UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended:November 30, 20172020

OR

Commission File No.:0-16035 000-16035

(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 ☑   NO   Yes    ☐

 No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer”, “smaller reporting company,”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. 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

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

NINE AND THREE MONTHS ENDED NOVEMBER 30, 2020 AND 2019

Nine Months Ended November 30, 2020 and 2019

Three Months Ended November 30, 2020 and 2019

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

NINE MONTHS ENDED NOVEMBER 30, 2020 and 2019

(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 with the instructions for Form 10-Q and saleArticle 8 of ultrasonic liquid atomizing nozzles, whichRegulation S-X. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended February 29, 2020 (“fiscal year 2020”) 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 2020 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 on May 29, 2020. 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, 2021 (“fiscal 2021”).

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.

ConsolidationConcentration of Credit Risk – -The Company had three customers, which accounted for 30% of sales during the three months ended November 30, 2020 and four customers which accounted for 30% of sales during the nine months ended November 30, 2020. Three customers accounted for 45% of the outstanding accounts receivables at November 30, 2020 and three customers accounted for 67% of the outstanding accounts receivable at February 29, 2020.

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of FDIC insurance limits.

Consolidation – The accompanying unaudited 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. All significant intercompany transactions and balances have been eliminated in consolidation.

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

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

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

Level 1: Quoted1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets.

Level 2: Observable market-based inputsmarkets for identical assets or unobservable inputs that are corroborated by market data.liabilities.

Level 3: Unobservable2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, for which there issuch as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data which requireexists for the use of the reporting entity’s own assumptions.assets or liabilities.

The fair values of financial assets of the Company were determined using the following categories at November 30, 20172020 and February 28, 2017,29, 2020, respectively:

Marketable Securities include mutual fundscertificates of $4,447,496deposit and $2,342,184US Treasury securities, totaling $3,225,516 and $4,219,240 that are considered to be highly liquid and easily tradeable as of November 30, 20172020 and February 28, 2017,29, 2020, respectively. TheseUS Treasury securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 and certificates of deposit are classified as Level 2 within the Company’s fair value hierarchy. The Company’s marketable securities are considered to be available-for-sale investmentstrading securities as defined under ASC 320 “Investments – Debt and Equity Securities.”

Grant Proceeds – The Company was awarded a $100,000 Wired Innovations Center grant in June 2019 from the utility that provides its electricity service. Proceeds of the grant was conditioned upon the Company’s successful completion of certain energy efficiency related improvements. In addition, the grant was subject to certain other requirements and was provided on a reimbursement basis only. The Company expended approximately $580,000 related to these improvements during the fiscal year ended February 29, 2020. During the second quarter of fiscal 2021, the Company received the $100,000 grant in its entirety.

The Company has concluded that this grant is not within the scope of ASC 606, as it does not meet the definition of a contract with a “customer”. The Company has further concluded that Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition also does not apply, as the Company is a business entity and the grant is from a public utility. Grants and related receivables are recognized when there is reasonable assurance that the grant will be received, and all attaching conditions will be complied with. The Company has applied the grant proceeds against the cost of the capitalized improvements applicable to the grant, reducing the carrying value and the related depreciation expense going forward.

Income Taxes – - The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. We use a recognition threshold and a measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.

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$179,244 and $139,000$171,210 at November 30, 20172020 and February 28, 2017,29, 2020, respectively. Annual amortization expense of such intangible assets is expected to be approximately $11,000 per year for the next five years.

Interim ReportingInventories – - 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, 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.net realizable value. Cost is determined using the first-in, first-out (FIFO) method for raw materials, subassemblies and work-in-progress and the specific identification method for finished goods.

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. No impairment losses were identified or recorded in the three or nine months ended November 30, 2020 and 2019 on the Company’s long lived assets.

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-Pronouncements – In November 2015,December 2019, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2015-17,ASU 2019-12, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred - Simplifying the Accounting for Income Taxes.” (“ASU 2015-17”). The standard requires thatguidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax assetsliabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and liabilitiesenacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU will be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Earlythe Company on March 1, 2021, with early adoption is permitted, and the standard may be applied either retrospectively or onis not expected to have a prospective basis to all deferred tax assets and liabilities. The Company adopted 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 nosignificant 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” (“ASU 2015-17”)2019-12 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.

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

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

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 the Company’s estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact the Company’s financial statements for each respective reporting period.

NOTE 3: REVENUE RECOGNITION

A majority of the Company’s sales revenue is derived 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, as defined by the contract terms. Based on prior experience, the Company reasonably estimates its 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.

The Company receives cash deposits for customer orders based upon contract terms. Upon receipt, customer deposits are recorded as a short-term liability. Cash deposits received from customers may not always equal 100% of the contracted revenue for a given contract. In addition to cash deposits, the Company will accept irrevocable standby letters of credit from customers based upon contract terms. The Company also provides negotiated payment terms to its customers.

At February 29, 2020, the Company had received $1,649,000 in cash deposits from customers. During the nine months ended November 30, 2020, the Company applied 100% of these deposits against customer accounts receivable when the Company's performance obligations were met.

At November 30, 2020, the Company had received $1,782,000 in cash deposits for customer orders and had issued Letters of Credit in the amount of $941,000 to secure some of these cash deposits.

The Company’s sales revenue by product line, for the three and nine months ended November 30, 2020 and 2019, is as follows:

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, 2017,2020, there were 744,100433,084 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, 2017,2020, there were 173,50047,500 options outstanding under the 2003 Plan, under which no additional options may be granted.

During the nine months ended November 30, 2020, 151,083 options were exercised on a cashless basis into 97,414 shares of common stock. During the nine months ended November 30, 2020, the Company granted options to acquire 22,500 shares to employees exercisable at $3.70, and options to acquire 20,000 shares to the non-employee members of the board of directors with an exercise price of $3.70. The options granted to employees and directors vest over three years and expire in ten years.

NOTE 5:6: STOCK BASED COMPENSATION

During the nine months ended November 30, 2020, the Company granted options to acquire 22,500 shares to employees exercisable at $3.70, and options to acquire 20,000 shares to the non-employee members of the board of directors with an exercise price of $3.70. The options granted to employees and directors vest over three years and expire in ten years. All of the options granted by the Company during the nine months ended November 30, 2020 had a combined weighted average grant date fair value of $1.03 per share.

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

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, theThe Company is required to estimate the expected forfeiture rate and only recognize expenseaccounts 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 optionsforfeitures 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.they occur.

For the three and nine months ended November 30, 20172020 and 2016,2019, 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$38,000 in additional compensation expense during each of the nine month periodsthree months ended November 30, 20172020 and 2016,2019, respectively. The impact of applying ASC 718 approximated $27,000 and $82,000 in additional compensation expense during the nine months ended November 30, 2020 and 2019, 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 atfor the three and nine months ended November 30, 20172020 and 20162019 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:

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%3.25% at November 30, 2017.2020. 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 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, 2017,2020, $941,000 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 at various times in the fiscal years ending February 28, 2021 and 2022. As of November 30, 2020, there were no outstanding balance was $0,borrowings under the line of credit and the unused portion of the credit line was $750,000.$559,000 as of November 30, 2020.

NOTE 10: SEGMENT INFORMATIONCOMMITMENTS AND CONTINGENCIES

TheOther than the letters of credit disclosed in Note 9, 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.

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.2020.

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking StatementsFORWARD-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.expectations and could cause actual results to differ materially. These factors include, among other considerations, general economic and business conditions; political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our products; the duration and scope of the COVID-19 pandemic; the extent and duration of the pandemic’s adverse effect on economic and social activity, consumer confidence, discretionary spending and preferences, labor and healthcare costs, and unemployment rates, any of which may reduce demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us; our ability to sell and provide our services and products, including as a result of continued pandemic related travel restrictions, mandatory business closures, and stay-at home or similar orders; any temporary reduction in our workforce, closures of our offices and facilities and our ability to adequately staff and maintain our operations resulting from the pandemic; the ability of our customers and suppliers to continue their operations as result of the pandemic, which could result in terminations of contracts, losses of revenue; the recovery of the Electronics/ Microelectronics and Medical markets following COVID-19 related slowdowns; the forgiveness of our PPP loan; and further adverse effects to our supply chain; maintenance of increased order backlog, including effects of any COVID-19 related cancellations; the imposition of tariffs; timely development and market acceptance of new products;products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the ability to enforce patentspatents; maintenance of operating leverage; maintenance of increased order backlog; consummation of order proposals; completion of large orders on schedule and on budget; continued sales growth in the abilitymedical and alternative energy markets; successful transition from primarily selling ultrasonic nozzles and components to achieve increased sales volumea more complex business providing complete machine solutions and continued profitability.higher value subsystems; and realization of quarterly and annual revenues within forecasted range.

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

OverviewOVERVIEW

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.

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 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 (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 and that it is attained 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 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 substantial portionbroader array of applications that enable better outcomes for our customers’ products and processes.

We are a global business with approximately 62% of our sales originatedgenerated from outside the United States and weCanada during the first nine months of fiscal 2021. Our direct sales team and our distributor and sales representative network are geographically present directly and through distributors and trade representativeslocated in North andAmerica, Latin America, Europe and Asia. The infrastructure upon which this diversified market approachOver 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 based, includes a newly equipped process development laboratory, a strengthened sales organizationco-located with application engineers, an engineering team with additional talentour manufacturing facilities in New York. These labs provide significant value for demonstrating to prospective customers the capabilities of our equipment and the latest, most sophisticated design software tools, as well as an expanded, highly trained installation and service organization.enabling us to develop custom solutions to meet their needs.

The new products whichOver the last decade, we have introduced, the new marketsshifted 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 range for our average full system selling price has increased as a result, going from tens of thousands of dollars to hundreds of thousands of dollars. As a result of this transition, we have broadened our addressable market and we believe that we have penetrated,can grow sales on a larger scale, however, we expect that we will experience wide variations in both order flow and shipments from quarter to quarter.

Third Quarter Fiscal 2021 Highlights (compared with the regionsthird quarter of fiscal 2020 unless otherwise noted) We refer to the three-month periods ended November 30, 2020 and 2019 as the third quarter of fiscal 2021 and fiscal 2020, respectively.

MarketsNine Month Fiscal 2021 Highlights (compared with the first nine months of fiscal 2020 unless otherwise noted) We Serverefer to the nine-month periods ended November 30, 2020 and 2019 as the first nine months of fiscal 2021 and fiscal 2020, respectively.

RESULTS OF OPERATIONS

Sales

Our diverse offerings have positioned us to provideProduct Sales:

Sales growth in the third quarter and the first nine months of fiscal 2021 was driven by several significant shipments of our Integrated Coating systems into the Industrial and Electronic markets. The increase in sales of Integrated Coating systems more than offset the decrease in sales of our Fluxing systems, Multi-Axis Coating systems and the Other categories.

Market Sales:

Significant growth in the Industrial market in the third quarter and the first nine months of fiscal 2021, was driven by a unique and superior family of customized products$463,000 shipment to the six major industries that we serve. Alltextile industry, which was part of these systems are based on our core technologya previously announced $1.6M order received early this fiscal year. The remaining balance of ultrasonic spray coating. Manythis order is scheduled to ship in the fourth quarter 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.fiscal 2021, or the first quarter of fiscal 2022.

1.        Electronics Industry.As anticipated, the Alternative Energy market showed significant growth with the expansion of fuel cell activities in the first nine months of fiscal 2021, as a global hydrogen energy infostructure continues to gain acceptance in many countries. The Medical and Emerging R&D markets both declined with several potential orders being put on hold due to COVID-19 concerns. We believe that these orders will increase as countries come back online from COVID-19 lockdowns.

We serve this industry primarily in two sectors; Printed Circuit Board (“PCB”) manufacturing and Semiconductor manufacturing.Geographic Sales:

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 reduceIn the amountthird quarter of fluxing chemical needed, enhance the qualityfiscal 2021, approximately 70% 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 65% in the EVS solder recovery system to our PCB customer base.prior year period.

We also have a significant established customer base inIn the semiconductor industry. The semiconductor industry utilizes our ultrasonic atomizing nozzles and robotic XYZ coating platforms for the application and depositionfirst nine months of photo-resist onto semiconductor wafers. Manyfiscal 2021, approximately 62% of our semi-conductor manufacturing industry customers engaged in the productionsales originated outside 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.

Our precision coating systems provide superior surface uniformity and density, which are directly related to enhanced energy efficiency, 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 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.

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.

Services

We recently expanded our in-house coating capabilities, with both additional machinery 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 expertise and specific customer process optimization on 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 manufacturesCanada compared with 65% in the EVS 10Kprior year period.

In the first nine months of fiscal 2021, the increase in US and EVS 8K solder recovery systemsCanada based sales was influenced by the COVID-19 pandemic, as we saw several manufacturers transfer operations back to the US; also resulting in a decrease in orders from several geographic territories outside the US. Timing and severity of overseas sales dips has varied country to country, as each location has come in and out of lock downs. Sales to China continued to show strong growth, however, a majority of this revenue was for orders received prior to the COVID-19 pandemic. Sales to Latin America decreased due to a decrease in sales of our spray fluxer units to Mexico during the COVID-19 lockdowns, and due to a large medical system sold into Latin America in the prior fiscal year. Sono-Tek has proven capable at adapting to COVID-19 country wide lockdowns by quickly refocusing efforts to those countries that are operational. This flexibility has been helpful in softening the impact of the pandemic and will continue to be part of our strategy for the foreseeable future.

Gross Profit:

For the third quarter of fiscal 2021, gross profit increased $134,000, or 7%, compared with the prior-year period due to increased revenue. Gross profit margin increased to 50.5% during the quarter compared with 48.9% for the prior year period. The current quarter’s increase in gross profit margin is due to a change in the product mix for the quarter.

Gross profit increased $463,000, or 10%, to $5,112,000 for the first nine months of fiscal 2021 compared with $4,649,000 in the prior year period due to increased revenue. Gross profit margin remains strong at 47.6% compared with 47.2% for the prior year period.

Operating Expenses:

Research and Product Development:

Research and product development costs increased in both the third quarter and the first nine months of fiscal 2021 due to increased salaries and related costs. In the prior year periods, some of our personnel were assigned to specific customer sales orders and the associated research and development costs were recorded in inventory, as incurred.

Marketing and Selling:

Marketing and selling costs decreased in the third quarter of fiscal 2021 due to decreases in commissions, travel and trade show expenses. Marketing and selling costs decreased in the first nine months of fiscal 2021 due to decreases in commissions, travel and trade show expenses. These decreases were partially offset by increased salaries and related costs in the first quarter of fiscal 2021.

In the third quarter of fiscal 2021, we expended approximately $195,000 for commissions as compared with $229,000 for the prior year fiscal period, a decrease of $34,000. For the first nine months of fiscal 2021, we expended approximately $441,000 for commissions as compared with $505,000 for the prior year fiscal period, a decrease of $64,000. The decrease in commission expense, in both periods, is primarily the result of a decrease in international sales being generated by our external distributors, which are usedcommissioned at a higher rate than our in-house sales team.

General and Administrative:

In the third quarter of fiscal 2021, we experienced decreases in professional fees, corporate expenses, bank fees and stock-based compensation expense. These decreases were partially offset by increased salaries.

In the first nine months of fiscal 2021, we experienced decreases in professional fees, stock based compensation expense, travel and bank fees. These decreases were partially offset by increased salaries, health insurance premiums and annual meeting and proxy expenses related to reclaim solder from the dross which accumulates inCovid-19 outbreak.

Health Insurance Premiums:

The Company’s health insurance program requires employee contributions. In the wave-solder equipmentthird quarter of circuit board manufacturers. The customer basefiscal 2021, the Company’s net health insurance expense was approximately $97,000 as compared with $94,000 for distributionthe prior year fiscal period, an increase of these systems is synergistic$3,000 or 3%.

For the first nine months of fiscal 2021, the Company’s net health insurance expense was approximately $288,000 as compared with our existing customer base$285,000 for spray fluxer sales in the printed circuit board industry.prior year fiscal period, an increase of $3,000 or 1%.

Rental Real Estate OperationsOperating Income:

Our operating income increased $177,000, to $447,000 in the third quarter of fiscal 2021, compared with $270,000 for the prior year period. This substantial improvement is the result of revenue growth and cost constraints which generated significant operating leverage. Operating margin for the third quarter increased to 11.7% compared with 7.4% in the prior year period.

For the first nine months of fiscal 2021, operating income increased $465,000, to $832,000 compared with $367,000 for the prior year period. This improvement is the result of revenue growth and cost constraints which generated operating leverage. Operating margin for the first nine months of fiscal 2021 increased to 7.8% compared with 3.7% in the prior year period.

Interest Expense:

Interest expense was $6,000 in the third fiscal quarter of 2021 compared with $8,000 for the prior-year period. For the first nine months of fiscal 2021, interest expense was $24,000 compared with $25,000 for the prior year period.

Interest and Dividend Income:

Interest and dividend income decreased $19,000 to $2,000 in the third quarter of fiscal 2021 as compared with $21,000 for the prior year period. For the first nine months of fiscal 2021, interest and dividend income decreased $50,000 to $27,000 as compared with $77,000 in the prior year period. The decrease in both periods is due to the decline in market rates. Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities, certificates of deposit and mutual funds. At November 30, 2020, the majority of our holdings are rated at or above investment grade.

Other Income:

Included in other income is the net revenue related to the rental of the Company’s real estate. For the third quarter of fiscal 2021, the Company’s net rental income was $11,000 compared to net rental income of $7,000 for the third quarter of fiscal 2020.

For the first nine months of fiscal 2021, the Company’s net rental income was $30,000 compared with net rental income of $19,000 for the first nine months of fiscal 2020.

Income Tax Expense:

We recorded income tax expense of $132,000 for the third quarter of fiscal 2021 compared with $10,000 for the prior year period and recorded income tax expense of $199,000 for the first nine months of fiscal 2021 compared with $23,000 for the prior year period.

The increase in income tax expense in the third quarter and the first nine months of fiscal 2021 is due to the current period’s increase in income before taxes and to provide for the estimated tax liability associated with the first nine months of fiscal 2021.

Net Income:

Net income increased by $40,000 to $320,000 for the third quarter of fiscal 2021 compared with $280,000 for the prior fiscal period.

Net income increased by $246,000 to $666,000 for the first nine months of fiscal 2021 compared with $420,000 for the prior year period.

Impact of Covid 19

In December 2010,2019, the novel coronavirus (“COVID-19”) outbreak occurred in China and has since spread to other parts of the world. On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak. Along with these declarations, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world. These actions include quarantines, social distancing and “stay-at-home” orders, travel restrictions, mandatory business closures and other mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations.

In response to the pandemic and these actions, we purchasedbegan implementing changes in our business in March 2020 to protect our employees and customers:

While all of these measures have been necessary and appropriate, they may result in Milton, NY. The park isadditional costs and may adversely impact our business and financial performance. As our response to the pandemic evolves, we may incur additional costs and will potentially experience adverse impacts to our business, each of which may be significant. In addition, an improved 3.13 acre parcelextended period of land comprisedremote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks, including, but not limited to, cybersecurity risks and increased vulnerability to security breaches, cyber-attacks, computer viruses, ransomware, or other similar events and intrusions. We mayexperience, decreases in demand and customer orders for our products in all sales channels, as well as temporary disruptions and closures of five buildings of office/industrial space, with 50,000 square feet of gross leasable floor area. We currently utilize 35,000 square feetour facilities due to decreased demand and government mandates.

COVID-19 has also impacted various aspects of the park forsupply chain as our operations.suppliers experience similar business disruptions due to operating restrictions from government mandates. We presently lease 15,000 square feetcontinue to monitor procurement of raw materials and components used in the manufacturing, distribution and sale of our products, but continued disruptions in the supply chain due to COVID-19 may cause difficulty in sourcing materials or unexpected shortages or delays in delivery of raw materials and components, and may result in increased costs in our supply chain.

We have implemented plans to reduce spending in certain areas of our business, including reductions or delays in capital expenditures, reduced trade show participation costs, reduced travel expenditures and may need to take additional actions to reduce spending in the future.

We are closely monitoring and assessing the impact of the parkpandemic on our business. The extent of the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our ability to unrelated third parties.execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted.

For financial reporting purposes,Given the inherent uncertainty surrounding COVID-19, we reportexpect the pandemic may continue to have an adverse impact on our business in the near term. Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, results of the park as rental real estate operations.operations, cash flow, liquidity, and financial condition.

Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES

Working Capital –Our working capital increased $413,000 from $6,070,000 at February 28, 2017$875,000 to $6,483,000$8,048,000 at November 30, 2017.2020 from $7,173,000 at February 29, 2020. The increase in working capital is due towas mostly the result of the current period’s net income and noncash charges and the proceeds 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 purchasea long term note payable partially offset by purchases of equipment and furnishings and $112,000 for the repayment of notes payable. The Company’s current ratio was 3.88 to 1 at November 30, 2017 as compared to 5.19 to 1 at February 28, 2017.long-term debt.

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, 2017,2020 and February 29, 2020, 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 $1,361,000 increase in “Cash”:

Stockholders’ Equity – Stockholder’sStockholders’ Equity increased $408,000 from $7,923,000 at February 28, 2017$694,000 to $8,331,000$10,476,000 at November 30, 2017.2020, from $9,782,000 at February 29, 2020. The increase iswas a result of the current period’s net income of $265,000,$666,000 and $28,000 in additional equity related to stock based compensation expense of $32,000 and an increase in our accumulated other comprehensive income of $111,000.awards.

Operating Activities – OurWe generated $713,000 of cash in our operating activities provided $1,405,000in the first nine months of fiscal 2021 compared with $1,023,000 in the first nine months of fiscal 2020. The decrease in cash generated by operating activities was mostly the result of decreased accounts payable, accrued expenses, customer deposits and an increase in accounts receivable. These uses of cash for the nine months ended November 30, 2017 as compared to providing $977,000 for the nine months ended November 30, 2016. During the nine months ended November 30, 2017, we had net income of $265,000, accounts receivablewere partially offset by decreased $172,000,spending on inventories increased $240,000, prepaid expenses decreased $21,000, accounts payable and accrued expenses increased $186,000, customer deposits increased $574,000 andan increase in income taxes payable, increased $37,000. In addition,and an increase in income for the current period we incurred non-cash expenses of $280,000 for depreciation and amortization, $32,000 for stock based compensation expense and $78,000 for our inventory reserve.period.

Investing Activities – For the nine months ended November 30, 2017, we used $2,152,000 inof fiscal 2021, our investing activities asgenerated $767,000 of cash compared to $490,000 forwith using $1,767,000 in the first nine months ended November 30, 2016.of fiscal 2020. For the first nine months ended November 30, 2017of fiscal years 2021 and 2016,2020, we used $158,000$327,000 and $171,000,$392,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first nine months ended November 30, 2017 and 2016, we used $1,994,000 and $320,000, respectively,of fiscal 2021, our marketable securities provided $994,000 compared with the use of $1,374,000 for the purchase of marketable securities.securities in the first nine months of fiscal 2020.

In the second quarter of fiscal 2021, we received $100,000 in grant proceeds from the utility which provides our electricity as a result of our completion of certain energy efficiency related improvements.

Financing Activities – ForIn the first nine months ended November 30, 2017of fiscal years 2021 and 2016,2020, we used $112,000$127,000 and $107,000,$122,000, respectively, for the repayment of our notesnote payable.

Paycheck Protection Program Loan

During the first quarter of fiscal 2021, we borrowed $1,001,640 (the “PPP Loan”) from a bank under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying companies and is administered by the U.S. Small Business Administration (the “SBA”). The PPP Loan has a two-year term, bears interest at the rate of 1.0% per annum, and may be prepaid at any time without payment of any premium. No payments of principal or interest were scheduled to be due until November 2020, at which time we were to have been required to make 18 monthly payments of principal and interest in the amount of $56,370.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, at least 60 percent of the PPP Loan proceeds must be used for eligible payroll and payroll related costs. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.

We believe that we have used the entire PPP Loan proceeds for designated qualifying expenses and have applied for forgiveness of the PPP Loan in accordance with the terms of the PPP. Under the Paycheck Protection Program Flexibility Act, payments of principal and interest shall be deferred until the date that the Small Business Administration remits the forgiveness amount to the Company’s lender or determines that some or all of the PPP loan is not eligible for forgiveness. If all or a portion of the loan is not forgiven the unforgiven balance and accrued interest shall be payable during the remainder of the term of the PPP loan.

No assurance can be given that we will obtain forgiveness of the PPP Loan in whole or in part. With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the PPP note and cross defaults. As of the date of this Report, we have incurred approximately $2,342,000 in payroll, payroll related costs and other qualifying expenses.

Net Increase (Decrease) Increase in Cash and Cash Equivalents –For In the first nine months ended November 30, 2017,of fiscal 2021 our cash balance decreasedincreased by $859,000 as$2,354,000 compared to an increasewith a decrease of $379,000 for$865,000 in the first nine months ended November 30, 2016. Duringof fiscal 2020. In the first nine months ended November 30, 2017,of fiscal 2021, our operations provided $1,405,000operating activities generated $713,000 of cash. Of this,In addition, we used $158,000$327,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements, $1,994,000 for the purchase ofour marketable securities provided $994,000 of cash, and $112,000we used $127,000 for the repayment of our notes payable.