UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  November 30, 2009May 31, 2010

OR

[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.:  0-16035

SONO-TEK CORPORATION
(Exact name of registrant as specified in its charter)

New York14-1568099
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)

2012 Rt. 9W, Milton, NY 12547
(Address of Principal Executive Offices)  (Zip Code)

Issuer's telephone no., including area code:  (845) 795-2020

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 |X|   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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer |_|      Accelerated Filer |_|      Smaller reporting company |X|
Non Accelerated Filer |_| (Do not check if a smaller reporting company)

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

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:

 Outstanding as of
ClassJanuary 6,June 30, 2010
Common Stock, par value $.01 per share14,437,511

 
 
 

SONO-TEK CORPORATION


INDEX


Part I - Financial InformationPage
  
  
Item 1 – Consolidated Financial Statements:1 - 3
  
Consolidated Balance Sheets – November 30, 2009May 31, 2010 (Unaudited) and February 28, 200920101
  
Consolidated Statements of Income – Nine Months and Three Months Ended November 30,May 31, 2010 and 2009 and 2008 (Unaudited)2
  
Consolidated Statements of Cash Flows – NineThree Months Ended November 30,May 31, 2010 and 2009 and 2008 (Unaudited)3
  
Notes to Consolidated Financial Statements4 - 7
  
  
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations8 – 1211
  
  
Item 3 – Quantitative and Qualitative Disclosures about Market Risk1311
  
  
Item 4 – Controls and Procedures1311
  
  
Part II - Other Information1412
  
  
Signatures and Certifications15 -1913 -17




 
 
 

SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS

ASSETS            
 November 30,  February 28,  May 31,    
 2009  2009  2010  February 28, 
Current Assets: Unaudited     Unaudited  2010 
Cash and cash equivalents $1,799,806  $1,472,054  $1,889,641  $1,787,516 
Accounts receivable (less allowance of $31,500 and        
$18,500 at November 30 and February 28, respectively)  1,089,729   801,290 
Accounts receivable (less allowance of $17,000 and $16,000 at May 31 and February 28, respectively)  800,763   974,429 
Inventories  1,808,894   1,663,574   1,860,782   1,757,153 
Prepaid expenses and other current assets  40,557   98,805   107,529   57,775 
Total current assets  4,738,986   4,035,723   4,658,715   4,576,873 
                
Equipment, furnishings and leasehold improvements (less accumulated depreciation        
of $1,473,346 and $1,274,793 at November 30 and February 28, respectively)  434,477   588,109 
        
Equipment, furnishings and leasehold improvements (less accumulated depreciation of $1,619,697 and $1,551,532 at May 31 and February 28, respectively)  484,982   514,623 
Intangible assets, net  70,123   57,778   81,455   76,913 
Other assets  7,171   7,171   7,171   7,171 
                
TOTAL ASSETS $5,250,757  $4,688,781  $5,232,323  $5,175,580 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
Current Liabilities:                
Accounts payable $445,997  $385,825  $379,721  $595,174 
Accrued expenses  448,892   405,033   347,109   466,656 
Customer Deposits  400,514   73,380   361,210   73,954 
Line of Credit - Bank  350,000   250,000   350,000   350,000 
Current maturities of long term debt  17,831   23,633   12,528   15,727 
Total current liabilities  1,663,234   1,137,871   1,450,568   1,501,511 
                
Long term debt, less current maturities  7,435   19,220   2,074   3,622 
Total liabilities  1,670,669   1,157,091   1,452,642   1,505,133 
                
Commitments and Contingencies  -   -   -   - 
        
Stockholders’ Equity                
Common stock, $.01 par value; 25,000,000 shares authorized,        
14,415,214 and 14,414,714 shares issued and outstanding,        
respectively at November 30 and February 29  144,152   144,148 
Common stock, $.01 par value; 25,000,000 shares authorized, 14,437,511 and 14,437,511 shares issued and outstanding, respectively at May 31 and February 28  144,376   144,376 
Additional paid-in capital  8,532,112   8,490,071   8,561,406   8,546,924 
Accumulated deficit  (5,096,176)  (5,102,529)  (4,926,101)  (5,020,853)
Total stockholders’ equity  3,580,088   3,531,690   3,779,681   3,670,447 
                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $5,250,757  $4,688,781  $5,232,323  $5,175,580 


See notes to consolidated financial statements.
 

 
-1-
 

SONO-TEK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

  Nine Months Ended November 30  Three Months Ended November 30 
  Unaudited  Unaudited 
  2009  2008  2009  2008 
             
Net Sales $5,128,933  $4,808,012  $1,980,321  $1,582,010 
Cost of Goods Sold  2,498,038   2,639,190   913,949   960,262 
        Gross Profit  2,630,895   2,168,822   1,066,372   621,748 
                 
Operating Expenses                
    Research and product development costs  524,992   625,906   184,442   206,448 
    Marketing and selling expenses  1,357,285   1,371,575   491,461   527,820 
    General and administrative costs  743,819   860,277   255,761   253,979 
            Total Operating Expenses  2,626,096   2,857,759   931,664   988,247 
                 
Operating (Loss) Income  4,799   (688,937)  134,708   (366,499)
                 
Interest Expense  (7,201)  (3,085)  (1,669)  (1,605)
Interest Income  1,551   12,021   308   1,519 
Other Income  5,661   7,549   1,886   1,887 
                 
(Loss) Income from Operations Before Income Taxes  4,810   (672,452)  135,233   (364,698)
                 
Income Tax Expense (Benefit)  (1,543)  611,586   -   611,586 
                 
Net (Loss) Income $6,353  $(1,284,038) $135,233  $(976,284)
                 
                 
Basic Earnings (Loss) Per Share $0.00  $(0.09) $0.01  $(0.07)
                 
Diluted Earnings (Loss) Per Share $0.00  $(0.09) $0.01  $(0.07)
                 
Weighted Average Shares - Basic  14,414,889   14,372,056   14,415,214   14,386,864 
                 
Weighted Average Shares - Diluted  14,459,671   14,372,056   14,535,372   14,386,864 
Unaudited

    
  Three Months Ended May 31, 
  2010  2009 
       
Net Sales $2,283,651  $1,464,728 
Cost of Goods Sold  1,166,623   807,347 
        Gross Profit  1,117,028   657,381 
         
Operating Expenses        
    Research and product development costs  209,546   171,031 
    Marketing and selling expenses  522,421   409,296 
    General and administrative costs  287,165   247,615 
            Total Operating Expenses  1,019,132   827,942 
         
Operating Income (Loss)  97,896   (170,561)
         
Interest Expense  (3,438)  (2,246)
Interest Income  460   549 
Other Income  -   2,831 
         
Income (Loss) from Operations Before Income Taxes  94,918   (169,427)
         
Income Tax Expense  166   - 
         
Net Income (Loss) $94,752  $(169,427)
         
         
Basic Earnings (Loss) Per Share $0.01  $(0.01)
         
Diluted Earnings (Loss) Per Share $0.01  $(0.01)
         
Weighted Average Shares - Basic  14,437,511   14,414,714 
         
Weighted Average Shares - Diluted  14,593,862   14,414,714 


See notes to consolidated financial statements.


 
-2-
 

SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

 Nine Months Ended November 30,  Three Months Ended May 31, 
 Unaudited  Unaudited 
 2009  2008  2010  2009 
            
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net Income (Loss) $6,353  $(1,284,038) $94,752  $(169,427)
                
Adjustments to reconcile net income (loss) to net cash                
provided by (used in) operating activities:                
Depreciation and amortization  229,319   170,995   69,917   80,132 
Stock based compensation expense  41,836   96,956   14,482   13,760 
Gain on sale of equipment  60,862   57,643 
Allowance for doubtful accounts  13,000   -   1,000   - 
Decrease (Increase) in:                
Accounts receivable  (301,439)  (323,918)  172,666   209,847 
Inventories  (145,320)  (122,369)  (103,629)  61,233 
Prepaid expenses and other current assets  58,248   20,146   (49,754)  33,338 
Deferred tax asset  -   611,586 
(Decrease) Increase in:                
Accounts payable and accrued expenses  104,031   (53,732)  (335,000)  (109,507)
Customer Deposits  327,134   (134,158)  287,256   - 
Net Cash Provided by (Used In) Operating Activities  394,024   (960,889)
Net Cash Provided by Operating Activities  151,690   119,376 
                
                
CASH FLOW FROM INVESTING ACTIVITIES:                
Patent application costs  (16,929)  (26,917)  (6,297)  (4,298)
Purchase of equipment and furnishings  (131,966)  (363,988)  (38,521)  (109,421)
Net Cash (Used In) Investing Activities  (148,895)  (390,905)  (44,818)  (113,719)
                
CASH FLOW FROM FINANCING ACTIVITIES:                
Proceeds from exercise of stock options and warrants  210   22,140 
Proceeds from note payable – Bank  -   17,590 
Proceeds from Line of Credit – Bank  350,000   250,000 
Repayment of Line of Credit – Bank  (250,000)  - 
Repayments of notes payable and loans  (17,587)  (20,487)  (4,747)  (6,332)
Net Cash Provided by Financing Activities  82,623   269,243 
Net Cash (Used In) Financing Activities  (4,747)  (6,332)
                
                
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  327,752   (1,082,551)  102,125   (675)
                
CASH AND CASH EQUIVALENTS                
Beginning of period  1,472,054   2,339,550   1,787,516   1,472,054 
End of period $1,799,806  $1,256,999  $1,889,641  $1,471,379 
                
SUPPLEMENTAL DISCLOSURE:                
Interest paid $6,923  $3,086  $3,066  $2,071 
Taxes Paid $0  $0  $166  $0 


See notes to consolidated financial statements.


 
-3-
 

SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
NineThree Months Ended November 30,May 31, 2010 and 2009 and 2008


NOTE 1:  SIGNIFICANT ACCOUNTING POLICIES

Consolidation - The accompanying consolidated financial statements of Sono-Tek Corporation, a New York Corporation (the “Company”), include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Cleaning Systems, Inc., a New Jersey Corporation (“SCS”), whose operations have been discontinued.  There have been no operations of this subsidiary since Fiscal Year Ended February 28, 2002.

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.  The Company occasionally has cash or cash equivalents on hand in excess of the $250,000 insurable limits at a given bank.  At November 30, 2009May 31, 2010 and February 28, 2009,2010, the Company had $1,322,416$1,379,091 and $1,121,241$1,289,917 over the insurable limit, respectively.

Fair Value of Financial Instruments - The carrying amounts reported in the balance sheet for cash, receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments.

Interim Reporting - The attached summary consolidated financial information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity with accounting principles generally accepted in the United States of America.  Such disclosures were included with the financial statements of the Company at February 28, 2009,2010, and included in its report on Form 10-K.  Such statements should be read in conjunction with the data herein.

The financial information reflects all adjustments, normal and recurring, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The results for such interim periods are not necessarily indicative of the results to be expected for the year.

Intangible Assets – Include cost of patent applications that are deferred and charged to operations over seventeen years for domestic patents and twelve years for foreign patents. The accumulated amortization is $68,786$72,607 and $64,202$70,852 at November 30, 2009May 31, 2010 and February 28, 2009,2010, respectively. Annual amortization expense of such intangible assets is expected to be $5,300$6,700 per year for the next five years.


 
-4-
 

Reclassifications – Certain reclassifications have been made to the prior period to conform to the presentations of the current period.

Impact of New Accounting Pronouncements - All new accounting pronouncements issued but not yet effective have been deemed to be not applicable to the Company, hence the adoption of these new accounting pronouncements once effective is not expected to have any impact on the Company.

Revenue Recognition – Multiple Deliverable Revenue Arrangements

In October 2009, the FASB issued guidance for Revenue Recognition – Multiple Deliverable Revenue Arrangements (Subtopic 605-25) “Subtopic”. This accounting standard update establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue – generating activities. Vendors often provide multiple products or services to their customers. Those deliverables often are provided at different points in time or over different time periods. Specifically, this Subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting.  The amendments in this guidance will affect the accounting and reporting for all vendors that enter into multiple-deliverable arrangements with their customers when those arrangements are within the scope of this Subtopic.

This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after June 15, 2010. Earlier adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity will apply the amendments under this Subtopic retrospectively from the beginning of the entity’s fiscal year.  The presentation and disclosure requirements shall be applied retrospectively for all periods presented. Management believes this Statement will have no impact on the financial statements of the Company once adopted.


NOTE 2:  INVENTORIES

Inventories consist of the following:

   November 30,  February 28, 
   2009  2009 
        
 Finished goods $907,078  $811,119 
 Work in process  615,720   553,447 
 Consignment  9,042   9,042 
 Raw materials and subassemblies  619,252   596,164 
 
    Total
  2,151,092   1,969,772 
 Less: Allowance  (342,198)  (306,198)
 Net inventories $1,808,894  $1,663,574 
  May 31,  February 28, 
  2010  2010 
       
Finished goods $922,968  $951,671 
Work in process  591,612   527,553 
Consignment  15,366   9,042 
Raw materials and subassemblies  539,794   477,845 
Total  2,069,740   1,966,111 
Less: Allowance  (208,958)  (208,958)
Net inventories $1,860,782  $1,757,153 


-5-

NOTE 3: STOCK OPTIONS AND WARRANTS

Stock Options - Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"), options can be granted to officers, directors, consultants and employees of the Company and its subsidiaries to purchase up to 1,500,000 of the Company's common shares.  The 2003 Plan supplemented and replaced the 1993 Stock Incentive Plan (the “1993 Plan”), under which no further options may be granted.  Options granted under the 1993 Plan expire on various dates through 2013. As of November 30, 2009,May 31, 2010, there were 62,500 options outstanding under the 1993 Plan and 1,147,0651,167,268 options outstanding under the 2003 plan.

Under both the 1993 and 2003 Stock Incentive Plans, option prices must be at least 100% of the fair market value of the common stock at time of grant.  For qualified employees, except under certain circumstances specified in the plans or unless otherwise specified at the discretion of the Board of Directors, no option may be exercised prior to one year after date of grant, with the balance becoming exercisable in cumulative installments over a three year period during the term of the option, and terminating at a stipulated period of time after an employee's termination of employment.


-5-

NOTE 4: STOCK BASED COMPENSATION

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

2010200920112010
Expected life4 years4 years4 years4 years
Risk free interest rate1.07% - 3.13%1.8% - 3.13%1.51% - 2.7%1.39% - 2.7%
Expected volatility56% - 137%55% - 70%63% - 96%66% - 96%
Expected dividend yield0%0%0%0%

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’sCompany’ ;s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amountnumber of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.


-6-

For the ninethree months ended November 30,May 31, 2010 and 2009, and 2008, net income and earnings per share reflect the actual deduction for stock-based compensation expense.   The impact of applying ASC 718 approximated $41,836$14,482 and $96,956$13,760 in additional compensation expense during the ninethree months ended November 30,May 31, 2010 and 2009, and 2008, respectively.  Such amounts are included in general and administrative expenses on the statement of operations.  The expense for stock-based compensation is a non-cash expense item.


NOTE 5: EARNINGS PER SHARE

The denominator for the calculation of diluted earnings per share at November 30,May 31, 2010 and 2009, and 2008 are calculated as follows:

 Nine Months Ended November 31,  Three Months Ended November 30, Three Months Ended May 31, 
 2009  2008  2009  2008 20102009 
           
Denominator for basic earnings per share 14,414,889  14,372,056  14,415,214  14,386,864 14,437,51114,414,714 
               
Dilutive effect of stock options 44,782  -  120,158  - 156,351- 
               
Denominator for diluted earnings per share 14,459,671  14,372,056  14,535,372  14,386,864 14,593,86214,414,714 

Due to the net loss for the three and nine month periodsmonths ended November 30, 2008,May 31, 2009, the effect of stock options is not used in the calculation of diluted earnings per share. The inclusion of stock options in the calculation would have an anti-dilutive effect.


-6-

NOTE 6: REVOLVING LINE OF CREDIT

The Company has a $500,000 revolving line of credit at prime which was 3.25% at November 30, 2009.May 31, 2010. The loan is collateralized by all of the assets of the Company. The line of credit is payable on demand and must be retired for a 30 day period once annually. If the Company fails to perform the 30 day annual pay down or if the bank elects to terminate the credit line, the bank may at its option convert the outstanding balance to a 36 month term note with payments including interest in 36 equal installments. As of November 30, 2009,May 31, 2010, the Company’s outstanding balance was $350,000, and the unused credit line was $150,000.

NOTE 7: SUBSEQUENT EVENTS

The Company has evaluated subsequent events through July 6, 2010 for disclosure purposes.

 
-7-
 

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

Forward-Looking Statements

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, press releases, and other written and oral statements.  These “forward-looking statements” are based on currently available competitive, financial and economic data and our operating plans.  They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations.  These factors include, among other considerations, general economic and business conditions; political, regulatory, competitive and technological developments affecting the Company's operations or the demand for its products; timely development and market acceptance of new products; adequacy of financing; capacity additions,ad ditions, the ability to enforce patents and the ability to achieve increased sales volume and continued profitability.

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

Overview

Sono-Tek has developed a unique and proprietary series of ultrasonic atomizing nozzles, which are being used in an increasing variety of electronic, advanced energy, medical, industrial, and nanotechnology applications.  These nozzles are electrically driven and create a fine, uniform, low velocity spray of atomized liquid particles, in contrast to common pressure nozzles.  These characteristics create a series of commercial applications that benefit from the precise, uniform, thin coatings that can be achieved.  When combined with significant reductions in liquid waste and less overspray than can be achieved with ordinary pressure nozzle systems, there is lower environmental impact and lower energy use.

Market Diversity

We have a well established position in the electronics industry with our SonoFlux spray fluxing equipment. It saves customers from 40% to 80% of the liquid flux required to solder printed circuit boards over othermore labor intensive methods, such as foam fluxing.  Less flux equates to less material cost, fewer chemicals in the workplace, and less clean-up.  Also, the SonoFlux equipment reduces the number of soldering defects, which reduces the amount of rework.

In recent years we have diversified our product lines andlines.  For example, we have successfully entered into the medical device market.  To accomplish this goal, we have focused engineering resources on the medical device market, with an emphasis on providing coating solutions for the newest generations of drug coated stents.stents and other implantable devices.  We have sold a significant number of specialized ultrasonic nozzles and MediCoat stent coating systems to large medical device customers.  Sono-Tek’s stent coating systems are superior compared to pressure nozzles in their ability to uniformly coat the very small arterial stents without creating webs or gaps in the coatings.  We sell a bench-top, fully outfitted stent coating system to a wide range of customerscus tomers that are manufacturing stents and/or applying coatings to be used in developmental trials.  We have also introduced and sold a production oriented stent coater known as Medicoat II in the past year.II.  We are also selling an increasing number of specialized medical implant coating devices now.


 
-8-
 

Another changeeffort that has stimulated an increase in business has been the development of the WideTrack coating system, a broad-based platform for applying a variety of coatings to moving webs of glass, textiles, plastic, metal, food products and packaging materials.  The WideTrack is a long-term product and market development effort.  Thus far, we have made successful inroads with WideTrack systems into the following industries: glass, medical textile (bandages), textiles and recently in the food industry.  This will require a continuation of market and technology development in these areas in the years ahead.industries.  Some of these WideTrack applications involve nano-technology based liquids.  We believe there is an excellent fit between the thin, precise films required in nano-technology coating applications and our ultrasonic nozzle systems.systems, as employed in the WideTrack system.

WeMore recently, we have also invested time and money in developing equipment solutions for applications in the solar cell and fuel cell clean energy markets.  We have seen significant growth in these markets and are serving them with our Exactacoat, Flexicoat and Hypersonic products.  We now have four diversified market/application areas, which creates a stable base for all of our business.

In our four core areas: the electronics, medical device, advanced energy and WideTrack coating markets, it has been incumbent upon us to focus our attention and resources on the development of a much greater international presence.  We believe we have accomplished this and plan to continue our marketing efforts.  Our international sales have risen from approximately 20% of total revenues in Fiscal Year 2003 to approximately 55%60% today.

Past history shows the cyclical nature of the electronics business.  This cycle, coupledgeographic market diversity in North America, Europe, Latin America and Asia is expected to provide us with the increasing trend toward moving electronics production offshore, created a need to diversify.  As expected, our US based electronicsadditional business experienced a significant decline as a result of the recent recession.  We have been able to offset this reduction in US electronics sales with an increase in our international electronics and medical device sales, as well as with new clean energy applications involving coatings on fuel cells and solar cells.  We are also beginning to see some revival in the electronics business.stability going forward.

The creation of technological innovations and markets and the expansion into new geographical markets requires the investment of both time and capital. Although there is no guarantee of success, we expect that over time, these newer markets will be the basis for Sono-Tek’s continued growth and will contribute to future profitability.


Liquidity and Capital Resources

Working Capital – Our working capital increased $178,000$133,000 from a working capital of $2,898,000$3,075,000 at February 28, 20092010 to $3,076,000$3,208,000 at November 30, 2009.May 31, 2010.  The increase in working capital is primarily a result of the current period’s net income.  The Company’s current ratio is 2.83.2 to 1 at November 30, 2009May 31, 2010 as compared to 3.53 to 1 at February 28, 2009.2010.

Stockholders’ Equity – Stockholder’s Equity increased $48,000$110,000 from $3,532,000$3,670,000 at February 28, 20092010 to $3,580,000$3,780,000 at November 30, 2009.May 31, 2010. The increase is a result of net income of $6,000,$95,000, and an adjustment for stock based compensation expense of $42,000.$15,000.

Operating Activities – Our operating activities provided $152,000 of cash for the three months ended May 31, 2010 as compared to providing $119,000 for the three months ended May 31, 2009.  During the three months ended May 31, 2010, accounts receivable decreased $173,000, inventory increased $104,000, prepaid expenses increased $50,000, accounts payable and accrued expenses decreased $335,000 and customer deposits increased $287,000.  In addition, we incurred non-cash expenses of $70,000 for depreciation and amortization, $15,000 for stock based compensation expense and $1,000 for bad debt expense.

Investing Activities – We used $39,000 for the purchase of capital equipment and $6,000 for patent application costs during the three months ended May 31, 2010. We used $109,000 for the purchase of capital equipment and $4,000 for patent application costs during the three months ended May 31, 2009.

Financing Activities – For the three months ended May 31, 2010 and 2009, we used $5,000 and $6,000, respectively for the repayment of our notes payable.



 
-9-
 

Operating Activities – Our operating activities provided $394,000 of cash for the nine months ended November 30, 2009 as compared to using $961,000 for the nine months ended November 30, 2008.  During the nine months ended November 30, 2009, accounts receivable increased $301,000, inventory increased $145,000, prepaid expenses decreased $58,000, accounts payable and accrued expenses increased $104,000 and customer deposits increased $327,000.  In addition, we incurred non-cash expenses of $229,000 for depreciation and amortization, $42,000 for stock based compensation expense and $13,000 for bad debt expense.

Investing Activities – We used $132,000 for the purchase of capital equipment and $17,000 for patent application costs during the nine months ended November 30, 2009. We used $364,000 for the purchase of capital equipment and $27,000 for patent application costs during the nine months ended November 30, 2008.

Financing Activities – Our financing activities provided $83,000 of cash for the nine months ended November 30, 2009 as compared to providing $269,000 for the nine months ended November 30, 2008.  For the nine months ended November 30, 2009, we used $18,000 for the repayment of our notes payable and $250,000 for the repayment of our line of credit. During the current period, the repayment of our notes payable and line of credit was offset by proceeds of our line of credit by $350,000.


Results of Operations

For the ninethree months ended November 30, 2009,May 31, 2010, our sales increased $321,000$819,000 or 7%56% to $5,129,000$2,284,000 as compared to $4,808,000 for the nine months ended November 30, 2008. For the three months ended November 30, 2009, our sales increased $398,000 to $1,980,000 as compared to $1,582,000$1,465,000 for the three months ended November 30, 2008.  Our sales forMay 31, 2009. During the three month period ended November 30, 2009 were improved over the same period last year due to additionalMay 31, 2010, we experienced an increase in sales in all of stentcoaters, WideTrackour product lines, except for Selecta Flux units and our programmable XYZ precision coatingHypersonic units (a new product).  Noteworthy sales increases took place in fluxer units, EZ Flux units, Servo units, Solder Recovery Systems and Widetrack units.

Our gross profit increased $462,000$460,000 to $2,631,000$1,117,000 for the ninethree months ended November 30, 2009May 31, 2010 from $2,169,000$657,000 for the ninethree months ended November 30, 2008.May 31, 2009.  The gross profit margin was 51%49% of sales for the ninethree months ended November 30, 2009May 31, 2010 and 45% of sales for the nine months ended November 30, 2008.  Our gross profit increased $444,000 to $1,066,000 for the three months ended November 30, 2009 as compared to $622,000 for the three months ended November 30, 2008.  Our gross profit margin was 54% for the three months ended November 30, 2009 and 39% for the three months ended November 30, 2008.May 31, 2009. The improvement in our gross profit margin for the three months ended November 30, 2009May 31, 2010 was due to an increase in a more profitable mix of products being sold when compared to the three months ended November 30, 2008.  In addition, during the three months ended November 30, 2008 our gross profit margin was negatively affected by a $75,000 increase in our inventory reserve for our electronics products lines.May 31, 2009.

Research and product development costs decreased $101,000increased $39,000 to $525,000 for the nine months ended November 30, 2009 from $626,000 for the nine months ended November 30, 2008 and $22,000 to $184,000$210,000 for the three months ended November 30, 2009May 31, 2010 from $206,000$171,000 for the three months ended November 30, 2008.May 31, 2009. The decreases wereincrease was principally due to a decreasean increase in salary expense related to a decreasean increase in engineering personnel and decreases in research materials expense in the current periods.personnel.


-10-

Marketing and selling costs decreased $15,000increased $113,000 to $1,357,000 for the nine months ended November 30, 2009 from $1,372,000 for the nine months ended November 30, 2008 and $37,000 to $491,000$522,000 for the three months ended November 30, 2009May 31, 2010 from $528,000$409,000 for the three months ended November 30, 2008.May 31, 2009.  During the nine months ended November 30, 2009 and the three months ended November 30, 2009,May 31, 2010, we saw an increase in salary expense, international commission expense and depreciation related to sales equipment.  The increase in these expenses was offset by decreases in travel and trade show expenses and salaryshows expense.

General and administrative costs decreased $116,000increased $39,000 to $744,000 for the nine months ended November 30, 2009 from $860,000 for the nine months ended November 30, 2008 and $2,000 to $256,000$287,000 for the three months ended November 30, 2009May 31, 2010 from $254,000$248,000 for the three months ended November 30, 2008.May 31, 2009.  The decreases wereincrease was principally due to voluntary decrease in officerincreased salary expense and a decreasean increase in stock based compensation expense.other corporate expenses.

We had net income of $6,000$95,000 for the ninethree months ended November 30, 2009May 31, 2010 as compared to a net loss of $1,284,000 for the nine months ended November 30, 2008.  During the three months ended November 30, 2009 we had net income of $135,000 as compared to a net loss of $976,000$169,000 for the three months ended November 30, 2008.May 31, 2009.  Our results for the three months ended November 30, 2009May 31, 2010 were improved over the same period last year due to an increase in sales and an improvement in our gross profit margin and reductions in salary expenses due to a decrease in personnel and voluntary salary decreases.  In addition, during the three months ended November 30, 2008, we increased the valuation reservemix of our deferred tax asset by $612,000, which increased our loss duringproducts that period.were sold.  Our net income for the current period does not reflect any deferred tax adjustments.


Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of the financial statements.  Actual results may differ from these estimates under different assumptions and conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions.  The Company believes that critical accounting policies are limited to those described below.  For a detailed discussion on the application of these and other accounting policies see Note 2 to the Company’s consolidated financial statements included in Form 10-K for the year ended February 28, 2009.2010.


 
-11--10-
 

Accounting for Income Taxes
As part of the process of preparing the Company’s consolidated financial statements, the Company is required to estimate its income taxes.  Management judgment is required in determining the provision for the deferred tax asset.  During the fiscal year ended February 28, 2009 the Company increased the valuation reserve for the deferred tax asset. In the event that actual results differ from these estimates, the Company may need to again adjust such valuation reserve.

Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model.  ASC 718 is a complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation.  The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options.  The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect futurefutur e stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.  ASC 718 requires the recognition of the fair value of stock compensation in net income.  Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.


Impact of New Accounting Pronouncements

Revenue Recognition – Multiple Deliverable Revenue Arrangements
In October 2009,Accounting pronouncements issued but not yet effective have been deemed to be not applicable or the FASB issued guidance for Revenue Recognition – Multiple Deliverable Revenue Arrangements (Subtopic 605-25) “Subtopic”. Thisadoption of such accounting standard update establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue – generating activities. Vendors often provide multiple products or servicespronouncements are not expected to their customers. Those deliverables often are provided at different points in time or over different time periods. Specifically, this Subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting.  The amendments in this guidance will affect the accounting and reporting for all vendors that enter into multiple-deliverable arrangements with their customers when those arrangements are within the scope of this Subtopic.
This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after June 15, 2010. Earlier adoption is permitted. Ifhave a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity will apply the amendments under this Subtopic retrospectively from the beginning of the entity’s fiscal year.  The presentation and disclosure requirements shall be applied retrospectively for all periods presented. Management believes this Statement will have nomaterial impact on the financial statements of the Company once adopted.Company.


 
-12-
 

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. Although the Company's assets included $1,800,000$1,890,000 in cash, the market rate risk associated with changing interest rates in the United States is not materialmaterial.



-11-

ITEM 4 – Controls and Procedures

The Company has established and maintains “disclosure controls and procedures” (as those terms are defined in Rules 13a –15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act’).  Christopher L. Coccio, Chief Executive Officer (principal executive) and Stephen J. Bagley, Chief Financial Officer (principal accounting officer) of the Company, have evaluated the Company’s disclosure controls and procedures as of November 30, 2009.May 31, 2010.  Based on this evaluation, they have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to Management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding timely disclosure.

In addition, there were no changes in the Company’s internal controls over financial reporting during the thirdfirst fiscal quarter of 20102011 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.



-13-

PART II - OTHER INFORMATION

 Item 1.Legal Proceedings
  None
Item 1A.Risk Factors
Note Required for Smaller Reporting Companies
   
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
  None
   
 Item 3.Defaults Upon Senior Securities
  None
   
 Item 4.Submission of Matters to a Vote of Security Holders
NoneReserved
   
 Item 5.Other Information
  None
   
 Item 6.Exhibits and Reports
   
  31.1 – 31.2 – Rule 13a - 14(a)/15d – 14(a) Certification
   
  32.1 – 32.2 – Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


 
-14--12-
 

SIGNATURES


In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: January 12,July 7, 2010

SONO-TEK CORPORATION
              (Registrant)


 
    /s/
SONO-TEK CORPORATION
              (Registrant)
By:/s/ Christopher L. Coccio
Christopher L. Coccio
Chief Executive Officer
 By: ____________________________________/s/ Stephen J. Bagley
Christopher L. Coccio
Chief Executive Officer



 
    /s/
Stephen J. Bagley
 By: ____________________________________
Stephen J. Bagley
Chief Financial Officer




 
-15--13-