UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended:November 30, 2017 May 31, 2019

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

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

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.

Large Accelerated Filer ☐     Accelerated Filer ☐     Smaller reporting company ☑

Non Accelerated Filer☐  (Do not check if a smaller reporting company)   Emerging growth company ☐

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.☐

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

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

INDEX

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MAY 31, 2019 AND 2018

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

Notes to Condensed Consolidated Financial Statements

Nine Months November 30, 2017 and 2016CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MAY 31, 2019 and 2018

(Unaudited)

NOTE 1: BUSINESS DESCRIPTION

Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporated in New York on March 21, 19751975. We are the world leader in the design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to protect, strengthen or smooth surfaces on parts 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 condensed 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 condensed 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, 2019 (“fiscal year 2019”) 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 2019 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 29, 2020 (“fiscal 2020”).

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

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

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, 2019 and February 28, 2017,2019, respectively:

Marketable Securities include mutual funds, certificates of $4,447,496deposit and $2,342,184US Treasury securities, totaling $3,779,187 and $2,365,706 as of May 31, 2019, and February 28, 2019, respectively, that are considered to be highly liquid and easily tradeable as of November 30, 2017 and February 28, 2017, respectively.tradeable. 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$163,127 and $139,000$160,433 at November 30, 2017May 31, 2019 and February 28, 2017,2019, 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, 2017,2019, 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.

Marketable Securities -The Company has 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 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. The fair value allowance of the securities at February 28, 2018 has been reclassified to Retained Earnings from Other Accumulated Comprehensive Income. The unrealized gain and loss on the marketable securities during the three months ended May 31, 2018 has been disclosed as a separate line item on the Income Statement.

New Accounting Pronouncements-Pronouncements -

In November 2015,February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2015-17, “Income TaxesASU 2016-02, Leases (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The standard requires that deferred tax assets842), to increase transparency and liabilities be classified as noncurrentcomparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet ratherfor all leases with terms longer than being separated into current and noncurrent.12 months. Leases will be classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. ASU 2015-172016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early2018, and early adoption is permittedwas permitted. The adoption of ASU 2016-02 had no material impact on the Company’s financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. ASU 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 Tax Cuts and Jobs Act, among other things, reduced the standard may be applied either retrospectively or on a prospective basiscorporate tax rate from 35% to all21%, which required the re-evaluation of any deferred tax assets and liabilities.liabilities at the lowered tax rate which potentially could leave a disproportionate tax effect in accumulated other comprehensive income. ASU 2018-02 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 fiscal years. Early adoption was permitted, including adoption in any interim period for public business entities for reporting periods for which financials statements have not yet been issued. The Company adoptedadoption of 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 was2018-02 had no material impact on the results of operations as a result of the adoption of ASU 2015-17.Company’s financial statements.

Other than Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“2016-02 and ASU 2015-17”)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: REVENUE RECOGNITION

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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.

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

Sales revenue is recognized when control of the Company’s manufactured equipment is transferred to its customers, in an amount that reflects the consideration the Company expects to receive based upon the agreed transaction price. The Company’s performance obligations are satisfied when its customers take control of the purchased equipment, which is based on the contract terms. Based on prior experience, the Company reasonably estimates its sales returns and warranty reserves. Sales are presented net of discounts and allowances. Discounts and allowances are determined when a sale is negotiated. The Company does not grant its customers or independent representatives, the ability to return equipment nor does it grant price adjustments after a sale is complete.

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

At May 31, 2019, the Company had received $1,334,000 in cash deposits, and had issued Letters of Credit in the amount of $808,000 to secure these cash deposits. The Company was utilizing $808,000 of its available credit line to collateralize these letters of credit. The Company’s inventory included approximately $600,000 directly related to servicing these customer contracts.

NOTE 4: INVENTORIES

Inventories consist of the following:

NOTE 4:5: 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, 2019, there were 744,100345,834 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, 2019, there were 173,50080,000 options outstanding under the 2003 Plan, under which no additional options may be granted.

During the three months ended May 31, 2019, 162,166 options were exercised on a cashless basis into 104,050 shares of common stock.

NOTE 5:6: 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, 2019 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, 2017May 31, 2019 and 2016,2018, net income and earnings per share reflect the actual deduction for stock-based compensation expense. The impact of applying ASC 718 approximated $32,000$11,000 and $33,000$9,000 in additional compensation expense during each of the nine month periodsthree months ended November 30, 2017May 31, 2019 and 2016,2018, 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 6:7: 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: LONG TERM DEBT

Long-term debt consists of the following:

NOTE 9: REVOLVING LINE OF CREDIT

The Company has a $750,000$1,500,000 revolving line of credit at prime which was 4.25%5.50% at November 30, 2017.May 31, 2019. The revolving credit line of credit is collateralized by all of the assets of the Company, except for the landCompany’s accounts receivable and buildings.inventory. The revolving credit 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, 2019, $808,000 of the Company’s credit line was being utilized to collateralize letters of credit issued to customers that have remitted cash deposits to the Company on existing orders. The letters of credit expire in 2020. As of May 31, 2019, there were no outstanding balance was $0,borrowings under the line of credit and the unused portion of the credit line was $750,000.$692,000 as of May 31, 2019.

NOTE 10: SEGMENT INFORMATIONCOMMITMENTS AND CONTINGENCIES

TheOther than the letters of credit disclosed in Note 8, the Company operates in two segments: ultrasonic spray coating systems, which is the businessdid not have any material commitments or contingencies as 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.May 31, 2019.

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: 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, 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, technological and technologicaltrade barrier developments affecting our operations or the demand for our products; timely development and market acceptance of new products; adequacy of financing; capacity additions,additions; the ability to enforce patentspatents; completion of backlog during the current fiscal year and the ability to achieve increased sales volume at projected levels 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. Based ondiversity by leveraging our core ultrasonic coating technology,technology. As a result, we have increased our portfolio of products, the industries we serve and the countries in which we sell our products.

Our ultrasonic nozzle systems use high frequency, ultrasonic vibrations that atomize liquids into minute drops that can be applied to surfaces at low velocity providing thin layers of protective materials over a surface such as glass or metals. Our solutions are environmentally-friendly, efficient and highly reliable. They enable dramatic reductions in overspray, savings in raw material, water and energy usage and provide improved process repeatability, transfer efficiency, high uniformity and reduced emissions.

TodayWe believe product superiority is imperative and that it is attained through the extensive experience we serve six major industries: electronics, advanced energy (solarhave in the coatings industry, our proprietary manufacturing know-how and fuel cells), medical device, glass, textilesskills and food.our unique work force we have built over the years. Our growth strategy is to leverage our innovative technologies, proprietary know-how, unique talent and experience, and global reach to further advance the use of ultrasonic coating technologies for the microscopic coating of surfaces in a broader array of applications that enable better outcomes for our customers’ products and processes.

In recent years,We are a substantial portionglobal business with approximately 56% of our sales originatedgenerated from outside the United States and we are geographically present directlyCanada. Our direct sales team and through distributorsour distributor and trade representativessales representative network is located in North andAmerica, Latin America, Europe and Asia. Over the last few years, we have expanded our sales capabilities by increasing the size of our direct sales force, adding new distributors and sales representatives (”reps”). In addition, we have established testing labs at our distribution partner sites in China, Taiwan, Germany, Turkey, Korea and Japan, while also expanding our first testing lab that is co-located with our manufacturing facilities in New York. These labs provide significant value for demonstrating to prospective customers the capabilities of our equipment and enabling us to develop custom solutions to meet their needs.

Over the last decade, we have shifted our business from primarily selling our ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems to original equipment manufacturers (“OEMs”). The infrastructure uponrange for our average unit selling price has increased as a result from less than $8,000 for a nozzle and generator package to a range of $50 thousand per unit to over $240 thousand per unit. As a result of this transition, we have broadened our addressable market and we believe that we can grow sales on a larger scale and we expect that we will experience wide variations in both order flow and shipments from quarter to quarter.

First Quarter Fiscal 2020 Highlights(compared with the first quarter of fiscal 2019 unless otherwise noted) We refer to the three-month periods ended May 31, 2019 and 2018 as the first quarter of fiscal 2020 and fiscal 2019, respectively.

Results of Operations

Sales:

Product Sales:

Sales growth was driven by demand for our more complex, highly-engineered and higher value multi-axis coating machines primarily for the Alternative Energy markets in in the first quarter of fiscal 2020. This equipment’s average selling price can range from $100 thousand to over $240 thousand per unit and is typically ordered in one-or two-unit volumes. Growth in these product categories more than offset the decline in integrated coating systems, which this diversifiedprimarily are for more mature applications in the Medical market approach is based, includes a newly equippedand can be highly variable in order volume.

Market Sales:

Use of our application process development laboratory a strengthened sales organization withby customers reached record levels in FY2019, which we believe demonstrates the success of our strategy to provide excellent application engineers, an engineering team with additional talent and the latest, most sophisticated design software tools,expertise as well as an expanded,paid coating services to prospects and customers to validate the capabilities of our coating technologies for their uses. These service-based customers are guided by our applications engineering team, to develop successful coating processes for their unique needs. Upon achieving coating results that meet the application requirements, the customer's next step is typically to purchase the newly defined coating solution. We believe a high percentage of prospects and customers that use our lab services to develop their products results in sales of our ultrasonic coating solutions.

As expected, the Alternative Energy market continued to grow as applications and new requirements for fuel cell manufacturing equipment increased. Asia, specifically China, has been driving demand for fuel cells because of the investments being made by the Chinese government. Our equipment is used to produce highly trained installationdurable, uniform, pinhole-free coatings of carbon-based catalyst inks onto fuel cell proton exchange membranes, reducing waste and service organization.improving functionality. Over the long term, demand from this market is poised for substantial growth as the industry continues to scale up from R&D prototype production to low rate production.

The new productsindustrial market showed a small decline in sales due to reduced orders in the float glass industry, which we have introduced,is typical due to variations in demand and applications from period to period. The decrease in the new markets that we have penetrated, and the regionsmedical market was primarily influenced by a reduction in which we now sell our products, are a strong foundation for our futurestent coating sales growth and enhanced profitability.in China.

Markets We ServeGeographic Sales:

Our diverse offerings have positioned us to provide a unique and superior familyIn the first quarter of customized products to the six major industries that we serve. Allfiscal 2020, approximately 56% 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 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.

Pursuant to an exclusive distribution agreement with EVS International Ltd (“EVS”) for the territoriessales originated outside of the United States and Canada we offercompared with 63% 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 $34,000, or 2.7%, to enhanced energy efficiency,$1,305,000 for the first quarter of fiscal 2020 compared with $1,271,000 in the prior year period. Our gross profit margin decreased 1% to 46.2% in the first quarter of fiscal 2020 compared to conventional systems. Our systems also afford our energy industry clients with the capabilities to significantly reduce the consumption 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 used47.1% 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 coatingsprior year period. The decrease in gross profit margin during the quarter is primarily due 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.product mix.

ProductsOperating Expenses:

Research and Product Development:

Research and product development expense increased in the first quarter of fiscal 2020 due to increases in salaries and measurable increases in health insurance costs. These increases were partially offset by decreased engineering materials and supplies and travel expense.

Marketing and Selling:

Marketing and selling expenses increased in the first quarter of fiscal 2020 due to increases in sales salaries, measurable increases in health insurance costs and increased trade show expenses. These increases were partially offset by decreased travel expenses.

General and Administrative:

In the first quarter of fiscal 2020, we experienced increases in health insurance, corporate expenses and stock-based compensation expense.

Operating Income:

Operating income decreased to $5,000 in the first quarter of fiscal 2020 compared with $32,000 for the prior year period, a decrease of $27,000. The decrease in operating income is a result of our operating expenses increasing by $61,000 offset by an increase in our gross margin of $34,000, resulting in a net decrease of $27,000 in operating income. We Offercontinue 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 of $9,000 in the first fiscal quarter of 2020 compared with $11,000 for the prior year period.

Interest and Dividend Income:

Interest and dividend income decreased $3,000 to $31,000 in the first quarter of fiscal 2020 as compared with $35,000 for the first quarter of fiscal 2019. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At May 31, 2019, 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. For the first quarter of fiscal 2020 there was no unrealized gain or loss recorded for the Company’s marketable securities.

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 2020, the Company’s rental revenue was $20,000, expenses were $15,000 and the net profit was $5,000.

In the first quarter of fiscal 2019, the Company’s rental revenue was $18,000, expenses were $16,000 and the net profit was $2,000.

Income Tax Expense:

We recorded income tax expense of $6,000 for the first quarter of fiscal 2020 compared with $18,000 for the first quarter of fiscal 2019.

Net Income:

We had net income of $25,000 for the first quarter of fiscal 2020 compared with $21,000 for the prior year period for the reasons previously noted.

Fiscal Year 2020 Outlook

We have core technology and have developed and marketexpect that all of our backlog of $4,024,000 as of May 31, 2019 to ship during 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 research15% to 20%. Furthermore, we expect that this increased sales volume will expand margins and development to high volume production in the applicationdrive stronger earnings. Part 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 futureour anticipated growth is 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$1,650,000 order for 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.newly introduced Robotic Coating Platform. 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 VersiCoatnew 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.

Services

We recently expanded our in-house coating capabilities, with both additional machinery and applications engineering personnel, towill allow us to provide low-mid volume contractpursue additional prospects for six-axis robotic coating services. In addition to purchasing our equipment, our customers can now access our coating expertise and specific customer process optimization onwhich presents an opportunity for a fee-for-service basis. We also provide these services at our customers’ sites where we can assist in the design and development of customized coating systems.

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 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.

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.ongoing growth.

Liquidity and Capital Resources

Working Capital –Our working capital increased $413,000decreased $46,000 to $6,378,000 at May 31, 2019 from $6,070,000$6,424,000 at February 28, 2017 to $6,483,000 at November 30, 2017.2019. The increasedecrease in working capital is due towas mostly the current period’s net incomeresult of $265,000 and our non-cash items including $280,000 for depreciation and amortization, $32,000 for stock based compensation expense and $111,000 for an increase in the market values of our Available-For-Sale Investments. We had cash outflows of $158,000 for the purchasepurchases of equipment and furnishings and $112,000 for the repayment of notes payable. The Company’slong-term debt partially offset by the current ratio was 3.88 to 1 at November 30, 2017 as compared to 5.19 to 1 at February 28, 2017.period's net income and noncash charges.

The aggregate balance ofCompany aggregates cash and cash equivalents and marketable securities increased $1,247,000 duringin managing its balance sheet and liquidity. For purposes of the nine-month period ended November 30, 2017following analysis, the total is referred to a total of $6,146,000.as “Cash.” At November 30, 2017,May 31, 2019 and February 28, 2019, our working capital included $1,699,000 of cashincluded:

The following table summarizes the accounts 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.the major reasons for the $192,000 increase in “Cash”:

Stockholders’ Equity – Stockholder’s Equity increased $408,000$36,000 from $7,923,000$8,585,000 at February 28, 20172019 to $8,331,000$8,621,000 at November 30, 2017.May 31, 2019. The increase is a result of the current period’s net income of $265,000, stock based$25,000 and stock-based compensation expense of $32,000 and an increase in our accumulated other comprehensive income of $111,000.$11,000.

Operating Activities – Our operating activities provided $1,405,000generated $362,000 of cash forin the nine months ended November 30, 2017 asfirst quarter of fiscal 2020 compared to providing $977,000 forwith using $374,000 in the nine months ended November 30, 2016. Duringfirst quarter of fiscal 2019. The increase in cash generated by operating activities was mostly the nine months ended November 30, 2017, we had net incomeresult of $265,000, accounts receivable decreased $172,000, inventories increased $240,000, prepaid expenses decreased $21,000, accounts payable and accruedcustomer deposits. These two sources of cash were partially offset by increased inventories and a decrease in prepaid expenses increased $186,000, customer deposits increased $574,000 and income taxesdirectly related to inventory. Our accounts payable increased $37,000. In addition,$410,000 to $1,014,000 in the current period we incurred non-cash expensesfirst quarter of $280,000 for depreciation and amortization, $32,000 for stock based compensation expense and $78,000 for ourfiscal 2020 compared to $586,000 at February 28, 2019. The increase is directly related to inventory reserve.purchases completed in the first quarter of fiscal 2020. The increase in inventory is a result of the Company’s increase in backlog.

Investing Activities – For the nine months ended November 30, 2017,first quarter of fiscal 2020, we used $2,152,000$1,543,000 in our investing activities as compared to $490,000with using $62,000 for the nine months ended November 30, 2016.first quarter of fiscal 2019. For the nine months ended November 30, 2017first quarters of fiscal years 2020 and 2016,2019, we used $158,000$129,000 and $171,000,$102,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the nine months ended November 30, 2017 and 2016,first quarter of fiscal 2020, we used $1,994,000 and $320,000, respectively,$1,413,000 for the purchase of marketable securities.securities and for the first quarter of 2019 our marketable securities provided $40,000.

Financing Activities – ForIn the nine months ended November 30, 2017first quarter of fiscal years 2020 and 2016,2019, we used $112,000$40,000 and $107,000,$39,000, 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 2020, our cash balance decreased by $859,000$1,221,000 as compared to an increasea decrease of $379,000 for$475,000 in the nine months ended November 30, 2016. Duringfirst quarter of 2019. In the nine months ended November 30, 2017,first quarter of fiscal 2020, our operations provided $1,405,000operating activities generated $362,000 of cash. Of this,In addition, we used $158,000$129,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements, $1,994,000used $1,413,000 for the purchase of marketable securities and $112,000$40,000 for the repayment of notesour note 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, 2017.2019.

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$1,923,000 in cash and $4,447,000$3,779,000 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, 2019. 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 20182020 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: January 16, 2018July 15, 2019