Sono-Tek Corporation Annual Report 2023

FY2023 Annual Report · Sono-Tek Corporation

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2023 ANNUAL REPORT

– NOVOCOAT IS A 3-AXIS AUTOMATED MOTION COATING PLATFORM SERIES DEVELOPED IN 2022

Sono-Tek is the world leader in ultrasonic coating solutions that deposit thin films of liquid chemistries used in highly
technical manufacturing processes. Our coating systems are used in the creation of a variety of disruptive technology
products, primarily for the electronics/microelectronics, precision medical device, and clean energy sectors.
The growing need for functional film capabilities on an expanding range of substrates is driving global demand.

Applying Precision
Coatings Since

1975

We continue to innovate and expand our capabilities with fully
engineered solutions designed and built exclusively by our
engineering team, including proprietary application expertise.
Pictured is the NovoCoat coating system, developed in 2022.

EXCELLENT BALANCE SHEET STRENGTH

Cash, Cash Equivalents &
Marketable Securities
$ in Millions

Stockholders’ Equity
$ in Millions

Total Debt
$ in Millions

*Does not include $1M PPP loan, forgiven in Q1 FY2022

The charts above demonstrate the financial success that has resulted from Sono-Tek’s strategy of diversification
of markets, products and geography. This has led to the ongoing development of an expanded line of ultrasonic
coating products and systems that no other company can match, and which has created multiple future growth
opportunities. Over the years we have built a substantial barrier to competition through our advanced technological
leadership, which we apply to win and retain customers. This has proven to be a significant competitive differentiator
for Sono-Tek in the global marketplace.

Founded in 1975, Sono-Tek Corporation designs and manufactures proprietary ultrasonic coating
systems that apply precise, thin-film coatings to a multitude of products for the microelectronics/
electronics, medical, alternative energy, and industrial markets, including specialized glass
applications for lenses and electronic device surfaces. Our recent growth has been driven by the
sale of larger, more complex, and higher value systems that uniquely help our customers succeed
while strengthening their bond with us.

Our environmentally-friendly ultrasonic spray systems provide high performance functional and protective
coatings, with dramatic reductions in overspray, savings in raw materials, water and energy usage, improved
process repeatability, transfer efficiency, high uniformity, and reduced emissions.

Sono-Tek’s founder was the inventor of the ultrasonic nozzle and we remain the leader in the industry.

2023 Annual Report
Dear Shareholders:

Sono-Tek’s fiscal year 2023, ended February 28, 2023, was very successful with renewed market activity, orders
and increasing backlog, which closed the year at the highest level in our history. Our focus on three major and
growing market segments—electronics and semiconductors, clean energy technologies, and medical device
coatings—has shown success and is expected to power us through the foreseeable future. Semiconductor
manufacturing and clean energy coating applications now have substantial government funding and incentives,
boosting these already strong segments for us.

In fact, we received our first million dollar order from the clean energy sector in August 2022. The order, valued
at $1.1 million, was also one of the largest in Sono-Tek’s corporate history at the time, both important milestones.
Since then, we’ve received another $1.1 million order from the same customer as well as two other initial orders
that are expected to total several million dollars each when the respective production lines are complete.

An unexpected post-COVID challenge developed this year for many businesses as parts, labor inflation
and difficulty in finding and retaining personnel led to manufacturing and shipping delays. Sono-Tek was not
immune to these challenges but we have successfully navigated them with market-based compensation and
additional training of newer staff. One area that has proven to be more challenging is the “supply chain” issue.

Five-Year Performance Highlights

Fiscal Calendar: March 1st - February 28th

($ in thousands, except employee and per share data)

FY2023

FY2022

FY2021

FY2020

FY2019

Net Sales

Gross Profit

Gross Margin

Selling, General and Administrative Expense

% of Sales

Research and Product Development Expense

% of Sales

Operating Income

Operating Margin

Net Income

Diluted Earnings Per Share

Weighted Average Shares Outstanding - Diluted

$ 15,058
$ 7,652
50.8%
$ 4,819
32
$ 2,150
14.3
683
4.5%
636
$
$ 0.04
15,769

$ 17,133

$ 8,613

$ 14,833

$ 6,997

$ 15,355

$ 11,610

$ 7,313

$ 5,249

50.3%

47.2%

47.6%

45.2%

$ 4,994

$ 4,012

$ 4,770

$ 3,841

29.1

27.0

31.1

33.1

$ 1,730

$ 1,645

$ 1,428

$ 1,325

10.1

11.1

9.3

11.4

$ 1,889

$ 1,340

$ 1,115

11.0%

$ 2,543

$ 0.16

9.0%

$ 1,121

$ 0.07

7.3%

0.7%

$ 1,107

$ 0.07

162

$ 0.01

15,623

15,672

15,359

15,219

Year End Financial Position
Cash, Cash Equivalents and Marketable Securities $ 11,445
$ 20,175
Total Assets
0
$
$ 14,634
$ 0.93

Total Debt (Long Term)

Book Value Per Share

Stockholders’ Equity

$ 10,709

$ 17,626

$ 13,741

$ 0.88

$ 8,648

$ 16,423

$ 7,879

$ 5,510

$ 14,743

$ 1,002*

708

$ 10,951

$ 0.71

$ 9,782

$ 0.64

$ 12,200

871

$ 8,585

$ 0.56

Other Year End Data
Depreciation and Amortization

Capital Expenditures

Number of Full-Time Employees
*Includes PPP loan, forgiven in Q1 FY2022

511
556
73

436

327

463

344

407

722

332

547

Some of our vendors and suppliers have been less successful than Sono-Tek in steering through this environment, and
pushed out promised delivery dates of our subsystems. To mitigate this issue going forward, we are increasing vertical
integration in several areas to create greater control over our shipping schedules.

However, these key part delays forced us to extend some of our own planned customer shipment dates, which
impacted our FY2023 revenue. As a result, total annual revenue decreased 12% over last year, although we still
reported a profitable year, with continuing growth in cash and shareholders’ equity.

Looking ahead, with our sales team back to traveling around the globe, and our engineering and manufacturing teams
back onsite, we are confident that Sono-Tek will achieve improved results in the new fiscal year, based on continued
progress to resolve the supply chain backlog issues and the receipt of large new orders from key customers in our
target markets.

Our team looks forward to an excellent and exciting FY2024.

Sincerely,

Christopher L. Coccio, PhD
Chairman and Chief Executive Officer

R. Stephen Harshbarger
President and Chief Operating Officer

SIZEABLE BACKLOG IN FY2023 IS EXPECTED TO STRENGTHEN REVENUES & GROWTH IN FY2024

Backlog at Fiscal Year End
$ in Millions

Revenue
$ in Millions

Gross Margin

Our engineering and manufacturing teams are constantly at work
on the development of new advanced platforms to maintain our
dominance in the application of precision thin film coating systems.

2023 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, news releases, and other written and oral statements. These “forward-looking statements” are based on currently
available competitive, financial and economic data and our operating plans. They are inherently uncertain, and inves-
tors must recognize that events could turn out to be significantly different from our expectations and could cause actual
results to differ materially. These factors include, among other considerations, general economic and business conditions;
political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our
products; inflationary and supply chain pressures; the continued abatement of the COVID-19 pandemic; the extent and
duration of the pandemic’s adverse effect on economic and social activity, consumer confidence, discretionary spending
and preferences, labor and healthcare costs, and unemployment rates, any of which may reduce demand for some of
our products and impair the ability of those with whom we do business to satisfy their obligations to us; our ability to sell
and provide our services and products, including as a result of continued pandemic related travel restrictions, mandatory
business closures, and stay-at home or similar orders; any temporary reduction in our workforce, closures of our offices
and facilities and our ability to adequately staff and maintain our operations resulting from the pandemic; the ability of
our customers and suppliers to continue their operations as result of the pandemic, which could result in terminations of
contracts, losses of revenue; the recovery of the Electronics/Microelectronics and Medical markets following COVID-19
related slowdowns; and further adverse effects to our supply chain; maintenance of increased order backlog, including
effects of any COVID-19 related cancellations; the imposition of tariffs; timely development and market acceptance of new
products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the
ability to enforce patents; 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 alter-
native energy markets; successful transition from primarily selling ultrasonic nozzles and components to a more complex
business providing complete machine solutions and higher value subsystems; and realization of quarterly and annual
revenues within the forecasted range of sales guidance.

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

Highlights

Highlights for fiscal 2023 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 shipments. Our customized complex coating
systems, which typically require longer than average delivery lead times, were especially impacted by these remaining
supply chain issues.

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

• Operating income for fiscal 2023 decreased 64% to $683,000 compared to $1.9 million in fiscal 2022, due to the

current period’s decrease in net sales combined with an increase in operating expenses.

• Backlog at February 28, 2023 reached a historical high of $8.5 million compared to the backlog at February 28, 2022
of $5.3 million, an increase of 60%. The large increase in backlog resulted from the receipt of several large, complex
system orders with longer than typical build delivery time frames and higher than average selling prices from the clean
energy sector during the year and from ongoing supply chain issues which slowed the rate at which we completed
our backlog of orders.

• Cash, cash equivalents and marketable securities increased to $11.4 million on February 28, 2023 from $10.7 million

on February 28, 2022.

Market and Geographic Diversity

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.

Today, we serve five industries: microelectronics/electronics, medical, alternative energy, industrial markets, and
emerging research and development and other.

We are a geographically diverse company with a presence either directly or through distributors and trade representatives
in the United States and Canada, EMEA (Europe, Middle East and Africa), APAC (Asia Pacific) and Latin America
(including Mexico). In fiscal 2023, approximately 55% of sales originated outside of the United States and Canada.

We have an established infrastructure of application process development laboratories located at our distributor sites in
Japan, China, Germany, Taiwan, Korea and our home office in New York, USA. These laboratories are equipped with
Sono-Tek systems and technical personnel to conduct customer demonstrations and process development for new
coating applications that our customers bring to us. Our engineering, service and sales teams all continue to grow as
we expand our addressable markets and enhance our product line to include larger more sophisticated machinery and
systems with increased capabilities.

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

Results of Operations

Sales and Gross Profit:

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

Fiscal Year Ended

February 28,
2023
$ 15,058,000
7,406,000
$ 7,652,000

February 28,
2022
$ 17,133,000
8,520,000
$ 8,613,000

Change

$ (2,075,000)
(1,114,000)
(961,000)
$

%
(12%)
(13%)
(11%)

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

50.8%

50.3%

Gross profit decreased $961,000, or 11% to $7,652,000 for fiscal 2023 compared with $8,613,000 in fiscal 2022. Gross
profit margin increased to 50.8% for fiscal 2023, compared to 50.3% for fiscal 2022. The 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.

2023 Annual Report

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

continued

Product Sales:

Fluxing Systems ........................
Integrated Coating Systems .....
Multi-Axis Coating Systems ......
OEM Systems ...........................
Other .........................................
TOTAL .......................................

Twelve Months Ended

February 28,
2023
$ 1,179,000
1,114,000
6,785,000
2,144,000
3,836,000
$ 15,058,000

% of
Total
8%
7%
45%
14%
26%

February 28, % of
Total
4%
7%
58%
14%
17%

2022
$
691,000
1,182,000
9,912,000
2,381,000
2,967,000
$ 17,133,000

Change

$
488,000
(68,000)
(3,127,000)
(237,000)
869,000

$ (2,075,000)

%
71%
(6%)
(32%)
(10%)
29%
(12%)

Sales of Multi-Axis coating systems recorded a 32% decrease due to lingering supply chain challenges, resulting in
several large system orders being pushed from planned fiscal 2023 shipments into planned fiscal 2024 shipments, and
are included in our year end fiscal 2023 backlog. Fluxing Systems sales showed an increase of 71%, due to the continued
adoption of a newly released spray fluxing platform, SonoFlux X2, which continues to be implemented with several large
printed circuit board contract manufacturers. Sales of the “Other” product basket increased by 29%, or $869,000, in large
part due to increased sales of high value spare parts packages to support our high ASP multi-axis machines already in
the field.

Market Sales:

Electronics/Microelectronics .....
Medical ......................................
Alternative Energy .....................
Emerging R&D and Other .........
Industrial ...................................
TOTAL .......................................

Twelve Months Ended

February 28,
2023
$ 5,509,000
3,702,000
3,060,000
347,000
2,440,000
$ 15,058,000

% of
Total
37%
25%
20%
2%
16%

February 28, % of
Total
42%
25%
22%
5%
6%

2022
$ 7,134,000
4,338,000
3,688,000
918,000
1,055,000
$ 17,133,000

Change

$ (1,625,000)
(636,000)
(628,000)
(571,000)
1,385,000
$ (2,075,000)

%
(23%)
(15%)
(17%)
(62%)
131%

(12%)

Sales to the Alternative Energy, Electronics, and Medical markets decreased by 17%, 23% and 15% respectively.
Large portions of all these markets use our multi-axis systems which experienced delayed deliveries due to supply chain
challenges, and moving several planned fiscal 2023 orders into fiscal 2024. The industrial market grew by 131% due to
a large multi-system order valued at $1,540,000, $1,080,000 of this order was shipped in fiscal 2023 and the remaining
$460,000 of the order shipped after the completion of fiscal 2023.

Geographic Sales:

U.S. & Canada .............................................................
Asia Pacific (APAC) ......................................................
Europe, Middle East, Asia (EMEA) ..............................
Latin America ...............................................................
TOTAL ..........................................................................

Twelve Months Ended

February 28,
2023
$ 6,804,000
3,260,000
3,448,000
1,546,000
$ 15,058,000

February 28,
2022

$ 5,480,000
5,301,000
5,255,000
1,097,000
$ 17,133,000

Change

$
$ 1,324,000
(2,041,000)
(1,807,000)
449,000
$ (2,075,000)

%
24%
(39%)
(34%)
41%
(12%)

In fiscal 2023, approximately 45% of our sales were to US and Canadian customers. This is compared to 32% in fiscal
2022. The increased sales to the US and Canada were positively impacted by several US Government initiatives to invest
in the green energy sector and advanced research markets. APAC revenue decreased by 39% in fiscal 2023, impacted by
reduced sales in China due to several China-based manufacturing sites moving operations back to the US and Mexico.
Also, the currently strong US Dollar has made Sono-Tek products more expensive in Japan and South Korea, resulting in
several delayed purchases.

Operating Expenses:

Research and product development ...........................
Marketing and selling ...................................................
General and administrative ..........................................
Total Operating Expenses ............................................

Research and Product Development:

Twelve Months Ended

February 28,
2023
$ 2,149,000
3,170,000
1,650,000
$ 6,969,000

February 28,
2022

$ 1,730,000
3,367,000
1,626,000
$ 6,723,000

Change

$ 419,000
(197,000)
24,000
$ 246,000

%
24%
(6%)
2%
4%

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

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.

During fiscal 2023, we expended approximately $398,000 for travel and trade show expenses compared with $205,000
for the prior fiscal year, an increase of $193,000. The increased travel and trade show expenses are a result of the global
lifting of COVID-19 restrictions.

General and Administrative:

General and Administrative costs increased $24,000 to $1,650,000 for fiscal 2023 due to an increase in stock-based
compensation expense. This increase was partially offset by decreases in corporate expenses and bad debt expense.

In fiscal 2023 stock-based compensation expense increased $78,000 to $257,000 compared with $179,000 in fiscal 2022.
The increase in stock-based compensation expense in fiscal 2023 is due to option awards that were issued in the prior
fiscal year. Option awards are expensed over three years based on vesting terms.

Operating Income:

Our operating income 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.

2023 Annual Report

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

continued

Interest and Dividend Income:

Interest and dividend income increased $131,000 to $140,000 for fiscal 2023 as compared with $9,000 for the prior fiscal
year. The increase in interest and dividend income is due to the reallocation of our investments into US Treasury securities
and certificates of deposit combined with the increase in current interest rates. Our present investment policy is to invest
excess cash in highly liquid, low risk US Treasury securities and certificates of deposit. At February 28, 2023, the majority
of our holdings are rated at or above investment grade.

Income Tax Expense:

We recorded income tax expense of $154,000 for fiscal 2023 compared with $362,000 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:

Net income decreased by $1,907,000 or 75%, to $636,000 for fiscal 2023 compared with $2,543,000 for the prior fiscal
year. The 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.

Liquidity and Capital Resources

Working Capital – Our working capital increased $335,000 to $11,117,000 at February 28, 2023 from $10,782,000 at
February 28, 2022. 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.

We aggregate cash and cash equivalents and marketable securities in managing our balance sheet and liquidity. For
purposes of the following analysis, the total is referred to as “Cash.” At February 28, 2023 and February 28, 2022, our
working capital included:

Cash and cash equivalents ...............................................
Marketable securities ........................................................
Total ...................................................................................

February 28, February 28,

2023

2022

$ 3,355,000 $ 4,841,000
5,868,000
8,090,000
$ 10,709,000
$ 11,445,000

Cash
Increase
$ (1,486,000)
2,222,000
736,000
$

The following table summarizes the accounts and the major reasons for the $736,000 increase in “Cash”:

Impact on Cash

Reason

Net income, adjusted for non-cash items .........................
Accounts receivable increase ...........................................

$ 853,000

(497,000)

Inventories increase ..........................................................

(875,000)

Customer deposits increase .............................................
Accounts payable ............................................................
Accrued expenses ............................................................
Prepaid and Other Assets decrease .................................
Income taxes payable increase ........................................
Equipment purchases .......................................................
Net increase in cash..........................................................

1,670,000
126,000
(376,000)
69,000
322,000
(556,000)

$ 736,000

To reconcile increase in cash.
Increase primarily due to shipments
in the last month of the fiscal year.
Additional inventory purchases
and increase in work in process
due to supply chain delays in
receipt of required components.
Received for new orders.
Timing of disbursements.
Timing of disbursements.
Decreased prepaid expenses.
Timing of disbursements.
Equipment and facilities upgrade.

Stockholders’ Equity – Stockholders’ equity increased $893,000 from $13,741,000 at February 28, 2022 to $14,634,000
at February 28, 2023. The increase was a result of the current year’s net income of $636,000 and $257,000 in additional
equity related to stock-based compensation awards. The details of stock-based compensation are explained in Note 4
in our financial statements.

Operating Activities – We generated $1,325,000 of cash in our operating activities in fiscal 2023 compared with
generating $2,319,000 in fiscal 2022. The 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.

2023 Annual Report

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

continued

Investing Activities – In fiscal 2023, we used $2,811,000 in our investing activities compared with using $1,631,000
of cash in fiscal 2022. Capital spending in fiscal 2023 was $556,000 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.

In fiscal 2023, we used $2,255,000 of cash compared with using $1,304,000 for the purchase of marketable securities in
fiscal 2022.

Financing Activities – In fiscal years 2023 and 2022, we received $0 and $69,000 from the exercise of stock options.

Bank Credit Facilities:

We currently have a revolving credit line of $1,500,000 and a $750,000 equipment purchase facility, both of which are with
a bank. The revolving credit line is collateralized by the Company’s accounts receivable and inventory. The revolving line of
credit is payable on demand and must be retired for a 30-day period, once annually. As of February 28, 2023, there were
no outstanding borrowings under the line of credit.

As of February 28, 2023, $145,000 of the Company’s credit line was being utilized to collateralize letters of credit issued to
customers that have remitted cash deposits to the Company on existing orders. The unused portion of the credit line was
$1,355,000 as of February 28, 2023. 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”). The PPP, established as part of the Coronavirus Aid, Relief and
Economic Security Act (“CARES Act”), provides for loans to qualifying companies and is administered 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.

Off - Balance Sheet Arrangements

We do not have any Off - Balance Sheet Arrangements as of February 28, 2023.

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, 2023,
management believes that there are no critical accounting policies applicable to the Company that are reflective of
significant judgments and or uncertainties.

Accounting for Income Taxes

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

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. The Company currently uses a Black-Scholes option pricing
model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the
assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ
materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future
stock award exercise experience could result in a change in the assumptions used to value awards in the future and
may result in a material change to the fair value calculation of stock-based awards. ASC 718 requires the recognition of
the fair value of stock compensation in net income.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core
principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange
for those goods or services.

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.

2023 Annual ReportREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Sono-Tek Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Sono-Tek Corporation (the “Company”) as of
February 28, 2023, the related consolidated statements of income, stockholders’ equity and cash flows for the year
ended February 28, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of February
28, 2023, and the results of its operations and its cash flows for the year ended February 28, 2023, in conformity with
accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis
for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures
that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. We determined that there are no critical audit matters.

We have served as the Company’s auditor since 2020 (such date takes into account the acquisition of certain assets of
Friedman LLP by Marcum LLP effective September 1, 2022).

East Hanover, New Jersey

May 25, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Sono-Tek Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Sono-Tek Corporation (the “Company”) as of
February 28, 2022, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year
ended February 28, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2022,
and the results of its operations and its cash flows for the year ended February 28, 2022, in conformity with accounting
principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control
over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

We served as the Company’s auditor from 2020 through 2022.

East Hanover, New Jersey

May 24, 2022

2023 Annual Report
SONO-TEK CORPORATION

CONSOLIDATED BALANCE SHEETS

February 28,
2023

February 28,
2022

ASSETS

Current Assets:

Cash and cash equivalents .........................................................................
Marketable securities ..................................................................................

$ 3,354,601
8,090,000

$ 4,840,558
5,867,990

Accounts receivable (less allowance of $12,225 and 56,123,
respectively) ................................................................................................
Inventories ...................................................................................................
Prepaid expenses and other current assets ...............................................
Total current assets ..............................................................................

1,633,866
3,242,909
254,046
16,575,422

Land ...................................................................................................................
Buildings, equipment, furnishings and leasehold improvements, net ..............
Intangible assets, net .........................................................................................
Deferred tax asset ..............................................................................................

250,000
2,624,996
57,202
667,098

1,092,505
2,373,242
323,304
14,497,599

250,000
2,561,184
76,015
240,736

TOTAL ASSETS..................................................................................................

$ 20,174,718

$ 17,625,534

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable .......................................................................................
Accrued expenses ......................................................................................
Customer deposits ......................................................................................
Income taxes payable .................................................................................
Total current liabilities ...........................................................................

810,863
1,427,446
2,838,165
381,421
5,457,895

$ 684,511
1,804,028
1,167,968
58,874
3,715,381

Deferred tax liability ............................................................................................

82,865

168,840

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

5,540,760

3,884,221

Commitments and Contingencies (Note 13)

Stockholders’ Equity

Common stock, $.01 par value; 25,000,000 shares authorized,
15,742,073 and 15,729,175 issued and outstanding as
February 28, 2023, and 2022, respectively .............................................
Additional paid-in capital ............................................................................
Accumulated earnings ................................................................................

157,421
9,566,898
4,909,639

157,292
9,310,287
4,273,734

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

14,633,958

13,741,313

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY ......................................

$ 20,174,718

$ 17,625,534

See accompanying notes to consolidated financial statements.

SONO-TEK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Fiscal Year Ended

February 28,
2023

February 28,
2022

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

$ 15,058,203
7,406,196
7,652,007

$ 17,132,710
8,520,156
8,612,554

Operating Expenses

Research and product development ..........................................................
Marketing and selling ..................................................................................
General and administrative .........................................................................
Total Operating Expenses ....................................................................

2,149,525
3,169,730
1,649,761
6,969,016

1,729,509
3,367,403
1,626,306
6,723,218

Operating Income ..............................................................................................

682,991

1,889,336

Other Income (Expense):
Interest and Dividend Income ...........................................................................
Net unrealized loss on marketable securities ....................................................
Paycheck Protection Program Loan Forgiveness ............................................
Income before Income Taxes ............................................................................

140,042
(33,119)

—
789,914

9,496
—
1,005,372
2,904,204

Income Tax Expense ..........................................................................................

154,009

361,631

Net Income ........................................................................................................

635,905

$ 2,542,573

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

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

0.04

0.16

0.04

0.16

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

15,735,451

15,586,404

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

15,769,499

15,623,485

See accompanying notes to consolidated financial statements.

2023 Annual Report

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SONO-TEK CORPORATION
YEARS ENDED FEBRUARY 28, 2023 AND 2022

Common Stock
Par Value $.01

Balance - February 28, 2021 .................... 15,452,656

Amount
$ 154,527

Additional
Paid – In
Capital
$ 9,064,994

Total

Accumulated Stockholders’

Earnings
$ 1,731,161

Equity
$ 10,950,682

Stock based compensation expense .......
Cashless exercise of stock options ..........
Proceeds from exercise of stock options ...
Net Income ..............................................
Balance - February 28, 2022 .................... 15,729,175

249,019
27,500

2,490
275

179,283
(2,490)
68,500

$ 157,292

$ 9,310,287

2,542,573
$ 4,273,734

Stock based compensation expense .......
Cashless exercise of stock options ..........
Net Income ..............................................
Balance - February 28, 2023 .................... 15,742,073

12,898

129

256,740
(129)

$ 157,421

$ 9,566,898

635,905
$ 4,909,639

179,283
—
68,775
2,542,573
$ 13,741,313

256,740
—
635,905
$ 14,633,958

See accompanying notes to consolidated financial statements.

SONO-TEK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income .................................................................................................
Adjustments to reconcile net income to net cash provided by
operating activities:

Fiscal Year Ended

February 28,
2023

February 28,
2022

$ 635,905

$ 2,542,573

Depreciation and amortization ............................................................
Stock based compensation expense ..................................................
Accounts receivable reserve ...............................................................
Inventory reserve .................................................................................
Paycheck Protection Program Loan Forgiveness ...............................
Unrealized loss on marketable securities ............................................
Deferred tax asset, net .........................................................................
(Increase) Decrease in:
Accounts receivable .........................................................................
Inventories ........................................................................................
Prepaid expenses and other assets ....................................................
(Decrease) Increase in:
Accounts payable .............................................................................
Accrued expenses ............................................................................
Customer deposits ...........................................................................
Income taxes payable ......................................................................
Net Cash Provided by Operating Activities ........................................

510,868
256,740
(43,898)
4,864
—
33,119
(512,337)

(497,463)
(874,531)
69,258

126,352
(376,582)
1,670,197
322,547
1,325,039

435,525
179,283
—
43,381
(1,005,372)

—
(17,620)

665,297
194,483
(171,988)

(606,241)
53,112
1,427
5,307
2,319,167

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of equipment, furnishings and leasehold improvements...........
Purchase of marketable securities, net ......................................................
Net Cash Used In Investing Activities ..................................................

(555,867)
(2,255,129)
(2,810,996)

(326,942)
(1,304,520)
(1,631,462)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercise of stock options ...................................................
Net Cash Provided By Financing Activities .......................................................

—
—

68,775
68,775

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

(1,485,957)

756,480

CASH AND CASH EQUIVALENTS:

Beginning of year .......................................................................................
End of year .................................................................................................

4,840,558
$ 3,354,601

4,084,078
$ 4,840,558

Supplemental Cash Flow Disclosure:

Interest Paid ................................................................................................
Income Taxes Paid .....................................................................................

—
$
$ 363,590

—
$
$ 373,928

See accompanying notes to consolidated financial statements.

2023 Annual Report

NOTES TO CONSOLIDATED STATEMENTS

SONO-TEK CORPORATION
YEARS ENDED FEBRUARY 28, 2023 AND 2022

NOTE 1: BUSINESS DESCRIPTION

Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporated in New York on March 21,
1975. We are the world leader in the design and manufacture of ultrasonic coating systems for applying precise,
thin film coatings to add functional properties, protect or strengthen surfaces on parts and components for the
microelectronics/electronics, alternative energy, medical, industrial and emerging research & development/other
markets. We design and manufacture custom-engineered ultrasonic coating systems incorporating our patented
technology, in combination with strong applications engineering knowledge, to assist our customers in achieving
their desired coating solutions.

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 fiscal 2023 and fiscal 2022 was $297,500 and $178,500, respectively.

Accounts Receivable, net - In the normal course of business, the Company extends credit to customers. Accounts
receivable, less the allowance for doubtful accounts, reflect the net realizable value of receivables and approximate
fair value. 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.

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. At February 28,
2023, the Company had $2,892,000 of cash in excess of the FDIC insured limit.

Consolidation - The accompanying consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC (“SIP”) in conformity with generally accepted
accounting principles in the United States (“GAAP”). SIP operates as a real estate holding company for the Company’s
real estate operations. All intercompany accounts and transactions have been eliminated in consolidation.

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 under the
treasury stock method.

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 applies Accounting Standards Codification (“ASC”) 820, Fair Value
Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair
value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an
asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction
between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the
asset or liability and are developed based on market data obtained from sources independent of the reporting entity.
Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the
assumptions that market participants would use in pricing the asset or liability and are to be developed based on the
best information available in the circumstances.

The carrying amounts of financial instruments reported in the accompanying consolidated financial statements for
current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of
the financial instruments.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on
the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are
described below:

Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair
value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with
similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are
observable at commonly quoted intervals.

Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation
techniques when little or no market data exists for the assets or liabilities.

The fair values of financial assets of the Company were determined using the following categories at February 28, 2023
and February 28, 2022, respectively:

Level 1

Level 2

Level 3

Total

Marketable Securities – February 28, 2023

$ 7,361,000

$ 729,000

$ —

$ 8,090,000

Marketable Securities – February 28, 2022

$ 5,716,338

$ 151,652

$ —

$ 5,867,990

Marketable Securities include certificates of deposit and US Treasury securities, totaling $8,090,000 and $5,867,990
that are considered to be highly liquid and easily tradeable as of February 28, 2023 and February 28, 2022, respectively.
US Treasury securities are valued using inputs observable in active markets for identical securities and are therefore
classified as Level 1 and certificates of deposit are classified as Level 2 within the Company’s fair value hierarchy. The
Company’s marketable securities are considered to be trading securities as defined under ASC 320 “Investments –
Debt and Equity Securities.”

2023 Annual Report

continued

NOTES TO CONSOLIDATED STATEMENTS

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. The Company uses a recognition threshold and a measurement
attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a
return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examina-
tion by taxing authorities. As of February 28, 2023 and February 28, 2022, there were no uncertain tax positions.

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, which is considered the useful life. The accumulated
amortization of patents is $202,681 and $192,490 at February 28, 2023 and February 28, 2022, 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 net realizable value. 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. Management compares the cost of inventory with the net realizable value and, if applicable, an
allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis,
inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon
forecasts for future demand and market conditions.

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.

At February 28, 2023 and 2022, the Company had Land, stated at cost of $250,000

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. No impairment losses were identified or recorded for the
years ended February 28, 2023 and February 28, 2022 on the Company’s long-lived assets.

Management Estimates - The preparation of the consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements - In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit
Losses-Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial
Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-
11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the
current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For SEC
filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company
(including this Company) and for non-SEC registrant public companies and other organizations, the amendments in
this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.
Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The Company has adopted ASU 2016-13 as updated and does not expect the
adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

Other than Accounting Standards Update (“ASU”) ASU 2016-13 discussed above, all new accounting pronouncements
issued but not yet effective have been deemed to be not applicable to the Company. Hence, the adoption of these new
accounting pronouncements, once effective, is not expected to have an impact on the Company.

Product Warranty - Expected future product warranty expense is recorded when revenue is recognized for
product sales.

Reclassifications - Building, equipment, leasehold improvements reclassifications have been made to the fiscal 2022
consolidated financial statements to conform to the fiscal 2023 consolidated financial statement presentation. These
reclassifications had no effect on net loss or cash flows as previously reported.

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 systems to meet unique customer specifications for potential orders or for new industry applications
and are expensed as incurred.

During fiscal 2023 and fiscal 2022, the Company spent approximately $2,149,000 and $1,730,000, respectively, on
research and development activities related to new products and services and the ongoing improvement of existing
products and services.

Revenue Recognition - The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with
Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to
receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company
determines are within the scope of ASC 606, the Company performs the following five steps:

Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract

•
•
• Determination of the transaction price
• Allocation of the transaction price to the performance obligations in the contract
• Recognition of revenue when, or as, performance obligations are satisfied

2023 Annual Report

continued

NOTES TO CONSOLIDATED STATEMENTS

Stock-Based Compensation - The Company currently uses a Black-Scholes option pricing model to calculate the fair
value of its stock options. 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 lives of the
awards. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes
model. 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.

ASC 718 requires the recognition of the fair value of stock compensation expense to be recognized over the vesting
term of such award. The Company accounts for forfeitures as they occur.

Uncertainties - Since early 2020, when the World Health Organization established the transmissible and pathogenic
coronavirus a global pandemic, there have been business slowdowns. The outbreak of such a communicable disease
has resulted in a widespread health crisis which has adversely affected general commercial activity and the economies
and financial markets of many countries, including the United States. As the outbreak of the disease has continued
through fiscal 2022 and into fiscal 2023, the measures taken by the governments of impacted countries have, at times,
adversely affected the Company’s business, financial condition, and results of operations. Pandemic related supply
shortages and increased energy expenses resulting from the war in Ukraine have recently created worldwide
inflationary pressures which may have a material adverse effect on the Company’s business, financial condition,
and results of operations if such factors continue unabated.

The Company has encountered challenges in procuring supplies of various materials and components, and electronic
components in particular, due to well-documented shortages and constraints in the global supply chain. Lead times for
ordered components may vary significantly, and some components used to manufacture our products are provided
by a limited number of sources. The Company experienced lengthened lead times throughout its supply chain as a
result of supply chain constraints and material shortages that have occurred through fiscal year 2023. This has been
exacerbated by the recent resurgence of the COVID-19 pandemic in certain parts of China, which has resulted in the
temporary closure of manufacturing facilities, including those that manufacture electronic parts that the Company
includes in its products.

NOTE 3: REVENUE RECOGNITION

The Company’s sales revenue is derived primarily from short term contracts with customers, which, on average, are
in effect for less than twelve months. Sales revenue from manufactured equipment transferred at a single point in time
accounts for a majority of the Company’s revenue.

Sales revenue is recognized when control of the Company’s manufactured equipment is transferred to its customers
in an amount that reflects the consideration the Company expects to receive based upon the agreed transaction price.
The Company’s performance obligations are satisfied when its customers take control of the purchased equipment,
in accordance with the contract terms. 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 transaction 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.

The Company does not capitalize any sales commission costs related to the acquisition of a contract. All commissions
related to a performance obligation that are satisfied at a point in time are expensed when the customer takes control
of the purchased equipment and revenue is recognized.

The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about
remaining performance obligations that have original expected durations of one-year or less.

At February 28, 2023, the Company had received $2,838,000 in cash deposits, representing contract liabilities, and had
issued Letters of Credit in the amount of $145,000 to secure these cash deposits. At February 28, 2023, the Company
was utilizing $145,000 of its available credit line to collateralize these letters of credit.

At February 28, 2022, the Company had received $1,168,000 in cash deposits, representing contract liabilities, and had
issued Letters of Credit in the amount of $5,000 to secure these cash deposits. At February 28, 2022, the Company was
utilizing $5,000 of its available credit line to collateralize these letters of credit.

The Company’s sales revenue, by product line is as follows:

Twelve Months Ended

Fluxing Systems .........................................

February 28,
2023
$ 1,179,000

% of total
8%

Integrated Coating Systems .......................

1,114,000

Multi-Axis Coating Systems ........................

6,785,000

OEM Systems .............................................

2,144,000

Other ...........................................................

3,836,000

TOTAL .........................................................

$ 15,058,000

45%

14%

26%

February 28,

2022

691,000

1,182,000

9,912,000

2,381,000

2,967,000

$ 17,133,000

% of total
4%

58%

14%

17%

NOTE 4: STOCK-BASED COMPENSATION

Stock Options - Under the 2013 Stock Incentive Plan, as amended (the “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, 2023, there were 250,759 options outstanding under the 2013 plan.

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 2023, the Company granted options to acquire 28,239 shares to employees exercisable at prices
ranging from $5.45 to $5.96 and options to acquire 16,500 shares to the non-employee members of the board of
directors with an exercise price of $5.50. The options granted to employees and directors vest over three years and
expire in ten years. The options granted by the Company during fiscal 2023 had a combined weighted average grant
date fair value of $3.44 per share.

During fiscal 2022, the Company granted options to acquire 138,085 shares to employees exercisable at prices
ranging from $3.19 to $6.26 and options to acquire 30,250 shares to the non-employee members of the board of
directors with an exercise price of $3.19. The options granted to employees and directors vest over three years and
expire in ten years. The options granted by the Company during fiscal 2022 had a combined weighted average grant
date fair value of $2.76 per share.

2023 Annual Report

NOTES TO CONSOLIDATED STATEMENTS

continued

A summary of the activity for fiscal 2023 and fiscal 2022 is as follows:

Stock Options

Exercise Price $

Balance - February 29, 2021 ......

Outstanding
508,459

Exercisable
333,500

Granted .......................................

168,335

Exercised ....................................

(403,334)

Cancelled ....................................

(19,750)

Exercisable
$ 2.17

Outstanding

$ 2.35

5.10

(2.12)

(3.27)

Remaining
Term - Years
6.99

Balance - February 28, 2022 ......

253,710

61,690

$ 4.46

$ 3.53

8.94

Weighted Average

Granted .......................................

44,739

Exercised ....................................

(16,973)

Cancelled ....................................

(30,717)

$ 5.71

(1.77)

(4.66)

Balance - February 28, 2023 ......

250,759

133,609

$ 4.84

$ 4.62

8.52

The aggregate intrinsic value of the Company’s vested and exercisable options at February 28, 2023 was $155,077.

For the years ended February 28, 2023 and 2022 the Company recognized $256,740 and $179,283 in stock based
compensation expense, respectively. Such amounts are included in general and administrative expenses on the
consolidated statements of income. Total compensation expense related to non-vested options not yet recognized
as of February 28, 2023 was $288,000 and will be recognized over the next three years based on vesting date.
The amount of future stock option compensation expense could be affected by any future option grants or by any
forfeitures. During the year ended February 28, 2023, the Company had net settlement exercises of stock options,
whereby, the optionee did not pay cash for the options but instead received the number of shares equal to the
difference between the exercise price and the market price on the date of exercise. Net settlement exercises during
the year ended February 28, 2023 resulted in 12,898 shares of common stock issued.

Determining the appropriate fair value of the stock-based awards requires the input of subjective assumptions,
including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and
the expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock
option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s
best estimates and involve inherent uncertainties and the application of management’s judgment.

The expected term of the options is estimated based on the Company’s historical exercise rate. The expected life of
awards that vest immediately use the contractual maturity since they are vested when issued. For stock price volatility,
the Company uses its expected volatility of the price of the Company’s common stock based on historical activity. The
risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option at the
grant-date.

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 ...............................................................................................

Fiscal Year Ended

February 28,
2023
5 - 8 years

February 28,
2022
5 - 8 years

Risk free interest rate ...................................................................................

2.82% - 4.02%

0.78% - 2.0%

Expected volatility ........................................................................................

55.02% - 62.01%

50.73% - 57.13%

Expected dividend yield ..............................................................................

NOTE 5: INVENTORIES

Inventories consist of the following:

Raw materials and subassemblies ..............................................................

Finished goods ............................................................................................

Work in process ...........................................................................................

February 28,
2023
$ 1,868,689

613,915

760,305

February 28,
2022
$ 1,250,589

779,533

343,120

Total ..............................................................................................................

$ 3,242,909

$ 2,373,242

The Company maintains an allowance for slow moving inventory for raw materials and finished goods. The recorded
allowances at February 28, 2023 and 2022, totaled $332,525 and $327,661, respectively.

NOTE 6: BUILDINGS, EQUIPMENT, FURNISHINGS AND LEASEHOLD IMPROVEMENTS

Buildings, equipment, furnishings and leasehold improvements consist of the following:

Buildings ......................................................................................................

February 28,
2023
$ 2,250,000

Laboratory equipment .................................................................................

1,647,951

Machinery and equipment ..........................................................................

1,807,817

Leasehold improvements ............................................................................

789,044

Tradeshow and demonstration equipment .................................................

1,137,346

Furniture and fixtures ...................................................................................

1,302,545

February 28,
2022
$ 2,250,000

1,421,845

1,729,587

715,999

1,137,346

1,206,918

Totals ............................................................................................................

8,934,703

8,461,695

Less: Accumulated depreciation .................................................................

(6,309,707)

(5,900,511)

$ 2,624,996

$ 2,561,184

Depreciation expense for the years ended February 28, 2023 and February 28, 2022 was $492,055 and $416,083,
respectively.

2023 Annual Report

NOTES TO CONSOLIDATED STATEMENTS

continued

NOTE 7: ACCRUED EXPENSES

Accrued expenses consist of the following:

Accrued compensation ................................................................................

February 28,
2023
$ 352,619

February 28,
2022
$ 449,673

Estimated warranty costs .............................................................................

Accrued commissions ..................................................................................

Professional fees ..........................................................................................

Other accrued expenses ..............................................................................

500,650

157,927

100,921

315,329

622,775

195,540

104,850

431,190

$ 1,427,446

$ 1,804,028

NOTE 8: REVOLVING LINE OF CREDIT

The Company has a $1,500,000 revolving line of credit at prime which was 7.75% at February 28, 2023 and 3.25%
at February 28, 2022. The revolving credit line is collateralized by the Company’s accounts receivable and inventory.
The revolving credit line 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, 2023, $145,000 of the Company’s credit line was being utilized to collateralize Letters of Credit
issued to customers that have remitted cash deposits to the Company on existing orders. The Letters of Credit expire
in May and July 2023. As of February 28, 2023, there were no outstanding borrowings under the line of credit and the
unused portion of the credit line was $1,355,000.

As of February 28, 2022, $5,000 of the Company’s credit line was being utilized to collateralize letters of credit issued
to customers that have remitted cash deposits to the Company on existing orders. The letters of credit expire in May
2023. As of February 28, 2022, there were no outstanding borrowings under the line of credit and the unused portion
of the credit line was $1,495,000.

NOTE 9: LONG-TERM DEBT

In fiscal year 2021, the Company obtained a loan under the Paycheck Protection Program for $1,001,640. In April 2021,
the Company received notice from the SBA that the loan was forgiven in full and recorded a gain on forgiveness of
$1,005,372, which is recorded on the consolidated statements of income in fiscal 2022.

NOTE 10: INCOME TAXES

The annual provision (benefit) for income taxes differs from amounts computed by applying the maximum U.S. Federal
income tax rate of 21% to pre-tax income as follows:

Expected federal income tax .......................................................................

February 28,
2023
$ 165,882

February 28,
2022
$ 609,883

State tax, net of federal ................................................................................

37,204

Research and development tax credits ......................................................

(127,329)

Permanent differences ................................................................................

78,252

Other ............................................................................................................

—

37,894

(101,573)

(179,320)

(5,253)

Income tax expense ....................................................................................

$ 154,009

$ 361,631

Components of the current and deferred tax expense are as follows:

February 28,
2023

February 28,
2022

Current:
Federal .........................................................................................................
State .............................................................................................................
Total current .................................................................................................

$ 438,263
83,525
521,788

$ 341,882
38,536
380,418

Deferred:
Federal .........................................................................................................
State .............................................................................................................
Total deferred ...............................................................................................

(321,458)
(46,321)
(367,779)

(18,787)
—
(18,787)

Net income taxes .........................................................................................

$ 154,009

$ 361,631

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and projections for future taxable income over periods in which the deferred tax assets are deductible.
Management believes it is more likely than not that the Company will realize the benefits of these deductible
differences.

The incorporation of the new tax laws for 2023, requires the Company to capitalize for income tax purposes research
and development expenses incurred during the year and for such expenses to be amortized over a five year period.
As a result, a deferred tax asset “ Capitalized R&D expenses – IRC Section 174” has been recorded.

The Company does not have any uncertain tax positions in 2023. There are no interest and penalties related to
uncertain tax positions in 2023. As of February 28, 2023, open years related to the federal and state jurisdictions are
2022, 2021 and 2020.

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

February 28,
2023

February 28,
2022

Deferred tax asset

Allowance for inventory ................................................................................

$ 76,000

$ 69,000

Allowance for accounts receivable ..............................................................

Capitalized R&D expenses – IRC Section 174 .............................................

Accrued expenses and other .......................................................................

3,000

441,000

147,000

12,000

—

160,000

Deferred tax asset – Long Term ................................................................

$ 667,000

$ 241,000

Deferred tax liability
Building and leasehold depreciation

(83,000)

(169,000)

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

$ (83,000)

$ (169,000)

2023 Annual Report

NOTES TO CONSOLIDATED STATEMENTS

continued

NOTE 11: EARNINGS PER SHARE

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

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

February 28,
2023
$ 635,905

February 28,
2022
$ 2,542,573

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

15,735,451

15,586,404

Effects of dilutive securities:

Stock options for employees, directors and outside consultants ...............

34,048

37,081

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

15,769,499

15,623,485

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

0.04

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

0.04

0.16

NOTE 12: CUSTOMER CONCENTRATIONS AND FOREIGN SALES

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

Asia Pacific (APAC) ......................................................................................

February 28,
2023
3,260,000

Europe, Middle East, Asia (EMEA) ..............................................................

3,448,000

Latin America ...............................................................................................

1,546,000

February 28,
2022
5,301,000

5,255,000

1,097,000

$ 8,254,000

$ 11,653,000

During fiscal 2023 and fiscal 2022, sales to foreign customers accounted for approximately $8,254,000 and
$11,653,000, or 55% and 68% respectively, of total revenues.

The Company had two customers which accounted for 14% of sales during fiscal 2023. Four customers accounted
for 44% of the outstanding accounts receivables at February 28, 2023.

The Company had two customers which accounted for 24% of sales during fiscal 2022. Three customers accounted
for 41% of the outstanding accounts receivables at February 28, 2022.

NOTE 13: COMMITMENTS AND CONTINGENCIES

Other than the letters of credit discussed in Notes 3 and 8, the Company did not have any material commitments or
contingencies as of February 28, 2023.

The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of
such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the
Company’s liquidity, financial condition, and cash flows. As of February 28, 2023, the Company did not have any
pending legal actions.

Shareholder Information

Corporate Headquarters
Sono-Tek Corporation
Sono-Tek Industrial Park
2012 Route 9W
Milton, NY 12547 USA
845-795-2020
www.sono-tek.com

2023 Annual Meeting

The Annual Meeting of Shareholders will be held
at 10:00AM ET on August 24, 2023 at Sono-Tek
Corporation headquarters.

Investor Relations

Investors, stockbrokers, security analysts and
others seeking information should contact:

Stephen J. Bagley, CPA
Chief Financial Officer
Sono-Tek Corporation
info@sono-tek.com

Stephanie Prince
PCG Advisory, Inc.
sprince@pcgadvisory.com

Transfer Agent

For services such as reporting a change of address,
replacement of lost stock certificates and changes
in registered ownership, or for inquiries about your
account, contact:

Equiniti Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
www.equiniti.com

Corporate Counsel

Eilenberg & Krause LLP
335 Madison Avenue, 9th Floor
New York, NY 10017
www.eeklaw.com

Independent Accountants

Marcum LLP
100 Eagle Rock Avenue, Suite 200
East Hanover, NJ 07936

Executive Leadership

Dr. Christopher L. Coccio
Chairman of the Board and Chief Executive Officer

R. Stephen Harshbarger
President and Chief Operating Officer

Stephen J. Bagley, CPA
Chief Financial Officer

Robb Engle
Executive Vice President, Engineering

Chris Cichetti
Vice President, Sales & Application Engineering

Maria Kuha
Vice President, Manufacturing Operations,
Procurement & Logistics

Board of Directors

Dr. Christopher L. Coccio
Chairman of the Board & Chief Executive Officer

R. Stephen Harshbarger
President and Chief Operating Officer

Dr. Joseph Riemer 2, 3*
Consultant, Retired President and Vice President,
Food Business Development, Sono-Tek Corporation

Philip Strasburg, CPA 1*, 2
Former Partner, Anchin Block and Anchin, LLP

Carol O’Donnell 1, 3
Chief Executive Officer of Protege Partners, LLC

Dr. Donald Mowbray 2*
Independent Science Consultant; Retired
Director, Mechanical Engineering Laboratory,
GE R&D Center

Eric Haskell, CPA 1
Retired, Executive Vice President and Chief
Financial Officer, SunCom Wireless Holdings, Inc.

1 Audit Committee

2 Compensation Committee

3 Nominations Committee

* Committee Chairman

2023 Annual ReportNASDAQ: SOTK

2012 Route 9W
Milton, NY 12547
845.795.2020
info@sono-tek.com
www.sono-tek.com