UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended:February 28, 201529, 2016

Commission File Number:0-16035

(Name of registrant as specified in its charter)

Registrant's Telephone Number, Including Area Code:(845) 795-2020

Securities Registered Pursuant to Section 12(b) of the Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☐ Yes   ☑ No

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.☐ Yes   ☑ No

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.☑ Yes   ☐ No

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).☑ Yes   ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.☑

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer | | Accelerated Filer | | Non-accelerated Filer | | Smaller reporting company☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes   ☑ No

As of August 31, 2014,2015, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $11,588,978$10,786,111 computed by reference to the average of the bid and asked prices of the Common Stock on said date, which average was $1.29.$1.16.

The Registrant had 14,933,10714,955,400 shares of Common Stock outstanding as of April 29, 2015.May 19, 2016.

DOCUMENTS INCORPORATED BY REFERENCE: None.

PART I

ITEM 1     DESCRIPTION OF BUSINESS

Organization and Business

Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) 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.nozzles and systems. 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. The principal advantage of these nozzle systems is that they use much less liquid than competitive nozzle systems to attain the required coatings on solar cells, fuel cells, glass, advanced textiles, food and food packaging, circuit boards, medical devices and many other coating applications. This advantage translates into precise thin films and lower costs for materials, less costly liquid consumption, less energy required for subsequent drying operations and less release into the environment of spray that would typically bounce back and scatter while using competitive nozzle systems. These factors are increasingly important to customers at a time of rising commodity and energy costs and supply limitations.

We use our core technology – ultrasonic spray coating – to provide both standard and customized coating solutions to a wide range of manufacturing companies, enabling them to reduce their product costs and to develop new products with superior features and quality. Presently, our customers are in six major industries: electronics, advanced energy (solar and fuel cells), medical device, glass, textiles and foods. Our diversified group of customers provides the base for both financial stability and business growth opportunities.

In addition, our systems are widelyused by leading high tech companies and research institutions, as well as by governmental, defense, energy and health agencies around the world.

Our diversified group of customers provides the base for both financial stability and business growth opportunities.

Markets

Our growth and diversification program over the past several years hasdiverse offerings have positioned us to offerprovide a unique and superior family of customized products to the six major industries that we serve. All of these systems are based on our core technology of ultrasonic spray coating. Many of these systems have been commercially proven in 24/7 working schedules, under harsh and challenging manufacturing environments, where they provide value in a continuous and reliable fashion.

1.       Electronics Industry.

We serve this industry primarily in two sectors; Printed Circuit Board (PCB) manufacturing and Semiconductor manufacturing.

We provide manufacturers of PCBs with state-of-the-art solder fluxers. Spray fluxers are used in the manufacturing process of PCBs to apply flux, which removes oxidation and prepares the PCB for the process of soldering components onto it.

Our ultrasonic spray fluxers reduce the amount of fluxing chemical needed, enhance the quality of the boards, and provide our customers with a better product at reduced costs of operations, when compared with conventional foam fluxers and pressure assisted fluxers.

We are recognized as a standard setter in the industry and our systems are incorporated by various original equipment manufacturers (OEM) in their manufacturing lines for makingthe production of electronic printed circuit boards. Some examples of products that we market to the electronics industry include: SonoFlux 2000F, SelectaFlux, SonoFlux EZ and SonoFlux Servo.

Pursuant to an exclusive distribution agreement with EVS International Ltd (“EVS”) for the territories of the United States and Canada, we offer the EVS solder recovery system to our PCB customer base.

We also have a significant established customer base in the semi-conductorsemiconductor industry. The semi-conductor industry utilizes our ultrasonic atomizing nozzles and robotic XYZ coating platforms for the application and deposition of photo-resist onto semiconductor wafers. Certain of our semi-conductor manufacturing industry customers engaged in the production of micro-electro-mechanical systems, “MEMS”, have proven the ability of our technology to apply micron thick coatings to these complex wafers.

2.       Advanced Energy Industry.

Manufacturers of solar cells and fuel cells share two major technical and business challenges: enhancing the energy efficiency of their products and manufacturing their products in a cost effective way. Extremely uniform, thin layer coatings are at the heart of the solution for these advanced energy systems’ challenges.

Our precision coating systems provide superior surface uniformity and density, which are directly related to enhanced energy efficiency.efficiency, compared to conventional systems. Our systems also afford our energy industry clients with the capabilities of saving up to 80% of the expensive catalysts and nano-materials used in these manufacturing processes. Some examples of our products marketed to the advanced energy industry include: ExactaCoat FC & SC, Sonic Syringe, VersiCoat, and FlexiCoat FC & SC, and SonoFlow Fusion.

3.       Medical Device Industry.

Our ultrasonic coating technology is used by medical device manufacturers worldwide. The leading applications for this industry are coating of arterial stents and balloon catheters with precise and uniform micronicmicron layers of polymers and drugs; coating of various implantable devices with lubricousbiomedical materials and coating of blood collection tubes with anti-coagulants. These applications are typically performed under strict regulatory supervision of governmental agencies in different countries, and the continuing demand for our systems from these customers is indicative of the high quality performance that our systems provide these customers. Some examples of our products marketed to the medical device industry include: MediCoat I; Medicoat II; Medicoat PSI; AccuMist; MicroMist; Balloon Catheter Coater.MedXT; MediCoat BCC and ExactaCoat MD.

4.       Glass Industry.

The manufacture of float glass occurs under extremely harsh conditions of elevated temperatures. Our ultrasonic coating technology provides this manufacturing process with the means to precisely and uniformly apply anti-stain, and other specialty chemical agents, on the hot glass. Our customers benefit from an improved quality product, enhanced productivity and significantly reduced expenditures on annual maintenance, often resulting in a return on investment of less than one year. Based on this equipment’s recent successful performance, our systems are now specified by many global glass manufacturers as their equipment of choice.

The equipment we offer to the glass industry is the WideTrack – wide area modular coating system.

5.       Advanced Textiles Industry.

The textiles industry is rapidly expanding to introducethe introduction of high performance value adding coatings onto fabrics, such as anti-microbial, anti-stain, flame retardant and moisture barriers. The current manufacturing process for applying these expensive coatings hascreates significant waste of material, energy and water. We are working with this industry to incorporate our ultrasonic technology;technology, often in combination with unique pre and post treatments of the coating materials, to reduce the effective material and energy usage by as much as 90%.

We have demonstrated to several leading textile manufacturers the technical advantages6.       Food Safety and financial benefits of our WideTrack coating system for their specific operations, and we are hopeful that these manufacturers will prioritize the WideTrack in their future capital investment budgets.Food Coatings Industry.

The food industry is evolving in response to greater demands for reduction of food borne illnesses. We have successfully introduced an anti-microbial coating system for sliced packaged meats, and we are focusing efforts on those global food companies whothat will need this technology to meet the new demands. We have also introduced our systems to other segments of the food industry for the coating of flavors, ingredients and other additives of interest. Most of our food industry equipment is designed on the WideTrack platform.

Products

We have core technology and have developed and market the following products:

Other Product Offerings – EVS Solder Recovery System

We have an exclusive distribution relationship with EVS to distribute EVS’s line of solder recovery systems and spare parts in the United States and Canada. EVS manufactures the EVS6000, EVS3000EVS 10K and the EVS1000EVS 8K solder recovery systems which are used to reclaim solder from the dross which accumulates in the wave-solder equipment of circuit board manufacturers. The customer base for distribution of these systems is synergistic with our existing customer base for spray fluxer sales in the printed circuit board industry.

Manufacturing

We purchase circuit board assemblies and sheet metal components from outside suppliers. These materials are available from a wide range of suppliers throughout the world. All raw materials used in our products are readily available from many different domestic suppliers. We also purchase certain systems and subsystems to supplement our in-house manufacturing. These items are integrated with our ultrasonic system technology to meet specific applications.

We provide a limited warranty on all of our products covering parts and labor for a period of one year from the date of sale.

We own an industrial park in Milton, New York. The park has 50,000 square feet of leasable area and we use more than half the space for manufacturing.

We have a business and quality control system that meets the qualifications of ISO 9001. We were ISO registered in September 1998 and we have been recertified annually since then.

Research and Development

We believe that our long-term growth and stability isare linked to the development and release of products that provide solutions to customer needs across a wide spectrum of industries, while advancing the utility of our core technology. We expended approximately $1,016,000$1,268,000 and $885,000$1,016,000 for Fiscal Years 20152016 and 20142015,respectively, on new engineering and product development.

Patents and Licenses

Our business is based in part on the technology covered by our United States patents. We also rely on unpatented know-how in the design and production of our nozzle systems. We have executed non-disclosure and non-compete agreements with all of our employees to safeguard our intellectual property. We execute reciprocal non-disclosure agreements with our key customers to safeguard any jointly developed intellectual property.

In recent years we have made significant progress on building our intellectual property portfolio. We have a patent pending covering a new design for our entire line of nozzle systems. We have also applied forDuring the fiscal year ended February 29, 2016, we were granted three new patents on the following projects:relating to:

In addition, the United States Patent and Trademark Office granted us a patent for a process for coating three dimensional substrates with thin organic films and products. This process uses our ultrasonic nozzles to produce micro-droplets in a vacuum chamber, which then produce a smooth, continuous, uniform conformal coating on various surfaces such as cardiovascular stents, diabetes monitors and other implantable medical devices. We also were recently granted a patent for a novel ultrasonic nozzle design based on ceramic materials that can achieve very high frequencies, smaller droplets and higher flow rates.

Marketing and Distribution

Our products are marketed and distributed through independent distributors, sales representatives, or sales representative companies, OEMs, and through an in-house direct sales force. Many of our sales leads are generated from our Internet web site and from attendance at major industry trade shows. In addition, we have retained an external marketing firm to expand awareness of our products in our targeted industries, and to make use of the Internet with our web page and other techniques.

Competition

We operate in competitive markets in the electronics and stent coating industries.many of our industry segments. We compete against global and regional manufacturers of nozzles and other products based on price, quality, product features and follow up service. We maintain our competitive position by providing highly effective solutions that meet our customers’ requirements and needs. In otherseveral emerging markets, we encounter less competition based on the uniqueness of our ultrasonic technology in these applications.

Significant Customers

We have significant geographic and market diversification. Our largest customer accounted for approximately 7% of our sales for the Fiscal Year ended February 28, 2015.29, 2016.

Foreign and Export Sales

During Fiscal Years 20152016 and 2014,2015, sales to foreign customers accounted for approximately $6,577,000 and $5,018,000, or 56% and $6,447,000, or 47% and 63% respectively, of total revenues.

Employees

As of February 28, 2015,29, 2016, we employed 5358 full-time employees and fourone part-time employees.employee. We believe that relations with our employees are generally good.

Available Information

We have filed reports, proxy statements and other information with the Securities and Exchange Commission. Copies of our reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC, at SEC, Public Reference Section, 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding us. The address of the SEC website is http://www.sec.gov. We will also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge available through our website at http://www.sono-tek.com as soon as reasonably practicable after filing electronically such material with the SEC. Copies are also available, without charge, from Sono-Tek Corporation, 2012 Route 9W, Milton, NY 12547.

We own an industrial park located in Milton, New York. The industrial park consists of approximately 50,000 square feet of office and warehouse space. Approximately 21,000 square feet of the park is leased or available for lease at any given time. The property is subject to a ten year mortgage, of which nineeight years remain.

Our offices, product development, manufacturing and assembly facilities are located in the industrial park. We presently utilize a 13,000 square foot building and 16,000 square feet of additional office and storage space in an adjacent building. Our current manufacturing areas consist of (i) a machine shop, (ii) a nozzle assembly/test area, (iii) an electronics assembly area, (iv) an area for assembling and testing final products and systems and (v) a receiving and shipping area. We believe our facilities will be adequate for the foreseeable future.

We presently maintain a sales and service office in Hong Kong and an equipment demonstration room in Shenzhen, China. The office and demonstration room are located on the premises of one of our product distributors.

PART II

Our common stock currently trades on the over-the-counter QB platform.OTCQX U.S. Premier 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.

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, 2015,29, 2016, there were 163165 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.

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 five 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 $518,000$343,000 from a working capital of $4,753,000$5,512,000 at February 28, 20142015 to $5,271,000$5,855,000 at February 28, 2015.29, 2016. The increase in working capital is due to: net income of $606,000,$548,000, offset by cash expenditures of $22,000$17,000 for patent and other asset costs, $357,000$465,000 for the purchase of equipment and furnishings and $160,000$158,000 for the repayment of notes payable. In addition, we incurred non-cash expenses for depreciation and amortization expense of $408,000 and$477,000, stock based compensation expense of $43,000.$43,000 and a decrease in our current deferred tax asset of $86,000. The Company’s current ratio was 3.54.5 to 1 at February 28, 201529, 2016 as compared to 3.6 to 1 at February 28, 2014.2015.

At February 28, 2015,29, 2016, our working capital includes $2,388,000 of cash and $1,696,000 of marketable securities as compared to $2,563,000 of cash and $1,652,000 of marketable securities as compared to $3,232,000 of cash and $631,000 of marketable securities at February 28, 2014.2015.

Stockholders’ Equity - Stockholders' equity increased $649,000$524,000 from $6,495,000 at February 28, 2014 to $7,144,000 at February 28, 2015.2015 to $7,668,000 at February 29, 2016. The increase in stockholders’ equity is the result of the current year’s net income of $606,000 and$548,000, stock based compensation of $43,000.$43,000 and stock option proceeds of $3,000 offset by the current year’s comprehensive loss valuation of $70,000.

Operating Activities –Our operating activities provided $924,000$629,000 of cash for the year ended February 28, 201529, 2016 as compared to providing $1,668,000$924,000 for the year ended February 28, 2014. During2015. For the year ended February 28, 2015,29, 2016, we had net income of $606,000,$548,000, accounts receivable increased $180,000,$188,000, inventories increased $484,000,decreased $234,000, prepaid expenses and other assets decreased $66,000,increased $15,000, accounts payable and accrued expenses increased $155,000,decreased $56,000, customer deposits increased $99,000decreased $261,000 and income taxes payable increased $100,000.decreased $142,000. In addition, we incurred non-cash expenses of $408,000$477,000 for depreciation and amortization, $43,000 for stock based compensation expense, $100,000$3,000 for our accounts receivable reserve, an increase of $107,000 in our deferred tax expense and a decrease in our inventory reserve and $11,000 for allowance for accounts receivable.of $120,000.

Investing Activities -For the year ended February 28, 2015,29, 2016, we used $648,000 of cash in our investing activities used $1,401,000 of cash as compared to providing $65,000using $1,401,000 for the year ended February 28, 2014.2015. In 20152016 and 2014,2015, we used $357,000$465,000 and $224,000,$357,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. In 20152016 and 2014,2015, we used $22,000$17,000 and $56,000,$22,000, respectively, for patent application and other asset costs. In 2016 and 2015, we used $165,000 and $1,022,000, respectively, for the purchase of marketable securities as compared to proceeds of $345,000 from the sale of marketable securities in 2014..

Financing Activities –For the year ended February 28, 2015,29, 2016, we used $193,000$155,000 of cash in our financing activities as compared to using $443,000 of cash$193,000 for the year ended February 28, 2014. We had proceeds of $2102015. In 2016 and 2015, we used $158,000 and $193,000, respectively, for stock option exercises in 2014. In addition, we madethe repayments of notes payable of $193,000 and $2,043,000 in 2015 and 2014, respectively. During the year ended February 28, 2014,payable. In 2016 we had proceeds of a note payable for $1,600,000received $3,000 for the refinancingexercise of the industrial park in which our operations are located.stock options.

Net Decrease in Cash –For the year ended February 28, 2015,29, 2016, our cash balance decreased by $669,000 as$174,000as compared to an increasea decrease of $1,291,000$669,000 for the year ended February 28, 2014.2015. During the year ended February 28, 2015,29, 2016, our operations provided $924,000$629,000 of cash, we used $1,401,000$648,000 in our investing activities and $193,000used $155,000 in our financing activities.

Net Increase in Marketable Securities –Bank Credit Facilities:For the year ended February 28, 2015, our marketable securities increased to $1,652,000 from $631,000 at February 28, 2014. The increase is due to additional investments that were made during the year.

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, 2015, we had29, 2016, there were no outstanding borrowings under the line of credit.

We had outstanding borrowings of $20,000 under the equipment facility at February 28, 2015. The borrowing has a repayment term of 48 months and bears interest at 2.12% per annum.

We had outstanding borrowings under a note payable of $1,458,000$1,320,000 at February 28, 2015.29, 2016. The note is payable over teneight 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 – Sales and Gross Profit:

Net Sales:

For the year ended February 28, 2015,29, 2016, our sales increased by $556,000$981,000 to $10,758,000$11,739,000 as compared to $10,202,000$10,758,000 for the year ended February 28, 2014,2015, an increase of 5.4%9%. Duringthe year ended February 28, 2015,29, 2016, we experienced an increase in sales of our nozzles and generators, XYZwidetrack units, fluxers and stent coatingrelated spares, servo units and spray dryer units. We did, however, see a decrease in sales of our widetrackstent coating units, lead solder recovery systemsXYZ units and servo units.nozzles and generators.

Gross Profit:

Our gross profit increased $467,000,$419,000, to $5,543,000 for the year ended February 29, 2016 from $5,124,000 for the year ended February 28, 2015 from $4,657,0002015. Our gross profit margin percentage was 47% for the year ended February 28, 2014. Our gross profit margin percentage was29, 2016 compared to 48% for the year ended February 28, 2015 compared to 46% for the year ended February 28, 2014.2015. The increasedecrease in the current year’s gross profit margin is due to increasesdecreases in sales of our higher gross margin stent coaters, XYZ units and fluxer units.

Export Sales:nozzles and generators.

Export Sales:

For the year ended February 28, 2015,29, 2016, sales to customers located in European countries increased by $252,000$720,000 or 14%35%, sales to customers located in Asian countries decreasedincreased by $1,181,000$834,000 or 35%39% and sales to other non-based US customers decreased $500,000 or 38%.were steady.

For the year ended February 28, 2015, sales to the Far East decreased by $1,181,000. During the year ended February 28, 2014, our sales to the Far East included approximately $800,000 of Widetrack equipment.

Operating Expenses:

Research and Product Development:

Research and product development costs increased $131,000$252,000 to $1,268,000 for the year ended February 29, 2016 as compared to $1,016,000 for the year ended February 28, 2015 as compared to $885,000 for the year ended February 28, 2014.2015. For the year ended February 28, 201529, 2016 we experienced increases in engineering salaries, engineering materials and depreciation.

During the year ended February 28, 2015,29, 2016, we expended approximately $589,000$787,000 for engineering personnel as compared to $552,000$589,000 for the year ended February 28, 2014.2015. The increase in salaries is a result of the start of our New Product Development team, which has recently completed two new products; the VersiCoat and SonoBraze. During the year ended February 28, 2015,29, 2016, we expended approximately $172,000$187,000 for additional research, materials and product development as compared to $118,000$172,000 for the year ended February 28, 2014.2015. During the year ended February 28, 201529, 2016 we incurred approximately $120,000$133,000 for depreciation expense as compared to $89,000$120,000 for the year ended February 28, 2014.2015.

Marketing and Selling:

Marketing and selling costs increased $195,000$218,000 to $2,371,000 for the year ended February 29, 2016 as compared to $2,153,000 for the year ended February 28, 2015 as compared to $1,958,000 for the year ended February 28, 2014.2015. For the year ended February 28, 2015,29, 2016, we experienced increases in commission expense, advertising and trade show expenses and sales salaries. In addition we experienced a decrease in travel and entertainment expense, and sales salaries.expense.

During the year ended February 28, 2015,29, 2016, we expended approximately $502,000$590,000 for commissions as compared to $384,000$502,000 for the year ended February 28, 2014,2015, an increase of $118,000. During the year ended February 28, 2014, our sales included four large orders that originated in house by our internal with no external commissions.$88,000.

During the year ended February 28, 2015,29, 2016, we expended approximately $157,000$228,000 for advertising and trade show expense compared to $169,000 for the year ended February 28, 2015, an increase of $59,000.

During the year ended February 29, 2016, salary expense was $1,119,000 as compared to $1,061,000 for the year ended February 28, 2015, an increase of $58,000.

During the year ended February 29, 2016, we expended approximately $113,000 for travel and entertainment as compared to $121,000$157,000 for the year ended February 28, 2014, an increase2015, a decrease of $36,000. During the year ended February 28, 2015, salary expense was $1,061,000 as compared to $1,029,000 for the year ended February 28, 2014, an increase of $32,000.$44,000.

General and Administrative:

General and administrative costs increased $16,000$67,000 to $1,100,000 for the year ended February 29, 2016 as compared to $1,033,000, for the year ended February 28, 20152015. For the year ended February 28, 2016, we experienced increases in insurance expense, depreciation expense, and corporate and other miscellaneous expenses. These increases were offset by a decrease in bad debt expense.

Operating Income – Ultrasonic Spraying:

Our operating income for the year ended February 29, 2016 was $804,000 as compared to $1,017,000,$922,000 for the year ended February 28, 2014. For2015, a decrease of $118,000 or 13%. During the current year, ended February 28, 2015, we experienced decreasesour gross profit increased by $419,000 when compared to the prior year. The increase in salary expense and professional fees, these decreases weregross profit was offset by an increase in stock based compensation expense.Research and Development costs, Marketing and Selling expenses and General and Administrative expenses, which collectively increased by $537,000 when compared to the prior year.

Rental Real Estate Operations:

For the year ended February 28, 2015,29, 2016, our real estate operations generated $92,000$95,000 in rental income from unrelated third parties as compared to $77,000$92,000 for the year ended February 28, 2014.2015. Our real estate operations incurred $163,000$108,000 in operating expenses compared to $155,000$114,000 for the prior year period, real estate taxes of $51,000 compared to $49,000 for the prior year period and $63,000$58,000 in interest expense compared to $108,000$63,000 for the prior year period. For the year ended February 28, 2015,29, 2016, our real estate operations reported a net loss of $134,000$122,000 compared to a net loss of $186,000$134,000 for the prior year period. The reported losses exclude any inter-company rent.

A summary of our real estate operations is as follows:

For the years ended February 29, 2016 and February 28, 2015, and 2014, net cash outflows related to the industrial park were $269,000$187,000 and $494,000,$269,000, 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, we hadour annual rental expense ofwas 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 29, 2016 and February 28, 2015.

Interest Income, Interest Expense and Income Taxes:

Interest income increased to $55,000 for the year ended February 29, 2016 as compared to $33,000 for the year ended February 28, 2015 when compared to $7,000 for the year ended February 28, 2014.2015. Our present investment policy is to invest excess cash in highly liquid mutual funds. Our holdings are rated at or above investment grade.

Interest expense decreased to $58,000 for the year ended February 29, 2016 as compared to $65,000 for the year ended February 28, 2015 as compared to $110,000 for the year ended February 28, 2014. The decrease in interest expense is a result of the refinancing of the Industrial Park in December 2013.2015.

We recorded income tax expense of $195,000 for the year ended February 29, 2016 as compared to $219,000 for the year ended February 28, 2015 as compared to $130,000 for the year ended February 28, 2014. As of February 28, 2015, we have no net operating loss deductions available to carry forward.2015. The details of the current year’s tax benefit areexpense is explained in Note 12 in our financial statements.

Net Income:

For the year ended February 28, 2015,29, 2016, we had net income of $606,000$548,000 as compared to $484,000$606,000 for the year ended February 28, 2014.2015. The increasedecrease in our net income is due to an increase in our sales volume combined withoperating expenses which was offset by an increase in our gross profit margin.profit.

For the years ended February 29, 2016 and February 28, 2015, and 2014, 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 Loss

Net unrealized loss on marketable securities:

As of February 29, 2016, certain of our marketable securities were in an unrealized loss position. Unrealized losses are principally due to changes in fair value of the 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 decline to be other-than-temporary.

As of February 29, 2016, our unrealized loss on available-for-sale securities was $70,140.

Off - Balance Sheet Arrangements

We do not have any Off - Balance Sheet Arrangements as of February 28, 2015.29, 2016.

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, 2015,29, 2016, 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.

Our financial statements are presented on pages 32 to 48 of this Report.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) as of the end of the period covered by this annual report on Form 10-K.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of such date, at a reasonable level of assurance, in ensuring that the information required to be disclosed by us in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chairman & CEO (principal executive officer) and Chief Financial Officer (principal accounting officer), we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of February 28, 2015.29, 2016. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.