UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended: May 31, 2025
OR
Commission File No.: 001-40763
(Exact name of registrant as specified in its charter)
SONO TEK CORP
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:
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 ☐
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”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
SONO-TEK CORPORATION
INDEX
Item 1 – Condensed Consolidated Financial Statements:
CONDENSED CONSOLIDATED BALANCE SHEETS
See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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SONO-TEK CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYTHREE MONTHS ENDED MAY 31, 2025 AND 2024
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CONDENDED CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2025 and 2024
NOTE 1: BUSINESS DESCRIPTION
Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporated in New York on March 21, 1975. We are the world leader in the design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to add functional properties, protect or strengthen surfaces on parts and components for the microelectronics/electronics, alternative energy, medical, industrial and emerging research & development/other markets. We design and manufacture custom-engineered ultrasonic coating systems incorporating our patented technology, in combination with strong applications engineering knowledge, to assist our customers in achieving their desired coating solutions.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, the unaudited 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 not 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 28, 2025 (“fiscal year 2025”) contained in the Company’s 2025 Annual Report on Form 10-K filed with the SEC on May 28, 2025. The Company’s current fiscal year ends on February 28, 2026 (“fiscal 2026”).
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
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. At May 31, 2025, $2,045,454 of the Company's bank deposits exceeded the insured limit provided by the Federal Deposit Insurance Corporation.
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”) in conformity with generally accepted accounting principles in the United States (“GAAP”). SIP operates as a real estate holding company for the Company’s real estate operations. All intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments - The Company applies Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed 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.
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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 — 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 for identical assets or liabilities.
Level 2 — 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, such 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 exists for the assets or liabilities.
The fair values of financial assets of the Company were determined using the following categories at May 31, 2025 and February 28, 2025, respectively:
Schedule of significant accounting policies - fair values of financial assets of the company
Marketable Securities include certificates of deposit and US Treasury securities that are considered to be highly liquid and easily tradeable totaling $5,991,056 and $6,727,678 as of May 31, 2025 and February 28, 2025, respectively. US 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 trading securities as defined under ASC 320 “Investments – Debt and Equity Securities.”
Income Taxes - The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company uses 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. As of May 31, 2025 and February 28, 2025, there were no uncertain tax positions.
Inventories - Inventories are stated at the lower of cost or 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. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market conditions.
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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.
At May 31, 2025 and February 28, 2025, the Company had land, stated at cost of $250,000.
At May 31, 2025 and February 28, 2025, the Company had buildings, equipment, furnishings and leasehold improvements totaling, $2,511,141 and $2,610,600 respectively, net of accumulated depreciation.
Management Estimates - The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements Not Yet Adopted - 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. This ASU should be applied on a prospective basis although retrospective application is 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.
Product Warranty - Expected future product warranty expense is recorded when revenue is recognized for product sales.
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. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
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NOTE 3: REVENUE RECOGNITION
The Company’s sales revenue is derived primarily from short term contracts with customers, which are generally in effect for less than twelve months. Sales revenue from manufactured equipment transferred at a single point in time accounts for a majority of the Company’s revenue.
Sales revenue is recognized when control of the Company’s manufactured equipment is transferred to its customers, in an amount that reflects the consideration the Company expects to receive based upon the agreed transaction price. The Company’s performance obligations are satisfied when its customers take control of the purchased equipment, which is based on the contract terms. Based on prior experience, the Company reasonably estimates its sales returns and warranty reserves. Sales are presented net of discounts and allowances. Discounts and allowances are determined when a sale is negotiated. The Company does not grant its customers or independent representatives, the ability to return equipment nor does it grant price adjustments after a sale is complete.
The Company does not capitalize any sales commission costs related to the acquisition of a contract. All commissions related to a performance obligation that are satisfied at a point in time are expensed when the customer takes control of the purchased equipment.
The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one-year or less.
At May 31, 2025, the Company had received approximately $2,290,000 in customer deposits, representing contract liabilities. As of May 31, 2025, $106,000 of the Company’s credit line was being utilized to collateralize letters of credit issued by the Company.
At February 28, 2025, the Company had received approximately $2,413,000 in customer deposits, representing contract liabilities, and had issued letters of credit in the amount of $106,000 to secure these cash deposits. During the three months ended May 31, 2025, the Company recognized $1,249,000 of these deposits as revenue.
The Company’s sales revenue, by product line is as follows:
Schedule of revenue recognition - sales revenue by product line
NOTE 4: INVENTORIES
Inventories consist of the following:
Schedule of inventory, current
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The Company maintains a valuation allowance for slow moving inventory for raw materials and finished goods. The valuation allowance creates a new cost basis for the inventory, and it is not subsequently marked up through a reduction in the valuation allowance based on any changes in the underlying facts and circumstances. When the valuation allowance is initially recorded, the increase to the allowance is recognized as an increase in cost of sales. The valuation allowance is only reduced if or when the underlying inventory is sold or destroyed, at which time cost of sales recognized would include the previous adjusted cost basis. During the three months ended May 31, 2025 and May 31, 2024, the Company recorded approximately $99,000and $12,000, respectively, in additional allowances for slow moving inventory.
NOTE 5: STOCK BASED COMPENSATION
Stock Options – In May 2023, the Company’s Board of Directors authorized the creation of the 2023 Stock Incentive Plan (the “2023 Plan”) pursuant to which the Company may grant up to 2,500,000options or shares to officers, directors, employees and consultants of the Company and its subsidiaries. The Company’s shareholders approved the adoption of the 2023 Plan in August 2023. The 2023 Plan replaced the 2013 Stock Incentive Plan (the “2013 Plan”) under which no additional options or shares could be granted after June 2023. At May 31, 2025, 220,367and 210,770 options were outstanding, respectively, under the 2023 Plan and the 2013 Plan.
The Company accounts for stock based compensation under ASC 718, “Share Based Payments”, which requires companies to expense the value of employee stock options and similar awards. The Company accounts for forfeitures as they occur.
During the three months ended May 31, 2025, the Company granted options to acquire 3,138shares to an employee at an exercise price of $3.77. Options granted to employees vest over three years and expire ten years from the date of issuance. The options granted during the three months ended May 31, 2025 had a grant date fair value of $2.39 per share.
The weighted-average fair value of options is estimated on the date of grant using the Black-Scholes options-pricing model. The weighted-average Black-Scholes assumptions are as follows:
Schedule of weighted-average black-scholes assumptions
For the three months ended May 31, 2025 and 2024 the Company recognized $75,163and $54,231 in stock based compensation expense, respectively. Such amounts are included in general and administration expenses on the unaudited condensed consolidated statements of income. Total compensation expense related to non-vested options not yet recognized as of May 31, 2025 was $351,000 and will be recognized over the next three years based on vesting date. The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.
The aggregate intrinsic value of the Company’s vested and exercisable options at May 31, 2025 was approximately $58,247.
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NOTE 6: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Schedule of computation of basic and diluted earnings per share
In the first quarter of fiscal year 2026, 360,788 stock options were excluded from the computation of diluted income per share because the effect of inclusion would have been anti-dilutive.
NOTE 7: REVOLVING LINE OF CREDIT
The Company has a $1,500,000 revolving line of credit at prime which was 7.50% at May 31, 2025 and February 28, 2025. The revolving credit line is collateralized by the Company’s accounts receivable and inventory. The revolving credit line 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 May 31, 2025, $106,000 of the Company’s credit line was being utilized to collateralize Letters of Credit issued by the Company. As of May 31, 2025, there were no outstanding borrowings under the line of credit and the unused portion of the credit line was $1,394,000.
The Company has a $750,000 equipment line of credit at prime plus 0.50%, which was 7.5%at May 31, 2025. At May 31, 2025, there were no outstanding borrowings under the equipment line of credit.
NOTE 8: CUSTOMER CONCENTRATIONS AND FOREIGN SALES
Export sales to customers located outside the United States and Canada were approximately as follows:
Schedule of customer concentrations and foreign sales
During the three months ended May 31, 2025 and 2024, sales to foreign customers accounted for approximately $1,590,000 and $1,940,000, or 31% and 39%, respectively, of total revenues.
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The Company had one customer which accounted for 57% of sales during the first quarter of fiscal 2026. One customer accounted for 68% of the outstanding accounts receivables at May 31, 2025.
The Company had one customer which accounted for 15% of sales during the first quarter of fiscal 2025.
Two customers accounted for 25% of the outstanding accounts receivables at February 28, 2025.
NOTE 9: SEGMENT DATA
The Company operates in one segment. The chief operating decision maker, who is responsible for allocating resources and assessing performance, has been identified as the Chief Executive Officer (the “CODM”). The CODM assesses the financial performance of the Company and decides how to allocate resources based on Operating income.
The following table presents the Company’s segment data (rounded to the nearest thousand):
Schedule of segment data
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NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company did not have any material commitments or contingencies as of May 31, 2025.
The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. As of May 31, 2025, the Company did not have any pending legal actions.
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ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, 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.
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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.
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Results of Operations
Sales:
Product Sales:
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:
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:
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.
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Gross Profit:
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:
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.
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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:
The following table summarizes the accounts and the major reasons for the $1,076,000 decrease in “Cash”:
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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.
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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.
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.
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ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company does not issue or invest in financial instruments or derivatives for trading or speculative purposes. Substantially all of the operations of the Company are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk. All of our sales transactions are completed in US dollars.
Although the Company's assets included $4,863,000 in cash and $5,991,000 in marketable securities, the market rate risk associated with changing interest rates in the United States is not material.
ITEM 4 – Controls and Procedures
The Company has established and maintains “disclosure controls and procedures” (as those terms are defined in Rules 13a –15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”). R. Stephen Harshbarger, Chief Executive Officer (principal executive) and Stephen J. Bagley, Chief Financial Officer (principal accounting officer) of the Company, have evaluated the Company’s disclosure controls and procedures as of May 31, 2025. Based on this evaluation, they have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to Management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding timely disclosure.
In addition, there were no changes in the Company’s internal controls over financial reporting during the first fiscal quarter of fiscal year 2026 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
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PART II - OTHER INFORMATION
Issuer Purchases of Equity Securities Pursuant to Stock Repurchase Program (1)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 10, 2025
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