................

337,726
1,026,650

171,719
1,176,349

Total Liabilities............................................................................................

2,812,911

3,001,927

Commitments and Contingencies ...............................................................

Stockholders’ Equity
Common stock, $.01 par value; 25,000,000 shares authorized,
14,961,076 and 14,955,400 issued and outstanding, respectively .......
Additional paid-in capital ...........................................................................
Accumulated deficit ...................................................................................
Accumulated other comprehensive income (loss) ...................................

149,611
8,859,486
(1,128,322)
42,250

149,554
8,812,224
(1,224,028)
(70,140)

Total stockholders’ equity ..............................................................................

7,923,025

7,667,610

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY ................................... $ 10,735,936

$ 10,669,537

See notes to consolidated financial statements.

SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Fiscal Year Ended

February 28,
2017

Net Sales ....................................................................................................... $ 9,724,553
5,230,559
Cost of Goods Sold .......................................................................................
4,493,994
Gross Profit ....................................................................................

Operating Expenses
Research and product development ........................................................
Marketing and selling ................................................................................
General and administrative .......................................................................
Real estate operations expense ................................................................
Total Operating Expenses..............................................................

1,249,591
2,197,991
1,034,239
160,440
4,642,261

February 29,
2016

$ 11,833,730
6,195,953
5,637,777

1,268,010
2,371,064
1,099,783
158,629
4,897,486

Operating (Loss) Income ..............................................................................

(148,267)

740,291

Other Income (Expense):
(52,294)
Interest Expense ............................................................................................
Interest and Dividend Income .......................................................................
70,797
Other Income ................................................................................................. 206,096
76,332
Income before Income Taxes ........................................................................

Income Tax (Benefit) Expense .......................................................................

(19,374)

(58,447)
54,757
5,851
742,452

194,723

Net Income .................................................................................................... $

95,706

547,729

Other Comprehensive Income (Loss)
Net unrealized income (loss) on marketable securities ............................

112,390

(70,140)

Comprehensive Income ................................................................................ $ 208,096

477,589

Basic Earnings Per Share .............................................................................. $

Diluted Earnings Per Share ........................................................................... $

.01

.04

Weighted Average Shares – Basic ................................................................

14,961,076

14,943,018

Weighted Average Shares – Diluted ..............................................................

15,018,282

15,029,601

See notes to consolidated financial statements.

2017 Annual Report

SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

Accumulated
Other

Balance – February 28, 2015 ........
Exercise of stock options ..............
Stock based compensation
expense .........................................
Unrealized (loss) on marketable ...
securities .......................................
Net Income ....................................
Balance – February 29, 2016 ........
Exercise of stock options ..............
Stock based compensation
expense .........................................
Unrealized gain on
marketable securities ....................
Net Income ....................................
Balance – February 28, 2017 ........

Common Stock
Par Value $.01

Shares
14,933,107
22,293

Amount
$ 149,331
223

Additional Comprehensive
Paid – In
Capital
$ 8,766,160
2,662

Income
(Loss)

-
-

Total

Accumulated Stockholders’

Deficit

Equity

$ (1,771,757) $ 7,143,734
2,885

43,402

-
-
14,955,400
5,676

-
-
$ 149,554
57

-
-
$ 8,812,224
(57)

(70,140)
-

(70,140)
547,729
(70,140) $ (1,224,028) $ 7,667,610
-

-
547,729

47,319

-
-
14,961,076

-
-
$ 149,611

-
-
$ 8,859,486

112,390
-
$ 42,250

-
95,706

112,390
95,706
$ (1,128,322) $ 7,923.025

See notes to consolidated financial statements.

SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended

February 28,
2017

February 29,
2016

95,706

547,729

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .................................................................................................... $
Adjustments to reconcile net income to net
cash provided by operating activities:

Depreciation and amortization .............................................................
Stock based compensation expense ...................................................
Inventory reserve ..................................................................................
Allowance for doubtful accounts ..........................................................
Deferred tax expense ...........................................................................

(Increase) Decrease in:
Accounts receivable .......................................................................
Inventories ......................................................................................
Prepaid expenses and other assets ..............................................

440,223
47,319
80,006
-
5,750

63,912
524,693
(17,322)

(Decrease) Increase in:
Accounts payable and accrued expenses ....................................
Customer deposits .........................................................................
Income taxes payable ....................................................................
Net Cash Provided by Operating Activities...............................

(16,017)
(122,576)
(73,041)
1,028,653

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, furnishings and leasehold improvements .............
(Purchase) of marketable securities ..............................................................
Patent application and other asset costs ......................................................
Net Cash (Used In) Investing Activities ................................................

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options ...............................................................
Repayment of long term debt .......................................................................
Net Cash (Used In) Financing Activities ...............................................

(182,837)
(533,559)
-
(716,396)

-
(143,389)
(143,389)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...........

168,868

CASH AND CASH EQUIVALENTS:
2,388,355
Beginning of year ..........................................................................................
End of year .................................................................................................... $ 2,557,223

Supplemental Cash Flow Disclosure:

Interest Paid ................................................................................................... $

52,294

Income Taxes Paid ......................................................................................... $

56,502

See notes to consolidated financial statements.

476,528
43,402
(119,924)
2,953
106,826

(188,416)
233,718
(15,467)

(55,568)
(260,690)
(142,267)
628,824

(465,427)
(164,825)
(17,700)
(647,952)

2,885
(158,184)
(155,299)

(174,427)

2,562,782
$ 2,388,355

58,447

230,289

2017 Annual Report

SONO-TEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

NOTE 1: BUSINESS DESCRIPTION

The Company was incorporated in New York on March 21, 1975 for the purpose of engaging in the development, manufacture,
and sale of ultrasonic liquid atomizing nozzles, which are sold world-wide. Ultrasonic nozzle systems atomize low to medium
viscosity liquids by converting electrical energy into mechanical motion in the form of high frequency ultrasonic vibrations that
break liquids into minute drops that can be applied to surfaces at low velocity.

Based on its core technology of ultrasonic liquid atomizing nozzles, the Company has developed intellectual property in the area
of precision spray coating of liquids. The Company is presently engaged in the development, manufacture, sales, installation and
servicing of diverse ultrasonic coating equipment for various manufacturing industries worldwide.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Advertising Expenses – The Company expenses the cost of advertising in the period in which the advertising takes place.
Advertising expense for the years ended February 28, 2017 and February 29, 2016 was $285,572 and $227,825, respectively.

Allowance for Doubtful Accounts – The Company records a bad debt expense/allowance based on management’s estimate
of uncollectible accounts. All outstanding accounts receivable accounts are reviewed for collectability on an individual basis.
The bad debt expense recorded for the years ended February 28, 2017 and February 29, 2016 was approximately $0 and $3,000,
respectively.

Available-for-Sale Investments – The Company’s available for sale investments are carried at fair value with the unrealized
gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Realized losses and declines in value below cost judged to be other than temporary, if any, are included as a component of
asset impairments expense in the consolidated statement of operations. The fair value of the available-for-sale investments are
based on quoted market prices. The Company’s fair value determination method is discussed below in “Fair Value of Financial
Instruments”.

Cash and Cash Equivalents – Cash and cash equivalents consist of money market mutual funds, short term commercial paper
and short-term certificates of deposit with original maturities of 90 days or less.

Concentration of Credit Risk – The Company does not believe that it is subject to any unusual or significant risks, in the normal
course of business. The Company had one customer, which accounted for 7% of sales during the year ended February 28, 2017.
Six customers accounted for 46% of the outstanding accounts receivables at February 28, 2017.

The Company had one customer, which accounted for 7% of sales during the year ended February 29, 2016. Four customers
accounted for 40% of the outstanding accounts receivables at February 29, 2016.

Consolidation – The accompanying consolidated financial statements of Sono-Tek Corporation, a New York corporation (the
“Company”), include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC. Sono-Tek
Industrial Park, LLC, operates as a real estate holding company for the Company’s real estate operations.

Earnings Per Share – Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.

Equipment, Furnishings and Leasehold Improvements – Equipment, furnishings and leasehold improvements are stated at
cost. Depreciation of equipment and furnishings is computed by use of the straight-line method based on the estimated useful
lives of the assets, which range from three to five years.

Fair Value of Financial Instruments – The Company follows the guidance in the “Fair Value Measurements and Disclosure
Topic” of the Accounting Standards Codification for assets and liabilities measured at fair value on a recurring basis. This guidance
establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the
use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value
measurements. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. Additionally, the guidance requires the use of
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are
prioritized below:

Level 1: Quoted prices in active markets.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own
assumptions.

The fair values of financial assets of the Company were determined using the following categories at February 28, 2017 and
February 29, 2016, respectively:

Quoted Prices in Active Markets
(Level 1)
February 28, 2017 February 29, 2016

Marketable Securities .........................................................................

$ 2,342,184

$ 1,695,689

Marketable Securities include mutual funds of $2,342,184 and $1,695,689, that are considered to be highly liquid and easily
tradeable as of February 28, 2017 and February 29, 2016, respectively. These securities are valued using inputs observable
in active markets for identical securities and are therefore classified as Level 1 within the Company’s fair value hierarchy. The
Company’s marketable securities are considered to be available-for-sale investments as defined under ASC 320 “Investments –
Debt and Equity Securities”.

Income Taxes – The Company accounts for income taxes under the asset and liability method. Under this method, deferred
income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates
applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets
and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance
is recognized.

Intangible Assets – Include costs of patent applications which are deferred and charged to operations over seventeen years
for domestic patents and twelve years for foreign patents. The accumulated amortization of patents is $138,777 and $127,900 at
February 28, 2017 and February 29, 2016, respectively. Annual amortization expense of such intangible assets is expected to be
approximately $11,000 per year for the next five years.

Inventories – Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for
raw materials, subassemblies and work-in-progress and the specific identification method for finished goods.

Land and Buildings – Land and buildings are stated at cost. Buildings are being depreciated by use of the straight-line method
based on an estimated useful life of forty years.

2017 Annual Report

Long-Lived Assets – The Company periodically evaluates the carrying value of long-lived assets, including intangible assets,
when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

Management Estimates – The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements – 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 are not expected
to have an impact on the Company.

Product Warranty – Expected future product warranty expense is recorded when the product is sold.

Reclassifications – Where appropriate, prior year’s financial statements reflect reclassifications to conform to the current year’s
presentation.

Recognition of Revenue – Sales are recorded at the time title passes to the customer, which, based on shipping terms,
generally occurs when the product is shipped to the customer. Based on prior experience, the Company reasonably estimates
its sales returns and warranty reserves. Sales are presented net of discounts and allowances. Discounts and allowances are
determined when a sale is negotiated. The Company does not grant its customers or independent representatives the ability to
return equipment nor does it grant price adjustments after a sale is complete.

Research and Product Development Expenses – Research and product development expenses represent engineering and
other expenditures incurred for developing new products, for refining the Company’s existing products and for developing sys-
tems to meet unique customer specifications for potential orders or for new industry applications and are expensed as incurred.

Shipping and Handling Costs – Shipping and handling costs are included in cost of sales in the accompanying consolidated
statements of operations.

NOTE 3: SEGMENT INFORMATION

The Company operates in two segments: ultrasonic spray coating systems, which is the business of developing, manufacturing,
selling, installing and servicing ultrasonic spray coating equipment; and real estate operations, which is the business of owning
and operating the Sono-Tek Industrial Park.

All inter-company transactions are eliminated in consolidation. Segment information is as follows:

Fiscal Year Ended February 28, 2017

Fiscal Year Ended February 29, 2016

196,298 $

Ultrasonic
Spraying

Rental
Real Estate
Operations Eliminations Consolidated

Rental
Real Estate
Operations Eliminations Consolidated
Net Sales .................. $ 9,634,956 $ 285,895 $ 196,298 $ 9,724,553 $ 11,738,982 $ 291,046 $ 196,298 $ 11,833,730
Rental Expense ........ $
-
Rental Operations
Expense ................... $
Depreciation
74,464
Expense ................... $
52,294
Interest Expense ...... $
Net Income (Loss) ... $
218,843 $ (123,137)
Assets ...................... $ 8,346,183 $ 2,389,753
- $ 1,176,348
Debt .......................... $

72,629
$ 429,360 $ 392,803 $
52,294 $
58,364
$
83 $
$
95,706 $ 669,974 $ (122,245)
$ 10,735,936 $ 8,214,873 $ 2,454,664
- $ 1,319,737
$ 1,176,348 $

$ 465,432
$
58,447
$ 547,729
$ 10,669,537
$ 1,319,737

354,896 $
- $

- $ 196,298 $

- $ (196,298) $

85,976

85,887

85,976

85,887

- $

NOTE 4: STOCK-BASED COMPENSATION

The Company adopted ASC 718, “Share Based Payments” which requires companies to expense the value of employee stock
options and similar awards.

The weighted-average fair value of options has been estimated on the date of grant using the Black-Scholes options-pricing
model. The weighted-average Black-Scholes assumptions are as follows:

Expected life ......................................................................................
Risk free interest rate .........................................................................
Expected volatility ..............................................................................
Expected dividend yield ....................................................................

Fiscal Year Ended

February 28, 2017
4 years
1.16%
28.02%
0%

February 29, 2016
8 years
.91% - 1.03%
18.73% - 23.72%
0%

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-
pricing model utilizing certain assumptions for a risk free interest rate, volatility and expected remaining lives of the awards. The
assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but
these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and
the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the
future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares
expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining
lives of unvested options, and the number of vested options as a percentage of total options outstanding. If the Company’s actual
forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what the Company has recorded in the current period.

For the years ended February 28, 2017 and February 29, 2016, net income and earnings per share reflect the actual deduction
for stock-based compensation expense. The impact of applying ASC 718 approximated $47,319 and $43,402 in additional
compensation expense for the years then ended, respectively. Such amount is included in general and administrative expenses
on the statement of operations. The expense for stock-based compensation is a non-cash expense item.

NOTE 5: INVENTORIES

Inventories consist of the following:

Raw materials and subassemblies ........................................................
Finished goods .......................................................................................
Work in process ......................................................................................
Total .......................................................................................................
Less: Allowance .....................................................................................
Net inventories ........................................................................................

February 28,
2017
$ 1,197,506
369,428
28,460
1,595,394
(254,710)
$ 1,340,684

February 29,
2016
$ 1,452,566
549,106
118,415
2,120,087
(174,704)
$ 1,945,383

2017 Annual Report

NOTE 6: BUILDINGS, EQUIPMENT, FURNISHINGS AND LEASEHOLD
IMPROVEMENTS

Equipment, furnishings and leasehold improvements consist of the following:

Buildings .................................................................................................
Laboratory equipment ............................................................................
Machinery and equipment......................................................................
Leasehold improvements .......................................................................
Trade show and demonstration equipment ...........................................
Furniture and fixtures ..............................................................................
Totals .......................................................................................................
Less: Accumulated depreciation ...........................................................

February 28,
2017
$ 2,250,000
1,012,824
858,694
369,433
1,072,425
907,428
6,470,804
(3,971,533)
$ 2,499,271

February 29,
2016
$ 2,250,000
872,836
857,994
368,572
1,037,830
891,443
6,278,675
(3,542,173)
$ 2,736,502

Depreciation expense for the years ended February 28, 2017 and February 29, 2016 was $429,360 and $465,432, respectively.

NOTE 7: ACCRUED EXPENSES

Accrued expenses consist of the following:

Accrued compensation ..........................................................................
Estimated warranty costs .......................................................................
Accrued commissions ............................................................................
Professional fees ....................................................................................
Other accrued expenses ........................................................................

February 28,
2017

$ 303,711
32,700
255,604
63,462
213,278
$ 868,755

February 29,
2016
$ 305,189
38,250
172,461
51,492
178,644
$ 746,036

NOTE 8: REVOLVING LINE OF CREDIT

The Company has a $750,000 revolving line of credit at prime which was 3.75% at February 28, 2017 and 3.50% at February 29,
2016. The line of credit is collateralized by all assets of the Company, except for the land and buildings. The line of credit is
payable on demand and must be retired for a 30 day period once annually. If the Company fails to perform the 30 day annual
pay down or if the bank elects to terminate the credit line, the bank may at its option convert the outstanding balance to a 36
month term note with payments including interest in 36 equal installments. As of February 28, 2017 and February 29, 2016, the
Company’s outstanding balance was $0, and the unused credit line was $750,000.

NOTE 9: LONG-TERM DEBT

Long-term debt consists of the following:

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

February 28,
2017

February 29,
2016

1,176,348

1,319,737

Total long term debt ................................................................ 1,176,348
149,698
Due within one year ................................................................
$ 1,026,650
Due after one year ..................................................................

1,319,737
143,388
$ 1,176,349

Long-term debt is payable as follows:

Fiscal Year ending February 28,

2018 ........................................................................................
2019 ........................................................................................
2020 ........................................................................................
2021 ........................................................................................
2022 ........................................................................................
Thereafter ................................................................................

149,698
156,119
162,816
169,716
177,081
360,918
$ 1,176,348

NOTE 10: BANK GUARANTEES

As of February 28, 2017, $77,543 of the Company’s cash on deposit with a foreign bank was being utilized to collateralize
guarantees issued by the bank in favor of international customers of the Company to secure cash deposits on orders that have
been remitted to the Company. The customers may exercise the guarantees, subject to certain performance requirements being
met by the Company. The guarantees expire at various dates in 2017.

NOTE 11: COMMITMENTS AND CONTINGENCIES

The Company did not have any material commitments or contingencies as of February 28, 2017.

NOTE 12: INCOME TAXES

The annual provision (benefit) for income taxes differs from amounts computed by applying the maximum U.S. Federal income tax
rate of 34% to pre-tax income as follows:

Expected federal income tax ..................................................................
State tax, net of federal...........................................................................
Research and development tax credits .................................................
Overaccrual of prior year taxes ..............................................................
Deferred tax expense .............................................................................
Permanent timing difference ..................................................................
Other adjustments ..................................................................................
Income tax (Benefit) Expense ................................................................

The deferred tax asset and liability are comprised of the following:

Inventory .................................................................................................
Allowance for accounts receivable .........................................................
Accrued expenses and other .................................................................
Deferred tax asset - Current ................................................................

February 28,
2017

$ 64,165
10,002
(70,827)
(63,351)
(5,080)
17,795
27,922
$ (19,374)

February 28,
2017
$ 253,500
18,100
43,500
315,100

Research tax credits ...............................................................................
Accrued expenses ..................................................................................
Intangible asset amortization .................................................................
Building and leasehold depreciation ......................................................

143,000
13,000
(30,000)
(464,000)

February 29,
2016
$ 252,321
39,059
(135,904)
(67,579)
106,826
-
-
$ 194,723

February 29,
2016
$ 87,000
18,000
50,000
155,000

102,000
15,000
(39,000)
(250,000)

Deferred tax liability – Long Term ...........................................................

$ (338,000)

$ (172,000)

At February 28, 2017 and February 29, 2016, the Company had $143,000 and $102,000 of research and development tax credits,
respectively, being carried forward.

2017 Annual Report

NOTE 13: STOCKHOLDERS’ EQUITY

Stock Options – Under the 2013 Stock Incentive Plan, as amended (“2013 Plan”), options can be granted to officers, directors,
consultants and employees of the Company and its subsidiaries to purchase up to 2,500,000 shares of the Company’s common
stock. Under the 2013 Plan options expire ten years after the date of grant. As of February 28, 2017, there were 634,100 options
outstanding under the 2013 plan.

Under the 2003 Stock Incentive Plan, as amended (“2003 Plan”), until May 2013, options were available to be granted to officers,
directors, consultants and employees of the Company and its subsidiaries to purchase up to 1,500,000 of the Company’s
common shares. As of February 28, 2017, there were 205,500 options outstanding under the 2003 Plan, under which no
additional options may be granted.

Under the 2013 Stock Incentive Plan, option prices must be at least 100% of the fair market value of the common stock at time
of grant. For qualified employees, except under certain circumstances specified in the plan or unless otherwise specified at the
discretion of the Board of Directors, no option may be exercised prior to one year after date of grant, with the balance becoming
exercisable in cumulative installments over a three-year period during the term of the option, and terminating at a stipulated period
of time after an employee’s termination of employment.

During Fiscal Year 2017, the Company granted options to acquire 400,000 shares to officers, at an exercise price of $0.91.

During Fiscal Year 2016, the Company granted options to acquire 73,500 shares exercisable at prices from $1.07 to $1.17, to
employees of the Company.

A summary of the activity of both plans for the years ended February 28, 2017 and February 29, 2016 is as follows:

Stock Options
Outstanding Exercisable
353,934

Weighted Average

Exercise Price $
Outstanding Exercisable

$ 0.86

Fair Value
Vested
$ 0.32

Balance – February 28, 2015 .................
Granted .................................................
Exercised ...............................................
Cancelled ..............................................
Balance – February 29, 2016 .................

489,434
73,500
(41,334)
(57,500)
464,100

Granted .................................................
Exercised ...............................................
Cancelled ..............................................
Balance – February 28, 2017 .................

400,000
(10,000)
(14,500)
839,600

349,820

395,405

$ 0.97
1.16
(0.61)
(1.08)
$ 0.91

$ 0.91
(0.48)
(1.21)
$ 0.91

$ 0.83

$ 0.39

$ 0.89

$ 0.32

The intrinsic value of the Company’s options exercised during the years ended February 28, 2017 and February 29, 2016 was
$1,632 and $12,479, respectively.

Information, at date of issuance, regarding stock option grants for the years ended February 28, 2017:

Year ended February 28, 2017:
Exercise price exceeds market price ..................................
-
Exercise price equals market price ..................................... 400,000
-
Exercise price is less than market price..............................

Weighted Weighted
Average
Average
Fair
Exercise
Value
Price

-
$ 0.91
-

-
$ 0.16
-

The aggregate intrinsic value of the Company’s outstanding options at February 28, 2017 and February 29, 2016 was $226,601
and $176,348, respectively.

The following table summarizes information about stock options outstanding and exercisable at February 28, 2017:

Number
Outstanding

Weighted Average
Remaining Life Exercise

in Years

Price

Number
Exercisable

Range of exercise prices:
$.42 to $.50 ...........................................
$.51 to $1.00 .........................................
$1.01 to $1.30 ......................................
Total Options: ...........................................

14,000
571,500
254,100
839,600

5.01
8.14
7.35

$ 0.47
$ 0.83
$ 1.14

14,000
171,500
209,905
395,405

NOTE 14: EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

February 28,
2017

February 29,
2016

Numerator for basic and diluted earnings per share .............................

95,706

547,729

Denominator for basic earnings per share - weighted average ............

14,961,076

14,943,018

Effects of dilutive securities:
Stock options for employees, directors and outside consultants .......

57,206

86,583

Denominator for diluted earnings per share ..........................................

15,018,282

15,029,601

Basic Earnings Per Share – Weighted Average .....................................

Diluted Earnings Per Share – Weighted Average ...................................

0.01

0.04

NOTE 15: OTHER COMPREHENSIVE INCOME (LOSS)

For the year ended February 28, 2017, the unrealized gain on our available-for-sale marketable securities was $112,000 compared
to a loss of $70,000 for the year ended February 29, 2016.

As of February 28, 2017, the unrealized gain on our available-for-sale securities was $42,250.

The following table sets forth the changes in Accumulated Other Comprehensive Gain (Loss) for the year ended February 28, 2017:

Beginning Balance February 29, 2016 ...................................................
Current Period Unrealized Gains ............................................................
Ending Balance February 28, 2017 ........................................................

$ (70,140)
112,390
$ 42,250

Unrealized Gain
(Loss) on Available
for Sale Securities

2017 Annual Report

NOTE 16: SIGNIFICANT CUSTOMERS AND FOREIGN SALES

Export sales to customers located outside the United States were approximately as follows:

Western Europe ......................................................................................
Far East ..................................................................................................
Middle East .............................................................................................
South America ........................................................................................
Mexico ....................................................................................................
Other .......................................................................................................

February 28,
2017

$ 1,695,000
2,702,000
232,000
208,000
275,000
249,000
$ 5,361,000

February 29,
2016

$ 2,643,000
2,947,000
247,000
208,000
421,000
111,000
$ 6,577,000

During Fiscal Years 2017 and 2016, sales to foreign customers accounted for approximately $5,361,000 and $6,577,000,
respectively, of total revenues. For both fiscal years, sales to foreign customers accounted for approximately 56% of total revenues.

One customer accounted for 7% of the Company’s sales for Fiscal Year ended February 28, 2017.

NOTE 17: SUBSEQUENT EVENTS

The Company has evaluated subsequent events for disclosure purposes.

Common Stock
Our common stock currently trades on the OTCQX Tier of the OTC Markets under the ticker symbol “SOTK”. The following table sets forth the range of
high and low closing bid quotations for our Common Stock for the periods indicated.

Years Ended

February 28, 2017
LOW
HIGH

February 29, 2016
LOW
HIGH

First Quarter ................................................................. $ 1.14
1.08
Second Quarter ...........................................................
1.19
Third Quarter ................................................................
1.30
Fourth Quarter..............................................................

$ 0.91
0.84
1.00
1.01

$ 1.16
1.25
1.19
1.15

$ 1.01
1.03
1.08
1.02

The above quotations are believed to represent inter-dealer quotations without retail markups, markdowns or commissions and may not represent actual
transactions.
As of February 28, 2017, there were 150 shareholders of record of our Common Stock, according to our stock transfer agent. We estimate that we have
between 1,000 and 1,400 beneficial shareholders of our common stock. The difference between the shareholders of record and the total shareholders is
due to stock being held in street names at our transfer agent.
We have not paid any cash dividends on our Common Stock since inception. We intend to retain earnings, if any, for use in our business and for other corporate
purposes.

Corporate Directory

Directors

Christopher L. Coccio, Ph.D. - Chairman and CEO

R. Stephen Harshbarger - President

Joseph Riemer, Ph.D. - Former Vice President, Food Business Development and
Food Consultant. Member of the Compensation Committee

Samuel Schwartz - Chairman Emeritus and former Chairman of the Board, retired
Chairman and CEO of Krystinel Corporation.

Edward J. Handler, Esq. - Compensation and Audit Committees, retired partner from
Kenyon and Kenyon intellectual property law firm, President and COO of The Bronx
Project, Inc., past President of the West Point Society of New York.

Eric Haskell, CPA - Audit Committee, former Executive Vice President and Chief Financial
Officer of SunCom Wireless Holdings, Inc., former Chief Financial Officer of Systems &
Computer Technology Corp.

Philip A. Strasburg, CPA - Chairman of the Audit Committee, Compensation Committee,
Certified Public Accountant in New York State, retired partner from the accounting firm of
Anchin Block and Anchin, LLP.

Donald F. Mowbray, Ph.D. - Chairman of the Compensation Committee, Independent
Consultant, Retired head of General Electric’s Corporate R&D Mechanical Engineering
Laboratory.

Executive Officers

Christopher L. Coccio, Ph.D. - Chairman and CEO
R. Stephen Harshbarger - President
Stephen J. Bagley, CPA - Chief Financial Officer
Robb Engle - Vice President, Engineering

Corporate Headquarters

Corporate Website

2012 Route 9W
Milton, NY 12547 USA
Phone: 845.795.2020
Fax: 845.795.2720

http://www.sono-tek.com

Corporate E-mail

info@sono-tek.com

2012 Route 9W, Milton, NY USA
T (845)795.2020, F (845)795.2720
Email: info@sono-tek.com
Internet: www.sono-tek.com