Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, news releases, and other written and oral statements. These "forward-looking statements" are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations and could cause actual results to differ materially. These factors include, among other considerations, general economic and business conditions; political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our products; inflationary and supply chain pressures; the recovery of the Electronics/Microelectronics and Medical markets; rebound of sales to the industrial market in the second quarter of fiscal year 2026; maintenance of increased order backlog; the imposition of tariffs; timely development and market acceptance of new products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the ability to enforce patents; maintenance of operating leverage; consummation of order proposals; completion of large orders on schedule and on budget; continued sales growth in the medical and alternative energy markets; successful transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems which are sold at higher average selling prices; and realization of quarterly and annual revenues within the forecasted range of sales guidance.

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

Overview

Founded in 1975, Sono-Tek Corporation is a global leader in designing and manufacturing ultrasonic coating systems that are shaping industries and driving innovation worldwide. Our ultrasonic coating systems are used to apply thin films onto parts used in diverse industries, including microelectronics, alternative energy, medical devices, advanced industrial manufacturing, and research and development sectors worldwide. Sono-Tek's move into the clean energy sector is showing transformative results in next-gen solar cells, fuel cells, green hydrogen generation, and carbon capture applications as we shape a sustainable future.

Our product line is rapidly evolving, transitioning from R&D to high-volume production machines with significantly higher average selling prices, showcasing our market leadership and adaptability. Over the last decade, we have shifted our business from primarily selling ultrasonic nozzles and components to providing complete machine solutions and higher-value subsystems to original equipment manufacturers (OEMs). This strategy has resulted in significant growth of our average unit selling price, with our larger machines often selling for over $300,000 and system prices sometimes reaching over $1,000,000. Consequently, we have broadened our addressable market and believe we can grow sales on a larger scale. We expect that we will experience wide variations in both order flow and shipments from quarter to quarter.

Our comprehensive suite of thin film coating solutions and application consulting services, provided by our expert applications engineers to guide our customers in developing the complete coating process, ensures unparalleled results for our clients. These solutions help some of the world's most promising companies achieve technological breakthroughs and bring them to market. In anticipation of customer demands, our significant focus on R&D efforts allows us to keep pace with industry trends while continuously innovating. We strategically deliver our products through a network of direct sales personnel, carefully chosen independent distributors, and experienced sales representatives located in North America, Latin America, Europe, and Asia. This network ensures efficient market reach across diverse sectors around the globe. Approximately 31% of our sales were generated outside the United States and Canada in the first three months of fiscal year 2026.

We continue to expand our sales capabilities by increasing the size of our direct sales force and adding new distributors and sales representatives. 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 co-located with our manufacturing facilities in New York. These labs provide significant value for demonstrating the capabilities of our equipment to prospective customers and enable us to develop custom solutions to meet their needs.

Our growth strategy is focused on leveraging our innovative technologies, proprietary know-how, unique talent and experience, and global reach to develop thin-film coating technologies that enable better outcomes for our customers' products and processes.

First Quarter Fiscal 2026 Highlights (compared with the first quarter of fiscal year 2025 unless otherwise noted) We refer to the three-month periods ended May 31, 2025 and 2024 as the first quarter of fiscal year 2026 and fiscal year 2025, respectively.

	•	Net Sales for the quarter increased 2% to $5,133,000 compared to $5,031,000 in the prior year period, driven by strong shipments to the Alternative/Clean Energy market.
	•	Combined equipment and service-related backlog at May 31, 2025 was $7.48 million, compared to backlog of $8.68 million at February 28, 2025, a decrease of $1.2 million or 14%. The decrease reflects the quarterly variability typical of our business due to the increasing frequency of High Average Selling Price (ASP) platform machine orders.
	•	Gross Profit increased 9% to $2.67 million, compared to $2.45 million in the prior-year period. Gross margin expanded 310 basis points to 51.9%, up from 48.8% in the first quarter of fiscal 2025. The improvement reflects a favorable product mix, including a repeat high ASP order with well-optimized production costs, and a concentration of shipments to the U.S., where sales typically involve minimal distributor discounts and lower commission expenses, helping to enhance margin performance.
	•	Operating income increased $245,000 to $483,000, compared to $238,000 in the prior year period. The increase is due to the current period's increase in gross profit combined with a decrease in operating expenses.
	•	Interest and dividend income remained steady at $142,000 for the first quarter of fiscal 2026 and 2025.
	•	As of May 31, 2025, we had $10.9 million in cash, cash equivalents and marketable securities and no outstanding debt. This compares to $11.9 million as of February 28, 2025.

Results of Operations

Sales:

Product Sales:

		Three Months Ended May 31,												Change
		2025				% of total		2024				% of total		$				%
Fluxing Systems		$	152,000			3%		$	134,000			2%			18,000			13%
Integrated Coating Systems			3,054,000			59%			747,000			15%			2,307,000			309%
Multi-Axis Coating Systems			677,000			13%			2,664,000			53%			(1,987,000	)		(75%)
OEM Systems			130,000			3%			332,000			7%			(202,000	)		(61%)
Spare Parts, Services and Other			1,120,000			22%			1,154,000			23%			(34,000	)		(3%)
TOTAL		$	5,133,000					$	5,031,000					$	102,000			2%

For the first quarter of fiscal year 2026, Integrated Coating Systems sales increased $2.31 million, or 309%, to $3.05 million, primarily driven by a repeat order totaling $2.95 million for four high ASP systems shipped to the clean energy sector for an advanced solar application. Multi-Axis Coating Systems declined $1.99 million, or 75%, to $677,000 due to decreased North American sales tied to reduced R&D funding in the clean energy sector following shifts in government policy. OEM Systems were down $202,000, or 61%, to $130,000, as several OEM partners targeting the China market experienced lower product demand. Fluxing Systems rose 13%, or $18,000, to $152,000. Spare Parts, Services, and Other remained relatively stable at $1.12 million, down slightly by $34,000, or 3%.

Market Sales:

		Three Months Ended May 31,												Change
		2025				% of total		2024				% of total		$				%
Electronics/Microelectronics		$	943,000			19%		$	1,568,000			31%			(625,000	)		(40%)
Medical			809,000			16%			857,000			17%			(48,000	)		(6%)
Alternative Energy/Clean			3,248,000			63%			2,282,000			46%			966,000			42%
Emerging R&D and Other			14,000			0%			11,000			0%			3,000			27%
Industrial			119,000			2%			313,000			6%			(194,000	)		(62%)
TOTAL		$	5,133,000					$	5,031,000					$	102,000			2%

Sales to the Alternative Energy/Clean market grew $966,000, or 42%, to $3.25 million, influenced by a $2.95 million repeat order for advanced solar cell applications. Medical market sales were $809,000, down slightly by $48,000 or 6%. Sales to the Electronics/Microelectronics market declined $625,000, or 40%, to $943,000, influenced by a non-recurring $370,000 order in the prior-year quarter for a semiconductor wafer handler system. Industrial sales decreased $194,000, or 62%, to $119,000 which was not especially impactful due to the small dollar amount involved. Emerging R&D and Other remains a negligible portion of sales and is not materially impactful for this period.

Geographic Sales:

		Three Months Ended
		May 31,								Change
		2025				2024				$				%
U.S. & Canada		$	3,543,000			$	3,091,000			$	452,000			15%
Asia Pacific (APAC)			597,000				513,000				84,000			16%
Europe, Middle East, Asia (EMEA)			897,000				1,245,000				(348,000	)		(28%	)
Latin America			96,000				182,000				(86,000	)		(47%	)
TOTAL		$	5,133,000			$	5,031,000			$	102,000			2%

In the first quarter of fiscal year 2026, approximately 69% of sales were to customers in the U.S. and Canada, up from 61% in the prior-year period. This increase was influenced by a $2.95 million repeat order of high ASP systems shipped to a U.S.-based customer in the clean energy sector. Asia Pacific (APAC) sales grew 16%, or $84,000, to $597,000, driven in part by a $78,000 low-volume stent coating system sold to a customer in China, with a higher-volume follow-on system currently in backlog. EMEA sales declined $348,000, or 28%, to $897,000, reflecting a slowdown in orders from that region during the quarter. Latin America sales decreased $86,000, or 47%, to $96,000 which was not especially impactful due to the small dollar amount involved.

Gross Profit:

		Three Months Ended May 31,								Change
		2025				2024				$				%
Net Sales		$	5,133,000			$	5,031,000			$	102,000			2%
Cost of Goods Sold			2,468,000				2,577,000				(109,000)			(4%)
Gross Profit		$	2,665,000			$	2,454,000			$	211,000			9%
Gross Profit %			51.9%				48.8%

Gross profit increased $211,000, or 9%, to $2.67 million for the first quarter of fiscal 2026, compared with $2.45 million in the prior-year period. Gross profit percentage improved by 310 basis points, rising to 51.9% from 48.8%. The improvement was influenced by a favorable product mix, including a significant increase in Integrated Coating System sales tied to a repeat high ASP order. Additionally, the system shipped to a U.S.-based customer, where sales typically involve minimal distributor discounts or external commissions, supporting stronger margins.

Operating Expenses:

		Three Months Ended
		May 31,								Change
		2025				2024				$				%
Research and product development		$	668,000			$	731,000			$	(63,000	)		(9%)
Marketing and selling		$	858,000			$	897,000			$	(39,000	)		(4%)
General and administrative		$	655,000			$	588,000			$	67,000			11%
Total Operating Expenses		$	2,181,000			$	2,216,000			$	(35,000	)		(2%)

Research and Product Development:

Research and product development costs decreased in the first quarter of fiscal year 2026 due to a decrease in salary expense associated with the departure of a senior engineer, a decrease in insurance expense and a decrease in other miscellaneous expenses. These decreases were partially offset by additional lab salaries.

Marketing and Selling:

Marketing and selling expenses decreased in the first quarter of fiscal year 2026 due to a decrease in salary expense related to the departure of a salesperson and a decrease in travel and entertainment. These decreases were partially offset by an increase in salaries related to our sales application lab.

Commission expense decreased in the first quarter of fiscal year 2026 due to a majority of the quarter's sales being generated by our in-house sales team. Our in-house sales team is compensated at a lower commission rate when compared to our external distributors.

General and Administrative:

General and administrative expenses increased in the first quarter of fiscal year 2026 due to increases in corporate investor coverage and other corporate expenses and stock based compensation. These increases were partially offset by decreases in salary expense and legal and accounting fees.

Operating Income:

In the first quarter of fiscal year 2026, our operating income increased $245,000 to $483,000 compared to $238,000 in the first quarter of fiscal year 2025. The increase is due to the current period's increase in gross profit combined with a decrease in operating expenses.

Interest and Dividend Income and Unrealized Loss:

Interest and dividend income remained steady at $142,000 in the first quarter of fiscal year 2026 and 2025. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At May 31, 2025, the majority of our holdings are rated at or above investment grade.

Net unrealized loss increased $32,000 to $22,000 in the first quarter of fiscal year 2026 as compared to an unrealized gain of $10,000 in the first quarter of fiscal year 2025.

Income Tax Expense:

We recorded an income tax expense of $119,000 for the first quarter of fiscal year 2026 compared with $60,000 for the first quarter of fiscal year 2025. The increase in income tax expense in fiscal 2026 is due to the increase in income before income taxes offset by the application of available research and development tax credits.

Due to recently enacted budget legislation, we anticipate that the realization of certain of our deferred tax assets may be accelerated.

Net Income:

Net income increased by $154,000 to $485,000 in the first quarter of fiscal year 2026 compared with $331,000 in the prior year period. The increase in net income is primarily a result of an increase in operating income partially offset by an increase in income tax expense.

Liquidity and Capital Resources

Working Capital - Our working capital increased $439,000 to $13,940,000 at May 31, 2025 from $13,501,000 at February 28, 2025. The increase in working capital was primarily the result of the current period's net income and noncash charges partially offset by purchases of equipment.

We aggregate cash, cash equivalents and marketable securities in managing our balance sheet and liquidity. For purposes of the following analysis, the total is referred to as "Cash." At May 31, 2025 and February 28, 2025, our working capital included:

		May 31, 2025				February 28, 2025				Cash Decrease
Cash and cash equivalents		$	4,863,000			$	5,202,000			$	(339,000	)
Marketable securities			5,991,000				6,728,000				(737,000	)
Total		$	10,854,000			$	11,930,000			$	(1,076,000	)

The following table summarizes the accounts and the major reasons for the $1,076,000 decrease in "Cash":

		Impact on Cash			Reason
Net income, adjusted for non-cash items		$	669,000		To reconcile decrease in cash.
Accounts receivable increase			(749,000)		Timing of cash receipts.
Inventories increase			(374,000)		Additional inventory purchases and increase in work in process due to customer requirements.
Customer deposits decrease			(123,000)		Decrease due to completed sales.
Accounts payable decrease			(159,000)		Timing of disbursements.
Accrued expenses increase			129,000		Timing of disbursements.
Prepaid and Other Assets increase			(31,000)		Increased prepaid expenses.
Income taxes payable decrease			(307,000)		Timing of disbursements.
Equipment purchases			(52,000)		Equipment and facilities upgrade.
Treasury stock purchases			(79,000)		Purchase of treasury stock.
Net decrease in Cash		$	(1,076,000)

Stockholders' Equity - Stockholder's Equity increased $481,000 from $17,792,000 at February 28, 2025 to $18,273,000 at May 31, 2025. The increase is a result of the current period's net income of $485,000 and $75,000 in additional equity related to stock-based compensation awards. These increases were partially offset by treasury stock purchases of $79,000. The details of stock-based compensation awards are explained in Note 5 in our financial statements.

Operating Activities - We used $922,000 of cash in our operating activities in the first quarter of fiscal year 2026 compared to them providing $328,000 of cash in the first quarter of fiscal year 2025, a decrease of $1,250,000. The decrease in cash generated by operating activities was the result of increases in accounts receivable and inventories combined with a decrease in income taxes payable and customer deposit balances.

In the first quarter of fiscal year 2026, our accounts receivable increased $749,000 when compared to the prior year. The increase in accounts receivable is primarily due to revised payment terms provided to one customer that purchased four units during the first quarter of fiscal year 2026, with a total sales price of $2.9 million. After completion of the first quarter of fiscal year 2026, the customer requested a modification to the timing of one of their scheduled payments due to a shift in their production plans from overseas to the United States. Because we have already collected a significant cash down payment on the order and we anticipate only a modest delay of approximately two months on a portion of the next payment, we accommodated the customer's request. The customer has indicated that they will return to the originally agreed payment schedule thereafter. Based on our long-standing relationship and ongoing communications we do not currently foresee any collection issues with this customer.

In the first quarter of fiscal year 2026, our accounts receivable increased $749,000 when compared to the prior year. The increase in accounts receivable is primarily due to extended payment terms being offered to one customer that purchased four units during the quarter with a total sales price of $2.9 million.

In the first quarter of fiscal year 2026, our inventories increased $374,000 when compared to the prior year. The increase in inventories is due to the number of customer orders in our backlog scheduled for shipment in the remaining part of the year.

In the first quarter of fiscal year 2026, our income taxes payable decreased $307,000 when compared to the prior year. The decrease in income taxes payable is due to payments on our current year tax returns and required estimated payments.

Investing Activities - For the first quarter of fiscal year 2026, our investing activities provided $662,000 of cash compared with using $61,000 for the first quarter of fiscal 2025. For the first quarters of fiscal years 2026 and 2025, we used $52,000 and $33,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements.

In the first quarter of fiscal year 2026, net sales of marketable securities generated $715,000 of cash compared with using $28,000 for the purchase of marketable securities in the prior year period.

Financing Activities - In the first quarter of fiscal year 2026, we used $79,000 of cash for the purchase of treasury stock.

Net Decrease in Cash and Cash Equivalents - In the first quarter of fiscal 2026, our cash balance decreased by $339,000 as compared to an increase of $267,000 in the first quarter of fiscal 2025. In the first quarter of fiscal 2026, our operating activities used $922,000 of cash and our marketable securities generated $715,000 of cash. In addition, we used $52,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements and we used $79,000 for the purchase of treasury stock.

Critical Accounting Estimates

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.

Management's estimates and judgments are continually evaluated and are based on historical experience and expectations regarding future events that are believed to be reasonable under the specific circumstances.

Critical accounting estimates 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, 2025.

Accounting for Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. We use a recognition threshold and a measurement attribute for financial statement recognition and measurement tax positions taken or expected to be taken in a return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of May 31, 2025 and May 31, 2024, there were no uncertain tax provisions.

Revenue Recognition

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

Judgment is required when determining at what point in time control of the Company's manufactured equipment is transferred to its customers. Management's judgment is based on each customer contract and the transfer of control of the equipment to the customer. The sales revenue to be recorded is based on each contract.

Impact of New Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. This ASU requires greater disaggregation of information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. This ASU applies to all entities subject to income taxes and is intended to help investors better understand an entity's exposure to potential changes in jurisdictional tax legislation and assess income tax information that affects cash flow forecasts and capital allocation decisions. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements and related disclosures.

In November 2024, the FASB issued ASU 2024-03 - Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which is intended to provide more detailed information about specified about specified categories of expenses (purchases of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the consolidated statement of operations. The guidance in this ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements and related disclosures.

Other than ASU 2023-09 and ASU 2024-03 discussed above, accounting pronouncements issued but not yet effective have been deemed to be not applicable or the adoption of such accounting pronouncements is not expected to have a material impact on the financial statements of the Company.