Quarterly Report for Quarter Ending November 30, 2025 (Form 10-Q)

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 fourth quarter of fiscal year 2026; continued depletion of excess inventory created by our OEM Partners; continued positive impact of recent distributor changes on Printed Circuit Board revenues; 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 ("ASP"); 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, ensure unparalleled results for our clients and 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, ensuring efficient market reach across diverse sectors around the globe. Approximately 37% of our sales were generated outside the United States and Canada in the first nine 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.

Third Quarter Fiscal 2026 Highlights (compared with the third quarter of fiscal 2025 unless otherwise noted) We refer to the three-month periods ended November 30, 2025 and 2024 as the third quarter of fiscal 2026 and fiscal 2025, respectively.

	·	Net Sales for the third quarter of fiscal 2026 were $5.0 million, down $186,000, or 3.6%, compared to $5.19 million for the prior year period. This marks the seventh consecutive quarter with revenue exceeding $5 million.
	·	Gross Profit increased 7.2% or $169,000 to $2.512 million and the Gross Profit % increased 500 basis points to 50% due to product mix, including a favorable mix of mature high ASP systems with reduced costs and favorable warranty expenses in the current period, and strong sales to the U.S., which typically carry less distributor discounting.
	·	Combined equipment and service-related backlog at November 30, 2025 reached a record $12.26 million, up 16% year-over-year and up 9% sequentially.
	·	Operating income increased 61.4% or $121,000 to $319,000 due to the increase in gross profit combined with operating leverage.
	·	Net income increased 24.0% or $66,000 to $340,000 for the quarter.
	·	Sales increased year over year in electronics, industrial, medical, and emerging R&D, with the only market decline in alternative energy due to reduced U.S. electrolysis-related demand following shifting government policy incentives.

Nine Month Fiscal 2026 Highlights (compared with the first nine months of fiscal 2025 unless otherwise noted) We refer to the nine-month periods ended November 30, 2025 and 2024 as the first nine-months of fiscal 2026 and fiscal 2025, respectively.

•

Net Sales were $15.3 million, essentially flat year over year, decreasing by 1%, Net income increased 32.0% or $303,000 to $1.249 million for the first nine months.

•

Medical sales increased 37% year over year (up $793,000), supported by strong balloon catheter system shipments across the U.S., Europe, and China, solid stent coating activity, and expanding new medical applications, while order momentum and backlog continue to accelerate in the medical device market.

•

In-Line coating sales increased 126% (up $3.578 million), reflecting shipment of eight high-ASP systems totaling approximately $5.9 million to a major solar customer, partially offset by a 46% decline in multi-axis system sales (down $3.785 million) due to slower electrolysis demand following government policy changes.

•

Gross profit increased $452,000 or 6%, to $7,766,000 and the gross profit percentage was 51% compared to 48% influenced by a favorable mix of mature high ASP systems with reduced manufacturing costs and favorable warranty expenses in the current period. In addition, sales to the US were strong, which typically carry less distributor discounting.

·

Operating income increased 69%, to $1,223,000 and operating margin was 8% reflecting the increase in gross profit.

As of November 30, 2025, the Company had no outstanding debt and had cash, cash equivalents and marketable securities totaling $12,262,000.

RESULTS OF OPERATIONS

Sales:

Product Sales

		Three Months Ended November 30,								Change							Nine Months Ended November 30,								Change
		2025				2024				$				%			2025				2024				$				%
Fluxing Systems		$	222,000			$	71,000				151,000			213%			$	583,000			$	324,000				259,000			80%
In-Line Coating Systems			1,844,000				81,000				1,763,000			2,177%				6,428,000				2,850,000				3,578,000			126%
Multi-Axis Coating Systems			1,666,000				3,563,000				(1,897,000	)		(53%	)			4,373,000				8,158,000				(3,785,000	)		(46%	)
OEM Systems			425,000				259,000				166,000			64%				936,000				796,000				140,000			18%
Other			847,000				1,217,000				(370,000	)		(30%	)			2,980,000				3,255,000				(275,000	)		(8%	)
TOTAL		$	5,004,000			$	5,191,000				(187,000	)		(4%	)		$	15,300,000			$	15,383,000				(83,000	)		(1%	)

Total sales for the first nine months of fiscal 2026 were essentially flat, decreasing by 1%, while total sales for the third quarter of fiscal 2026 decreased by 4%. The decrease in revenue for the first nine months of fiscal 2026 is the result of a 46% decrease in Multi Axis Coating Systems revenue partially offset by a 126% increase in In-Line Coating Systems revenue. For the third quarter of fiscal 2026, sales of our Multi Axis Coating Systems decreased by 53%, but this decrease was mostly offset by a 2177% increase in In-Line Coating Systems revenue.

OEM Systems revenue for the third quarter and first nine months of fiscal 2026 increased by 64% and 18%, respectively. The increase was driven by higher demand from both fluxing-related OEM customers and medical device OEM partners, reflecting continued adoption of our ultrasonic coating technology within customer-integrated production platforms and expanding OEM relationships in medical and industrial applications.

Fluxing Systems revenue for the third quarter and first nine months of fiscal 2026 increased by 213% and 80%, respectively. The increase was driven primarily by stronger demand in Asia, outside of China, from PCB manufacturing companies.

The Other revenue category decreased by 30% in the third quarter of fiscal 2026 and 8% for the first nine months of fiscal 2026, reflecting the timing of service-related activities and spare parts sales that occurred in the prior-year periods.

Market Sales

		Three Months Ended November 30,								Change								Nine Months Ended November 30,								Change
		2025				2024				$				%				2025				2024				$				%
Electronics/Microelectronics		$	1,287,000			$	1,016,000				271,000				27%			$	3,686,000			$	4,060,000				(374,000	)			(9%	)
Medical			1,136,000				897,000				239,000				27%				2,949,000				2,156,000				793,000				37%
Alternative Energy			1,912,000				2,959,000				(1,047,000	)			(35%	)			7,592,000				7,740,000				(148,000	)			(2%	)
Emerging R&D and Other			18,000				17,000				1,000				6%				65,000				57,000				8,000				14%
Industrial			651,000				302,000				349,000				116%				1,008,000				1,370,000				(362,000	)			(26%	)
TOTAL		$	5,004,000			$	5,191,000				(187,000	)			(4%	)		$	15,300,000			$	15,383,000				(83,000	)			(1%	)

During the third quarter of fiscal 2026, sales performance varied across end markets. Medical, electronics, and industrial markets all increased year over year, while alternative energy declined. Medical market growth was driven by strong demand for stent coating systems, balloon catheter coating platforms, and emerging diagnostic device applications. Electronics market growth reflected increased demand for fluxing systems and the shipment of a semiconductor coating system to a customer in South Korea. Industrial market sales increased due to the shipment of a large textile coating platform to a United States government customer. The decline in alternative energy sales during the quarter was primarily attributable to reduced demand for electrolysis-related applications following shifts in U.S. government policy incentives affecting carbon capture and fuel cell projects.

For the first nine months of fiscal 2026, medical market sales increased 37% year over year, driven by shipments of balloon catheter coating systems to customers in the United States, Europe, and China, continued stent coating activity, and expanding medical applications. Medical-related order activity and backlog continued to strengthen during the period. Alternative energy sales for the first nine months of fiscal 2026 were essentially flat, as strong shipments of high-ASP in-line coating systems to the solar industry offset lower demand for electrolysis-related applications in the United States. Electronics and industrial market sales declined year over year, primarily due to strong prior-year comparisons and customer timing, including the non-recurrence of a large European glass coating order in the industrial market. Emerging research and development market sales remained relatively flat as projects continued to transition into established production markets.

Geographic Sales

		Three Months Ended November 30,								Change								Nine Months Ended November 30,								Change
		2025				2024				$				%				2025				2024				$				%
U.S. & Canada		$	3,415,000			$	2,823,000				592,000				21%			$	9,674,000			$	9,409,000				265,000				3%
Asia Pacific (APAC)			734,000				1,114,000				(380,000	)			(34%	)			2,262,000				1,994,000				268,000				13%
Europe, Middle East, Asia (EMEA)			706,000				957,000				(251,000	)			(26%	)			3,027,000				3,338,000				(311,000	)			(9%	)
Latin America			149,000				297,000				(148,000	)			(50%	)			337,000				642,000				(305,000	)			(48%	)
TOTAL		$	5,004,000			$	5,191,000				(187,000	)			(4%	)		$	15,300,000			$	15,383,000				(83,000	)			(1%	)

In the first nine months of fiscal 2026, approximately 37% of sales originated outside of the United States and Canada compared with 39% in the first nine months of fiscal 2025.

In the third quarter of fiscal 2026, approximately 32% of sales originated outside of the United States and Canada compared with 46% in the third quarter of fiscal 2025.

Sales in the United States and Canada remained strong during the current periods, influenced in part by shipments of high-ASP in-line coating systems to a significant solar customer.

Asia sales declined in the third quarter primarily due to timing following a strong prior year quarter, but increased for the first nine months of fiscal 2026, driven by medical activity in China and alternative energy demand in Japan and South Korea.

Latin America sales declined in both the third quarter and first nine months of fiscal 2026, reflecting the non-recurrence of an orthopedic system shipment in the prior-year third quarter and slower fluxing activity in Mexico during the current year.

Gross Profit:

		Three Months Ended November 30,								Change								Nine Months Ended November 30,								Change
		2025				2024				$				%				2025				2024				$				%
Net Sales		$	5,004,000			$	5,191,000				(187,000	)			(4%	)		$	15,300,000			$	15,383,000				(83,000	)			(1%	)
Cost of Goods Sold			2,492,000				2,848,000				(356,000	)			(13%	)			7,534,000				8,069,000				(535,000	)			(7%	)
Gross Profit		$	2,512,000			$	2,343,000				169,000				7%			$	7,766,000			$	7,314,000				452,000				6%
Gross Profit %			50%				45%												51%				48%

For the third quarter of fiscal 2026, gross profit increased $169,000, or 7%, compared with the third quarter of fiscal 2025. For the third quarter of fiscal 2026, the gross profit percentage was 50% compared with 45% for the prior year period. The increase in the gross profit percentage was influenced by product mix, including a favorable mix of mature high ASP systems with reduced manufacturing costs and favorable warranty expenses in the current period. In addition, sales to the United States were strong, which typically carry less distributor discounting.

Gross profit increased $452,000, or 6%, to $7,766,000 for the first nine months of fiscal 2026 compared with $7,314,000 in the first nine months of fiscal 2025. The gross profit percentage was 51% compared with 48% for the prior year period. The increase in the gross profit percentage was influenced by product mix, including a favorable mix of mature high ASP systems with reduced manufacturing costs and favorable warranty expenses in the current period. In addition, sales to the United States were strong, which typically carry less distributor discounting.

Operating Expenses:

		Three Months Ended November 30,								Change								Nine Months Ended November 30,								Change
		2025				2024				$				%				2025				2024				$				%
Research and product development		$	638,000			$	628,000				10,000				2%			$	1,934,000			$	2,055,000				(121,000	)			(6%	)
Marketing and selling			927,000				929,000				(2,000	)			0%				2,657,000				2,815,000				(158,000	)			(6%	)
General and administrative			628,000				589,000				39,000				7%				1,952,000				1,722,000				230,000				13%
Total Operating Expenses		$	2,193,000			$	2,146,000			$	47,000				2%			$	6,543,000			$	6,592,000			$	(49,000	)			(1%	)

Research and Product Development:

Research and product development costs increased in the third quarter of fiscal 2026 due to an increase in lab salaries. This increase was partially offset by decreases in research and development materials, supplies, salaries and travel expenses. These decreases were partially offset by additional lab salaries.

Research and product development costs decreased in the first nine months of fiscal 2026 due to a decrease in salary expense associated with the departure of a senior engineer, research and development materials, supplies, insurance expense and travel expenses. These decreases were partially offset by additional lab salaries.

Marketing and Selling:

Marketing and selling expenses decreased slightly in both the third quarter and the first nine months of fiscal 2026 due to a decrease in salary expense related to the departure of a salesperson and a decrease in travel and entertainment expenses. These decreases were partially offset by an increase in salaries related to our sales application lab and increased trade show expenses. Our sales and marketing costs are variable, and a large portion of the costs are dependent upon trade shows and where geographically our sales are generated. We anticipate that our costs will increase in the future as we increase our trade show presence and the potential change in geographic origin of our sales from our in-house sales team to our external distributors.

In the third quarter and the first nine months of fiscal 2026, commission expense decreased approximately $73,000 and $153,000, respectively. The decline was driven by a higher mix of sales closed directly by our in-house team. Our in-house team earns a consistent commission percentage on all sales; when sales are made through distributors or manufacturer representatives, we also incur their additional commissions (and related channel costs), which increase total selling costs. The shift toward direct sales reduced those third-party costs in the current period.

General and Administrative:

General and administrative expenses increased in the third quarter of fiscal 2026 due to increased salaries, legal and audit fees, corporate expenses and stock-based compensation. These increases were partially offset by decreases in travel and entertainment and other expenses.

In the first nine months of fiscal 2026 general and administrative expenses increased due to increases in salaries, corporate expenses and stock-based compensation. These increases were partially offset by decreases in legal and audit fees and travel and entertainment expenses.

Operating Income:

In the third quarter of fiscal 2026, operating income increased $121,000, or 61%, to $319,000 compared with $198,000 for the third quarter of fiscal 2025. Operating margin for the third quarter of fiscal 2026 was 6% compared with 4% in the prior year period. In the third quarter of fiscal 2026, an increase in gross profit was the key factor in the increase in operating income.

In the first nine months of fiscal 2026, operating income increased $501,000, or 69%, to $1,223,000 compared with $722,000 for the first nine months of fiscal 2025. Operating margin for the first nine months of fiscal 2026 was 8% compared with 5% in the prior year period. In the first nine months of fiscal 2026, an increase in gross profit was the key factor in the increase in operating income.

Interest, Dividend Income and Unrealized Gain/(Loss):

Interest and dividend income decreased by $23,000 to $108,000 in the third quarter of fiscal 2025 as compared with $132,000 for the third quarter of fiscal 2024, reflecting a minor reduction in interest rates earned on our cash balances in the third quarter of fiscal 2025. In the first nine months of fiscal 2025, interest and dividend income decreased by $27,000 to $332,000 as compared with $359,000 for the first nine months of fiscal 2024. Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities. At November 30, 2025, the majority of our holdings were rated at or above investment grade.

Net unrealized gain decreased to a $15,000 net unrealized loss in the third quarter of fiscal 2025 compared to a gain of $20,000 in the prior year period. In the first nine months of fiscal 2025, net unrealized gain increased $8,000 to $39,000 compared with $31,000 in the prior year period.

Income Tax Expense:

We recorded income tax expense of $87,000 for the third quarter of fiscal 2026 compared with $40,000 for the third quarter of fiscal 2025. For the first nine months of fiscal 2026 we recorded income tax expense of $308,000 compared with $174,000 for the first nine months of fiscal 2025.

The increase in income tax expense in the third quarter and first nine months of fiscal 2026 is due to the increase in income before income taxes combined with an increase in permanent timing differences. These increases were partially offset by the reduction of income taxes due to the application of available research and development tax credits from research and development expenditures.

The deferred tax asset decreased approximately $258,000, to $1,267,000 at November 30, 2025 from $1,525,000 at February 28, 2025. Additionally, the deferred tax liability decreased approximately $73,000, to $59,000 at November 30, 2025 from $132,000 at February 28, 2025. The net decrease in the deferred tax asset and liability was approximately $331,000 for the first nine months of fiscal 2026. This decrease is primarily due to the retroactive expensing of research and development expenses that were capitalized for tax purposes, prior to the enactment of the One Big Beautiful Bill Act (the "Act" or "OBBBA") on July 4, 2025.

The Act introduces significant changes to the Internal Revenue Code, including the permanent extension of many provisions of the 2017 Tax Cuts and Jobs Act ("TCJA") and various new tax incentives and adjustments. The financial reporting implications of the Act were recorded in the income tax provision for the quarter and year to date periods ended August 31, 2025, in accordance with ASC 740, Income Taxes.

The OBBBA did not change the statutory U.S. federal tax rate. Accordingly, the OBBBA did not compel us to remeasure our deferred tax assets and liabilities solely because of a rate change. However, the various changes in tax law did impact our current and deferred tax calculations.

The most significant tax provisions impacting us include:

Bonus Depreciation - The Act permanently restores 100% bonus depreciation for qualified property acquired and placed into service after January 19, 2025. This change will likely lead to a reduction in current tax payable for capital expenditures in fiscal year 2026.

Research and Development ("R&D) Costs - The Act reinstates the ability for entities to immediately expense domestic R&D costs for tax years beginning after December 31, 2024. Certain small businesses may also retroactively expense R&D costs, which were capitalized under the TCJA during the calendar years 2022 - 2024. The retroactive expensing of these R&D costs may generate tax refunds.

Net Income:

Net income increased by $66,000 or 24% to $340,000 for the third quarter of fiscal 2026 compared with $274,000 for the third quarter of fiscal 2025. The increase in net income during the third quarter is primarily the result of an increase in gross profit partially offset by an increase in operating expenses and income tax expense.

Net income increased by $303,000 or 32% to $1,249,000 for the first nine months of fiscal 2026 compared with $946,000 for the first nine months of fiscal 2025. The increase in net income in the first nine months of fiscal 2026 is primarily the result of an increase in gross profit partially offset by an increase in income tax expense.

Liquidity and Capital Resources

Working Capital - Our working capital increased $1,854,000 to $15,355,000 at November 30, 2025 from $13,501,000 at February 28, 2025. The increase in working capital was mostly the result of the current period's net income and noncash charges partially offset by purchases of equipment and treasury stock.

We aggregate cash and 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 November 30, 2025 and February 28, 2025, our working capital included:

		November 30, 2025				February 28, 2025				Cash Increase (Decrease)
Cash and cash equivalents		$	5,396,000			$	5,202,000			$	194,000
Marketable securities			6,323,000				6,728,000				(405,000	)
Total		$	11,719,000			$	11,930,000			$	(211,000	)

The following table summarizes the accounts and the major reasons for the $211,000 decrease in "Cash":

		Impact on Cash				Reason
Net income, adjusted for non-cash items		$	2,221,000			To reconcile increase in cash.
Accounts receivable increase			(2,064,000	)		Timing of cash receipts.
Inventories decrease			771,000			Decrease in inventory due to completed sales.
Customer deposits decrease			(261,000	)		Decrease due completed sales.
Accounts payable decrease			(325,000	)		Timing of disbursements.
Accrued expenses increase			290,000			Timing of disbursements.
Prepaid and Other Assets increase			(69,000	)		Increased in prepaid expenses.
Income taxes payable decrease			(453,000	)		Timing of disbursements.
Equipment purchases			(181,000	)		Equipment and facilities upgrade.
Proceeds from exercise of stock options			11,000			Received from stock options.
Treasury stock purchases			(151,000	)		Purchase of treasury stock.
Net decrease in cash		$	(211,000	)

Stockholders' Equity - Stockholders' Equity increased $1,340,000 from $17,792,000 at February 28, 2025 to $19,132,000 at November 30, 2025. The increase is a result of the current period's net income of $1,249,000, proceeds from exercise of stock options of $10,000, and $232,000 in additional equity related to stock-based compensation awards. These increases were partially offset by treasury stock purchases of $151,000. The details of stock-based compensation awards are explained in Note 5 in our financial statements.

Operating Activities - Our operating activities provided $110,000 of cash in the first nine months of fiscal 2026 compared to providing $1,199,000 of cash in the first nine months of fiscal 2025, a decrease of $1,089,000. The decrease in cash provided by our operating activities was the result of an increase in accounts receivable and prepaid expenses combined with decreases in accounts payable, income taxes payable and customer deposit balances.

During the past year, we have experienced a shift in customer mix toward larger, more financially stable companies that generally operate under stricter standard payment terms. As a result, customer deposits decreased and accounts receivable increased, reflecting a normalization of payment practices relative to prior years when we secured high upfront deposits.

In the first nine months of fiscal 2026, our accounts receivable increased $2,064,000 when compared to the prior year period. The increase in accounts receivable is primarily due to revised payment terms provided to one customer that purchased eight units during the first nine months of fiscal 2026, with a total sales price of $5.9 million. After completion of the first quarter of fiscal 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 had already collected a significant cash down payment on the order and we anticipated only a modest delay of approximately two months on a portion of the next payment, we accommodated the customer's request. The customer has since returned to the originally agreed upon payment schedule. Based on our long-standing relationship and ongoing communications, we do not currently foresee any collection issues with this customer.

In the first nine months of fiscal 2026, our inventories decreased $772,000 when compared to the prior year. The decrease in inventories is due to the completion of customer orders in the first nine months of fiscal 2026.

In the first nine months of fiscal 2026, our income taxes payable decreased $453,000 when compared to the prior year. The decrease in income taxes payable is due to cash payments on our current year tax returns and required estimated payments.

Investing Activities - For the first nine months of fiscal 2026, our investing activities provided $224,000 of cash compared with providing $4,765,000 for the first nine months of fiscal 2025. For the first nine months of fiscal 2026 and 2025, we used $180,000 and $403,000 of cash, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements.

In the first nine months of fiscal 2026, net sales of marketable securities provided $405,000 of cash compared with providing $5,167,000 from the net sales of marketable securities in the prior year period.

Financing Activities - In the first nine months of fiscal 2026, we used $151,000 of cash for the purchase of treasury stock.

Net Increase in Cash and Cash Equivalents - In the first nine months of fiscal 2026, our cash balance increased by $193,000 compared to an increase of $5,964,000 in the first nine months of fiscal 2025. In the first nine months of fiscal 2026, our operating activities provided $110,000 of cash and net sales of our marketable securities provided $405,000. In addition, we used $181,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements and we used $151,000 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 judgements 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 November 30, 2025 and November 30, 2024, there were no uncertain tax provisions.

On July 4, 2025, the One Big Beautiful Bill Act (the "Act" or "OBBBA") was signed into law. The Act introduces significant changes to the Internal Revenue Code, including the permanent extension of many provisions of the 2017 Tax Cuts and Jobs Act ("TCJA") and various new tax incentives and adjustments. The financial reporting implications of the Act were recorded in the income tax provision for the quarter and year to date periods ended November 30, 2025, in accordance with ASC 740, Income Taxes.

The OBBBA did not change the statutory U.S. federal tax rate. Accordingly, the OBBBA did not compel the Company to remeasure its deferred tax assets and liabilities solely because of a rate change. However, the various changes in tax law did impact the Company's current and deferred tax calculations.

The most significant tax provisions impacting the Company include:

Bonus Depreciation - The Act permanently restores 100% bonus depreciation for qualified property acquired and placed into service after January 19, 2025. This change will likely lead to a reduction in current tax payable for capital expenditures in fiscal year 2026.

Research and Development Costs - The Act reinstates the ability for entities to immediately expense domestic research and development costs for tax years beginning after December 31, 2024. Certain small businesses may also retroactively expense research and development costs, which were capitalized under the TCJA during the calendar years 2022 - 2024.

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 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.

In July 2025, the FASB issued ASU 2025-05, Financial Instruments - Credit Losses. This ASU provides entities the ability to use a practical expedient when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under ASC 606, Revenue from Contracts with Customers. The purpose of this ASU is to simplify the estimation of credit losses on current accounts receivable and current contract assets accounted for ASC 606. This ASU is effective for annual periods beginning after December 15, 2025, 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, ASU 2024-03 and ASU-2025-05 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.