UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended:November 30, 2017 May 31, 2018

OR

Commission File No.:0-16035

(Exact name of registrant as specified in its charter)

2012 Rt. 9W, Milton, NY 12547

(Address of Principal Executive Offices) (Zip Code)

Issuer's telephone no., including area code:(845) 795-2020

Indicate by check mark 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 ☑ NOYes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer” and “smaller reporting company,” and “emerging growth company“company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

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APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

SONO-TEK CORPORATION

INDEX

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

See notes to condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to condensed consolidated financial statements.

3 

SONO-TEK CORPORATION

Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months November 30,THREE MONTHS ENDED MAY 31, 2018 and 2017 and 2016

(Unaudited)

NOTE 1: BUSINESS DESCRIPTION

Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporatedis the world leader in New Yorkthe design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to protect, strengthen or smooth surfaces on March 21, 1975parts and components for the purpose of engagingmicroelectronics/electronics, alternative energy, medical, industrial and emerging research & development/other markets. We design and manufacture custom-engineered ultrasonic coating systems and also provide patented nozzles and generators for manufacturers’ equipment.

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the development, manufacture,United States (“GAAP”) for interim financial information. Accordingly, the Consolidated Financial Statements do not include all of the information and salefootnotes required by GAAP for complete financial statements. In the opinion of ultrasonic liquid atomizing nozzles, whichthe Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are sold world-wide. Ultrasonic nozzle systems atomize low to medium viscosity liquids by converting electrical energy into mechanical motionnot necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended February 28, 2018 (“fiscal year 2018”) contained in the form of high frequency ultrasonic vibrations that break liquids into minute drops that can be applied to surfaces at low velocity.

BasedCompany’s 2018 Annual Report on its core technology of ultrasonic liquid atomizing nozzles,Form 10-K filed with the Company has developed intellectual property in the area of precision spray coating of liquids.SEC. The Company is presently engaged in the development, manufacture, sales, installation and servicing of diverse ultrasonic coating equipment for various manufacturing industries worldwide.Company’s current fiscal year ends on February 28, 2019 (“fiscal 2019”).

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Available-For-Sale Investments –Marketable Securities -The Company’s availableCompany adopted ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments (except those accounted for sale investments are carriedunder the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized losses and declines in value below cost judged to be other than temporary, if any, are included as a component of asset impairments expense inexit price notion when measuring the consolidated statement of operations. The fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the available-for-sale investments are based on quoted market prices. The Company’srequirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value determination methodthat is discussed belowrequired to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and the fair value from of the securities from the prior year has been reclassified to Retained Earnings from Other Accumulated Comprehensive Income. The unrealized loss on the marketable securities during the three months ended May 31, 2018 has been recorded in “Fair Value of Financial Instruments.”Other Income on the Income Statement.

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.

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

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

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

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

Level 1: Quoted prices in active markets.

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

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

The fair values of financial assets of the Company were determined using the following categories at November 30, 2017May 31, 2018 and February 28, 2017,2018, respectively:

Marketable Securities include mutual funds of $4,447,496$4,316,746 and $2,342,184$4,405,900 that are considered to be highly liquid and easily tradeable as of November 30, 2017May 31, 2018, and February 28, 2017,2018, respectively. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the Company’s fair value hierarchy. The Company’s marketable securities are considered to be available-for-sale investments as defined under ASC 320 “Investments – Debt and Equity Securities.”

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

Intangible Assets -Include costs of patent applications which are deferred and charged to operations over seventeen years for domestic patents and twelve years for foreign patents. The accumulated amortization of patents is $147,000$152,304 and $139,000$149,654 at November 30, 2017May 31, 2018 and February 28, 2017,2018, respectively. Annual amortization expense of such intangible assets is expected to be approximately $11,000 per year for the next five years.

Interim Reporting - The attached summary condensed consolidated financial information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Such disclosures were included with the financial statements of the Company at February 28, 2017,2018, and included in its report on Form 10-K. Such statements should be read in conjunction with the data herein.

The financial information reflects all adjustments, normal and recurring, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results for such interim periods are not necessarily indicative of the results to be expected for the year.

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

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

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

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

New Accounting Pronouncements- In November 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17,2014-09, “Revenue from Contracts with Customers” (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is effective for fiscal years beginning after December 15, 2017.

The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. The implementation of the standard did not have a material impact on the financial statements.

In January 2016, The FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for all entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements, the fair value of the securities from the prior year has been reclassified to Retained Earnings from Other Accumulated Comprehensive Income. The unrealized loss on the marketable securities during the three months ended May 31, 2018 has been recorded in Other Income Taxeson the Income Statement.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 740): Balance Sheet Classification220), “Reclassification of Deferred TaxesCertain Tax Effects from Accumulated Other Comprehensive Income” (“. ASU 2015-17”).2018-02 was issued to allow the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effect resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. The standard requires thatTax Cuts and Jobs Act, among other things, reduced the corporate tax rate from 35% to 21%, which required the re-evaluation of any deferred tax assets and liabilities be classified as noncurrent onat the balance sheet rather than being separated into current and noncurrent.lowered tax rate which potentially could leave a disproportionate tax effect in accumulated other comprehensive income. ASU 2015-172018-02 allows for the election to reclassify these stranded tax effects to retained earnings. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those years, beginning after December 15, 2016.fiscal years. Early adoption is permitted, and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities.including adoption in any interim period for public business entities for reporting periods for which financials statements have not yet been issued. The Company adoptedis currently evaluating the impact of adopting ASU 2015-17 during the first quarter of fiscal year 2018 on a retrospective basis. Accordingly, the Company reclassified the current deferred taxes to noncurrent on its February 28, 2017 Consolidated Balance Sheet, which increased noncurrent deferred tax assets by $315,171. There was no impact on the results of operations as a result of the adoption of ASU 2015-17.2018-02.

Other than, Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“2014-09, ASU 2015-17”)2016-01 and ASU 2018-02 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, areis not expected to have an impact on the Company.

Reclassifications – Where appropriate, certain reclassifications have been made to the prior period to conform to the presentations of the current period.

NOTE 3: INVENTORIES

Inventories consist of the following:

NOTE 4: STOCK OPTIONS AND WARRANTS

Stock Options – Under the 2013 Stock Incentive Plan ("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 November 30, 2017,May 31, 2018, there were 744,100 options outstanding under the 2013 Plan.

Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"), until May 2013, options were available to be granted to officers, directors, consultants and employees of the Company and its subsidiaries to purchase up to 1,500,000 shares of the Company's common stock. As of November 30, 2017,May 31, 2018, there were 173,500160,500 options outstanding under the 2003 Plan, under which no additional options may be granted.

NOTE 5: STOCK BASED COMPENSATION

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

The weighted-average fair value of options are estimated on the date of grant using the Black-Scholes options-pricing model. For the three months ended May 31, 2018 no options were issued.

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

For the ninethree months ended November 30,May 31, 2018 and 2017, and 2016, net income and earnings per share reflect the actual deduction for stock-based compensation expense. The impact of applying ASC 718 approximated $32,000$9,000 and $33,000$10,000 in additional compensation expense during each of the nine month periodsthree months ended November 30,May 31, 2018 and 2017, and 2016, respectively. Such amounts are included in general and administrative expenses on the statement of operations. The expense for stock-based compensation is a non-cash expense item.

NOTE 6: EARNINGS PER SHARE

The denominators for the calculation of diluted earnings per share at November 30, 2017 and 2016 are calculated as follows:

NOTE 7: OTHER COMPREHENSIVE INCOME (LOSS)

As of November 30, 2017, certain of the Company’s marketable securities were in an unrealized gain position. Unrealized gains and losses are principally due to changes in fair value of the investments held as available-for-sale. Because the Company has the ability and intent to hold the securities for the foreseeable future as classified as available-for-sale, the Company does not deem these unrealized gains or losses to be other than temporary.

As of November 30, 2017, the unrealized gain on available-for-sale securities was $153,387.

The following table sets forth the changes in Accumulated Other Comprehensive Gain for the nine months ended November 30, 2017:computation of basic and diluted earnings per share:

NOTE 8:7: LONG TERM DEBT

Long-term debt consists of the following:

NOTE 9:8: REVOLVING LINE OF CREDIT

The Company has a $750,000 revolving line of credit at prime which was 4.25%4.75% at November 30, 2017.May 31, 2018. The line of creditloan 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. 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 November 30, 2017,May 31, 2018, and February 28, 2018, the Company’s outstanding balance was $0, and the unused credit line was $750,000.

NOTE 10: SEGMENT INFORMATION

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

All inter-company transactions are eliminated in consolidation. For the nine and three months ended November 30, 2017 and 2016, segment information is as follows:

NOTE 11:9: SUBSEQUENT EVENTS

The Company has evaluated subsequent events for disclosure purposes.

ITEM 2 – 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, pressnews 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 uniqueFounded in 1975, Sono-Tek Corporation designs and proprietary series ofmanufactures ultrasonic atomizing nozzles andcoating 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.

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 intoapply 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 ultrasonic spray coating technology to provide both standard and customized coating solutionsfilm coatings to a wide rangemultitude of manufacturing companies, enabling themproducts for the microelectronics/electronics, alternative energy, medical and industrial markets, including specialized glass applications in construction and automotive. We also sell our products to reduce their product costsemerging research and to develop new products with superior featuresdevelopment and quality. Presently, our customers are in six major industries: electronics, advanced energy (solar and fuel cells), medical device, glass, textiles and foods. Our systems are widely used 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.

Market Diversity

During the past several years weother markets. We have invested significant time, monies and effortsresources to enhance our market diversity. BasedFounded on our core ultrasonic coating technology, we have 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, advancedOur ultrasonic nozzle systems use high frequency ultrasonic vibrations that atomize liquids into minute drops that can be applied to surfaces at low velocity providing microscopic layers of protective materials over a surface such as glass. Our solutions are environmentally-friendly, efficient and highly reliable. They enable dramatic reductions in overspray, savings in raw material, water and energy (solarusage and fuel cells), medical device, glass, textilesprovide improved process repeatability, transfer efficiency, high uniformity and food.reduced emissions.

In recent years,We believe product superiority is imperative in all that we produce and that it is developed through the extensive experience we have in the coatings industry, our proprietary manufacturing know-how and skills and our unique work force we have built over the years. Our growth strategy is focused on leveraging our innovative technologies, proprietary know-how, unique talent and experience, and global reach to further develop microscopic coating technologies that enable better outcomes for our customers’ products and processes.

We are a substantial portionglobal business with approximately 63% of our sales originatedgenerated from outside the United States in the first quarter of fiscal 2019. Our direct sales team and we are geographically present directlyour distributor and through distributors and trade representativessales representative network is located in North andAmerica, Latin America, Europe and Asia. The infrastructure upon which this diversified market approach is based, includes a newly equipped process development laboratory, a strengthenedOver the last few years, we have expanded our sales organization with application engineers, an engineering team with additional talentcapabilities by increasing the size of our direct sales force, adding new distributors and sales representatives (“reps”). Of note, we have developed demonstration labs in Asia and at our facility in New York that are used to train our distributors and reps. These labs are also very valuable for demonstrating to prospective customers the latest, most sophisticated design software tools, as well as an expanded, highly trained installationcapabilities of our equipment and service organization.enable us to develop custom solutions to meet their needs.

The new products which we have introduced,First Quarter Fiscal 2019 Highlights(compared with the new markets that we have penetrated,first quarter of fiscal 2018 unless otherwise noted) We refer to the three-month periods ended May 31, 2018 and 2017 as the regions in which we now sell our products, are a strong foundation for our future sales growthfirst quarter of fiscal 2019 and enhanced profitability.fiscal 2018, respectively.

Results of Operations

Markets We ServeSales:

Product Sales:

Our diverse offerings have positioned us to provide 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 reduceability to provide subsystems and components including our custom-designed Align system, which OEMs include in their equipment, drove higher sales of this product category.

Increased demand in the amountMicroelectronic/Electronics and medical market drove higher sales of fluxing chemical needed, enhanceMulti-Axis Coating Systems.

Improved sales of Fluxing Systems reflect the qualitysuccess of the boards,introduction of a newly developed camera recognition system, InSight, which automatically identifies different PCBs and providechanges the process recipes.

These increases more than offset the decline in sales of Integrated Coating Systems which reflected the fluctuation of demand in Alternative Energy, primarily in fuel cells.

Market Sales:

Our strategy of providing paid coating services, in addition to Sono-Tek coating equipment, is showing success.  These service based customers are guided by our applications engineering team, to develop successful coating processes for unique needs.  Upon achieving coating results that meet the applications requirement, a sale of the needed equipment is than the next step.   This process has been well received by our customers, withand resulted in several shipments during the first quarter to our Medical and Electronic markets, contributing to our increased revenue.

In the first quarter of fiscal 2019, sales in the alternative energy market decreased due to customer delivery schedules, however, based upon our current backlog and forecast, we believe this market will show a better product at reduced costssignificant increase for the remainder of operations, when compared with conventional foam fluxers and pressure assisted fluxers.the fiscal year.

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 the 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.Geographic Sales:

Pursuant to an exclusive distribution agreement with EVS International Ltd (“EVS”) forIn the territoriesfirst quarter of fiscal 2019, approximately 63% of sales originated outside of the United States and Canada we offercompared with 67% in the EVS solder recovery system to our PCB customer base.prior year period.

We also have a significant established customer base in the semiconductor industry. The semiconductor industry utilizes our ultrasonic atomizing nozzles and robotic XYZ coating platforms for the application and deposition of photo-resist onto semiconductor wafers. Many 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, fuel cells and advanced batteries 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.Gross Profit:

Our precision coating systems provide superior surface uniformity and density, which are directly relatedgross profit increased $90,000, or 8%, to enhanced energy efficiency,$1,271,000 for the first quarter of fiscal 2019 compared to conventional systems. Our systems also afford our energy industry clientswith $1,181,000 in the prior year period. Gross profit margin of 47.1% was relatively consistent with the capabilities to significantly reduceprior year period. The change in product mix and higher direct labor and service department costs partially offset the consumptionbenefit 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 micron layers of polymers and drugs; coating of various implantable devices with biomedical 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; MedXT; MediCoat BCC and ExactaCoat MD.

4.         Glass Industry.

Our glass coating systems are primarily sold in two separate sub-markets, which we identify as “Float Glass” and “Panel Glass”.

Float Glass - 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 float glass manufacturers as their equipment of choice.

Panel Glass – Panel glass primarily refers to glass used in the manufacture of TV’s, tablets, phones, lenses and other consumer viewing devices. By using our coating equipment, manufacturers can apply a wide range of functional coatings to these devices, such as conductive layers, hard coatings, anti-reflection, and other nano-material formulations.

The equipment we offer to the glass industry is typically the WideTrack and FlexiCoat platforms.

5.         Advanced Textiles Industry.

The textiles industry is expanding the 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 creates significant waste of material, energy and water. We are working with this industry to incorporate our ultrasonic 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%.

6.         Food Safety and 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 that 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.higher volume.

Products We Offer

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

MediCoat DES 1000 / 2000 / 3000 / 4000, MediCoat II and MediCoat PSI provide a full range of stent coating platforms for uses ranging from research and development to high volume production in the application of thin layers of polymer and drug coatings to arterial stents with high precision. The system incorporates motion control of the stent during the coating process and produces coatings having excellent uniformity. The MediCoat systems use either the AccuMist or MicroMist nozzle systems, which are precision nozzle configurations used in applications where precise patterns and coatings are required. These products minimize waste of expensive drug polymer coatings and provide high uniformity of drug addition from stent to stent. We also have additional medical coating platforms to address developing market segments for drug coated balloons, catheters and other implantable devices.

Wide area modular coating system – designed to be used in applications that require efficient web-coating or wide area spraying capability. One module can cover substrates from six inches to 24 inches wide, depending on the application. Much greater widths can be achieved by linking modules together, and these systems have been applied in glass lines of up to 13 feet wide. A large number of systems have been sold over the past six years, and this application holds promise for the future due to cost and environmental savings demonstrated at customer sites. It uses non-clogging ultrasonic atomizing nozzles to produce a low velocity, highly controllable spray. The WideTrack System offers significant advantages over conventional pressure-spray methods in a broad range of applications such as non-woven fabrics, float glass, or odd-shaped industrial or consumer products. Since the ultrasonic spray can be easily controlled, it is possible to use fewer chemicals and less water and energy in applying coatings to glass, textiles, food products and packaging materials than with traditional nozzles. This also results in reduced environmental impact due to less overspray.

We offer a line of robotic XYZ coating equipment for applications involving coatings for fuel cell membranes, solar energy panels and specialty lens products. This equipment is offered in bench-top configurations as our SIMCoat and ExactaCoat product and standalone as our FlexiCoat product. These platforms position and move our nozzle systems in a precise three-dimensional application pattern. These coaters are extremely efficient especially when combined with our patented ultrasonic syringe pump to agitate and suspend nano-particles, which are often used in many of our applications.

The VersiCoat platform is a standalone conveyorized ultrasonic coating machine that incorporates WideTrack technology, using either one or two nozzles. The system can coat widths ranging from 2” – 24” and is used for high volume production needs. The machine is typically used for panel glass and advanced energy coating applications.

ALIGN is an acronym for our fully integrated ultrasonic spray module containing five primary components and stands for: a) Air delivery, b) Liquid delivery, c) Interface Electronics, d) Generator to run ultrasonics, and e) Nozzle. We successfully introduced ALIGN in our fiscal year ended February 28, 2017. This product is typically used by customers wishing to integrate ultrasonic spray technology onto an existing platform.

ServicesOperating Expenses:

We recently expanded our in-house coating capabilities, with both additional machinery

Research and applications engineering personnel, to allow us to provide low-mid volume contract coating services. In addition to purchasing our equipment, our customers can now access our coating expertiseProduct Development:

Higher research and specific customer process optimization on for a fee-for-service basis. We also provide these services at our customers’ sites where we can assistproduct development expense in the designfirst quarter of fiscal 2019 was primarily due to the increase in salaries to ensure employee retention in a competitive labor market and measurable increases in health insurance costs. Higher costs for engineering materials and supplies as well as travel expense also contributed to the increase.

Marketing and Selling:

The increase reflects increases in sales salaries and higher health insurance costs. These increases were partially offset by decreased travel and trade show expenses.

General and Administrative:

In the first quarter of fiscal 2019, we experienced increases in health insurance, professional fees and corporate and other miscellaneous expenses.

Operating Income:

Our operating income increased $11,000, or 53%, to $32,000 in the first quarter of fiscal 2019 compared with $21,000 for the prior year period. Higher gross profit more than offset the 7% increase in operating expenses. Operating margin for the quarter increased to 1.2% compared with 0.8% in the prior year period. We continue to invest in our research and product development as well as marketing and selling activities in order to expand our future market opportunities. We expect with continued growth, we will begin to demonstrate operating leverage and improved margins.

Interest Expense:

Interest expense $11,000 in the first fiscal quarter of customized coating systems.2019 compared with $12,000 for the prior year period.

Interest and Dividend Income:

Interest and dividend income increased to $35,000 in the first quarter of fiscal 2019 as compared with $17,000 for the first quarter of fiscal 2018. Our present investment policy is to invest excess cash in highly liquid, lower risk fixed income mutual funds. At May 31, 2018, the majority of our holdings are rated at or above investment grade.

Net unrealized loss on marketable securities:

The Company adopted ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” in the first quarter of fiscal 2019. ASU 2016-01 requires the Company to measure its equity investments at fair value and changes in fair value are to be recognized in net income. Further information is available in NOTE 2: SIGNIFICANT ACCOUNTING POLICIES in our financial statements.

In the first quarter of fiscal 2019, net income and earnings per share reflect the actual deduction of $49,000 for the unrealized loss on our marketable securities.

In the first quarter of fiscal 2018, changes in the fair value of our marketable securities were not recognized in net income, they were recorded as a component of Other Comprehensive Income. In the first quarter of fiscal 2018, the company reported $27,000 as an unrealized gain on marketable securities in Other Comprehensive Income.

Other Income:

Included in other income is the net revenue related to the rental of the Company’s real estate. For the first quarter of fiscal 2019, the Company’s rental revenue was $18,000, expenses were $16,000 and the net revenue was $2,000.

In the first quarter of fiscal 2018, the Company’s rental revenue was $11,000, expenses were $13,000 and the net revenue was ($2,000).

Income Tax Expense:

We recorded income tax expense of $18,000 for the first quarter of fiscal 2019 compared with $8,000 for the first quarter of fiscal 2018.

Other Product Offerings – EVS Solder Recovery SystemNet Income:

We have an exclusive distribution relationshipNet income increased by $5,000 to $21,000 for the first quarter of fiscal 2019 compared with EVS to distribute EVS’s line$16,000 for the prior year period. Driving the improvement in net income was the $11,000 in higher operating profit, the $19,000 net increase in interest income and dividends and interest expense, and the $4,000 increase in other income. Offsetting these improvements were the $20,000 net loss on marketable securities ($29,000 realized gain offset by $49,000 unrealized loss) and higher income tax expense of solder recovery systems and spare parts in the United States and Canada. EVS manufactures the EVS 10K and EVS 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.$9,000.

Rental Real Estate Operations

In December 2010, we purchased the industrial park where our facilities are located in Milton, NY. The park is an improved 3.13 acre parcel of land comprised of five buildings of office/industrial space, with 50,000 square feet of gross leasable floor area. We currently utilize 35,000 square feet of the park for our operations. We presently lease 15,000 square feet of the park to unrelated third parties.

For financial reporting purposes, we report the results of the park as rental real estate operations.

Liquidity and Capital Resources

Working Capital –Our working capital increased $413,000decreased $31,000 from $6,070,000$6,560,000 at February 28, 20172018 to $6,483,000$6,529,000 at November 30, 2017.May 31, 2018. The increasedecline in working capital is due towas mostly as a result of the current period’s net income of $265,000 and our non-cash items including $280,000reduction in cash used for depreciation and amortization, $32,000 for stock based compensation expense and $111,000 for an increaseinvestments in the market values of our Available-For-Sale Investments. We had cash outflows of $158,000 for the purchase of equipment and furnishings and $112,000 for thea $40,000 repayment of notes payable.long term debt. The Company’s current ratio was 3.88is 4.5 to 1 at November 30, 2017May 31, 2018 as compared to 5.19with 4.08 to 1 at February 28, 2017.2018.

At May 31, 2018, working capital included $1,542,000 of cash and $4,317,000 of marketable securities, for a total of $5,859,000. At February 28, 2018, working capital included $2,016,000 of cash and $4,406,000 of marketable securities, for a total of $6,422,000. The aggregate balance of cash and marketable securities increased $1,247,000decreased $563,000 during the nine-monththree-month period ended November 30, 2017 to a total of $6,146,000. At November 30, 2017, our working capital included $1,699,000 of cash and $4,447,000 of marketable securities, a total of $6,146,000. At February 28, 2017, our working capital included $2,557,000 of cash and $2,342,000 of marketable securities, a total of $4,899,000.May 31, 2018.

Stockholders’ Equity – Stockholder’s Equity increased $408,000$30,000 from $7,923,000$8,393,000 at February 28, 20172018 to $8,331,000$8,423,000 at November 30, 2017.May 31, 2018. The increase is a result of the current period’s net income of $265,000,$21,000 and stock based compensation expense of $32,000 and an increase in our accumulated other comprehensive income of $111,000.$9,000.

Operating Activities – OurWe used $374,000 in our operating activities provided $1,405,000in the first quarter of cash for the nine months ended November 30, 2017fiscal 2019 as compared to our operating activities providing $977,000 for$358,000 in the nine months ended November 30, 2016.first quarter of fiscal 2018. During the nine months ended November 30, 2017,first quarter of fiscal 2019, we had net income of $265,000,$21,000, accounts receivable decreased $172,000,increased $199,000, inventories increased $240,000,$89,000, prepaid expenses decreased $21,000,$5,000, accounts payable and accrued expenses increased $186,000,decreased $290,000, customer deposits increased $574,000$3,000 and income taxes payable increased $37,000.$18,000. In addition, in the current period we incurred non-cash expenses of $280,000$81,000 for depreciation and amortization, $32,000$9,000 for stock based compensation expense, and $78,000$18,000 for our inventory reserve.reserve and $49,000 as an unrealized loss on our marketable securities.

Investing Activities – For the nine months ended November 30, 2017,first quarter of fiscal 2019, we used $2,152,000$62,000 in our investing activities as compared to $490,000with $577,000 for the nine months ended November 30, 2016.first quarter of fiscal 2018. For the nine months ended November 30, 2017first quarters of fiscal years 2019 and 2016,2018, we used $158,000$102,000 and $171,000,$40,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the nine months ended November 30, 2017first quarter of 2019 our marketable securities provided $40,000 and 2016, we used $1,994,000 and $320,000, respectively, for$537,000 in the purchasefirst quarter of marketable securities.2018.

Financing Activities – ForIn the nine months ended November 30, 2017first quarter of fiscal years 2019 and 2016,2018, we used $112,000$39,000 and $107,000,$37,000, respectively, for the repayment of our notes payable.

Net (Decrease) Increase in Cash –ForIn the nine months ended November 30, 2017,first quarter of fiscal 2019 our cash balance decreased by $859,000$475,000 as compared to an increasea decrease of $379,000 for$256,000 in the nine months ended November 30, 2016. Duringfirst quarter of 2018. In the nine months ended November 30, 2017, our operations provided $1,405,000first quarter of cash. Of this,fiscal 2019, we used $158,000$374,000 in our operations. In addition, we used $102,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements, $1,994,000 forreceived $40,000 from the purchasesale of marketable securities and $112,000$39,000 for the repayment of our notes payable.

Results of Operations

Ultrasonic Spraying Systems Segment:

For the nine months ended November 30, 2017, our sales increased $1,037,000 or 15% to $8,114,000 as compared to $7,077,000 for the nine months ended November 30, 2016. During the nine-month period ended November 30, 2017, we experienced increases in sales of our Nozzles and Ultrasonic Generators, Stent Coating Units, XYZ Platform Units, and Universal Align Systems. These increases were partially offset by decreases in sales of our WideTrack Units, Servo PCB Fluxing Units, Solder Recovery Systems and Spray Dryer Units.

For the three months ended November 30, 2017, our sales increased $385,000 or 15% to $2,960,000 as compared to $2,575,000 for the three months ended November 30, 2016. During the three-month period ended November 30, 2017, we experienced increases in sales of our Stent Coating Units, XYZ Platform Units, PCB Fluxing Units and Parts and Universal Align Systems. These increases were partially offset by decreases in sales of our WideTrack Units, Servo PCB Fluxing Units, Solder Recovery Systems and Versicoat Units.

For the nine and three-month periods ended November 30, 2017, sales of our Stent Coating Units increased $965,000 and $223,000, respectively, when compared to the prior year periods.

For the nine and three-month periods ended November 30, 2017, sales of our XYZ Platform Units increased $393,000 and $518,000, respectively, when compared to the prior year periods.

Sales of our Stent Coating Units, XYZ Platform Units, Widetrack Units and Servo PCB Fluxing Units typically vary from quarter to quarter. Demand for our products fluctuates and is dependent upon market conditions. The continuing expansion of our product lines has reduced our dependence on any specific market and provides us flexibility to adapt to changing economic conditions.

Gross Profit:

Our gross profit increased $766,000 to $3,981,000 for the nine months ended November 30, 2017 from $3,216,000 for the nine months ended November 30, 2016. The gross profit margin was 49% of sales for the nine months ended November 30, 2017 as compared to 45% for the nine months ended November 30, 2016. The increase in gross profit for the nine months ended November 30, 2017 is primarily due to an increase in sales of our Nozzles and Ultrasonic Generators, Stent Coating Units, XYZ Platform Units and Universal Align Systems.

Our gross profit increased $237,000 to $1,452,000 for the three months ended November 30, 2017 from $1,215,000 for the three months ended November 30, 2016. The gross profit margin was 49% of sales for the three months ended November 30, 2017 as compared to 47% for the three months ended November 30, 2016. The increase in gross profit for the three months ended November 30, 2017 is due to an increase in sales of our Stent Coating Units, XYZ Platform Units, PCB Fluxing Units and Parts and Universal Align Systems.

In addition, for the nine and three-month periods ended November 30, 2017, our fixed overhead costs remained constant as our sales levels increased.

Operating Expenses:

Research and Product Development:

Research and product development costs decreased $2,000 to $922,000 for the nine months ended November 30, 2017 from $924,000 for the nine months ended November 30, 2016. The decrease is due to decreased expenses for research and development materials, depreciation expense and salaries. These decreases were partially offset by increases in health insurance premiums and engineering supplies.

Research and development costs increased $10,000 to $318,000 for the three months ended November 30, 2017 from $308,000 for the three months ended November 30, 2016. The increase is due to increased expenses for research and development materials and depreciation expense. These increases were partially offset by decreases in salaries.

Marketing and Selling:

Marketing and selling costs increased $211,000 to $1,866,000 for the nine months ended November 30, 2017 from $1,655,000 for the nine months ended November 30, 2016. During the nine months ended November 30, 2017, salaries, commissions, health insurance premiums and travel expenses increased. These increases were partially offset by decreases in trade show and depreciation expenses.

Marketing and selling costs increased $84,000 to $660,000 for the three months ended November 30, 2017 from $576,000 for the three-month period ended November 30, 2016. During the three months ended November 30, 2017, salaries, health insurance premiums and trade show expenses increased. These increases were partially offset by decreases in travel and depreciation expense.

General and Administrative:

General and administrative costs increased $53,000 to $820,000 for the nine months ended November 30, 2017 from $767,000 for the nine months ended November 30, 2016. During the nine months ended November 30, 2017, salaries, health insurance premiums, supplies and other corporate expenses increased. These increases were partially offset by decreases in professional fees, stock based compensation expense and depreciation.

General and administrative costs decreased $4,000 to $262,000 for the three months ended November 30, 2017 from $266,000 for the three months ended November 30, 2016. During the three months ended November 30, 2017, professional fees and stock based compensation expense decreased. These decreases were partially offset by increases in health insurance premiums, supplies and other corporate expenses.

Rental Real Estate Operations:

For the nine months ended November 30, 2017, our real estate operations generated $55,000 in rental income from unrelated third parties as compared to $73,000 for the nine months ended November 30, 2016. Our real estate operations incurred $111,000 in operating expenses compared to $118,000 for the prior year period and $35,000 in interest expense compared to $40,000 for the prior year period. For the nine months ended November 30, 2017, our real estate operations reported a net loss of $91,000 compared to a net loss of $85,000 for the prior year period. The reported losses exclude any inter-company rent. A summary of our real estate operations is as follows:

Interest and Dividend Income:

During the nine months ended November 30, 2017, we recorded interest and dividend income of approximately $58,000 as compared to $48,000 for the nine months ended November 30, 2016.

Other (Expense) Income:

During the nine months ended November 30, 2017, we recorded net realized gains of $11,000 on the sale of some of our available-for-sale investments. In addition, we recorded $6,000 of miscellaneous income.

During the nine months ended November 30, 2016, we received a payout of $200,000 in life insurance proceeds from the death of a former employee.

Condensed Consolidated Results:

We had net income of $265,000 for the nine months ended November 30, 2017, as compared to $28,000 for the nine months ended November 30, 2016. For the nine months ended November 30, 2017, our revenue increased $1,019,000, gross profit increased $748,000, operating expenses increased $256,000, and our operating income increased $492,000. Interest and dividend income, net of interest (expense) increased $15,000 and other income (expense) decreased $190,000 when compared to the nine months ended November 30, 2016.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations are based upon the 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. The Company believes that critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to the Company’s consolidated financial statements included in Form 10-K for the year ended February 28, 2017.2018.

Accounting for Income Taxes

As part of the process of preparing the Company’s condensed consolidated financial statements, the Company is required to estimate its income taxes. Management judgment is required in determining the provision for the deferred tax asset.

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. 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

Accounting pronouncements issued but not yet effective have been deemed to be not applicable or the adoption of such accounting pronouncements are not expected to have a material impact on the financial statements of the Company.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company does not issue or invest in financial instruments or derivatives for trading or speculative purposes. Substantially all of the operations of the Company are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk. All of our sales transactions are completed in US dollars.

Although the Company's assets included $1,699,000$1,542,000 in cash and $4,447,000$4,317,000 in marketable securities, the market rate risk associated with changing interest rates in the United States is not material.

ITEM 4 – Controls and Procedures

The Company has established and maintains “disclosure controls and procedures” (as those terms are defined in Rules 13a –15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”). Christopher L. Coccio, Chief Executive Officer (principal executive) and Stephen J. Bagley, Chief Financial Officer (principal accounting officer) of the Company, have evaluated the Company’s disclosure controls and procedures as of November 30, 2017.May 31, 2018. Based on this evaluation, they have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to Management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding timely disclosure.

In addition, there were no changes in the Company’s internal controls over financial reporting during the thirdfirst fiscal quarter of 20182019 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

PART II - OTHER INFORMATION

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: JanuaryJuly 16, 2018