Executive Summary / Key Takeaways

• Sono-Tek leverages its proprietary ultrasonic coating technology and a strategic shift towards high-Average Selling Price (ASP) production systems to drive growth in high-tech markets like Clean Energy, Medical, and Electronics.
• Fiscal Year 2025 saw record net sales of $20.5 million, a 4% increase, primarily fueled by a 64% surge in the Clean Energy sector as customers transitioned to larger, more complex systems.
• Despite a slight dip in profitability metrics in FY2025 due to product mix and R&D reclassification, the company maintains a strong balance sheet with $11.9 million in cash and no debt, providing financial flexibility.
• A solid backlog of $8.6 million at year-end, including significant high-ASP orders, supports management's expectation for continued revenue growth and profitability in the first half of fiscal year 2026.
• Key risks include customer concentration, potential impacts from geopolitical factors and trade policies on international sales (39% of FY25 revenue), and competition from alternative technologies and larger, more scaled players, though SOTK's unique technology provides a significant competitive moat in precision applications.

The Evolution of Precision: From Nozzles to High-Tech Systems

Sono-Tek Corporation, founded in 1975 by the inventor of the ultrasonic nozzle, Dr. Harvey Berger, has evolved from a pioneer in ultrasonic atomization technology into a leading provider of sophisticated coating systems for critical high-tech applications. Initially focused on niche applications like coating blood collection tubes and printed circuit boards, the company recognized the broader potential of its core technology – using high-frequency ultrasonic vibrations to atomize liquids into minute drops for precise, thin film coatings. This environmentally friendly approach offers dramatic reductions in overspray, material waste, water, and energy usage, while providing superior uniformity and process repeatability compared to traditional methods.

Over decades, Sono-Tek strategically invested in research and development, expanding its product portfolio and market reach. A pivotal shift involved moving beyond selling just nozzles and components to developing and manufacturing complete, custom-engineered coating systems. This strategy aimed to address more complex customer needs, broaden the addressable market, and significantly increase the average selling price (ASP) of its offerings. Today, larger systems commonly sell for over $300,000, with some reaching $1 million or more, a substantial increase from historical norms. This transition, achieved organically through internal development efforts like Project Altair (integrating sophisticated PLC-based controls) and Project Ares (enhancing multi-axis platform design and vertical integration), has fundamentally reshaped Sono-Tek's business model and growth trajectory.

The Ultrasonic Moat: Quantifiable Advantages in Thin-Film Coating

At the heart of Sono-Tek's competitive advantage lies its proprietary ultrasonic coating technology. This technology enables the application of micron and nano-thin films with exceptional precision and uniformity, capabilities often unmatched by alternative coating methods. The tangible benefits are significant and quantifiable:

• Material Savings: Ultrasonic atomization dramatically reduces overspray, leading to substantial savings in expensive coating materials. While specific company-wide figures for material savings compared to all alternatives are not provided, the core technology's nature inherently offers significant efficiency gains over traditional spray methods.
• Environmental Impact: Reduced material usage directly translates to minimized hazardous waste and lower emissions, helping customers comply with increasingly stringent environmental regulations.
• Coating Uniformity: The fine, consistent droplet size produced by ultrasonic nozzles allows for highly uniform coatings, critical for performance in sensitive applications like semiconductors and medical devices.
• Process Repeatability: The controlled nature of ultrasonic spraying provides improved process repeatability, essential for high-volume manufacturing and quality control.

Sono-Tek continues to invest heavily in R&D, spending $2.72 million in FY2025 (13.3% of sales), down slightly from $2.89 million (14.6% of sales) in FY2024, partly due to reclassification of labor costs to COGS following successful project completions. Recent R&D initiatives focus on expanding capabilities in high-growth areas:

• Project Altair: Integrated sophisticated PLC-based controls into systems, enabling access to customers requiring advanced automation and control, significantly expanding the addressable market for integrated systems.
• Project Ares: Enhanced internal design and manufacturing capabilities for multi-axis platforms (e.g., NovoCoat series), improving vertical integration, supply chain resilience, and potentially future margins.
• Semiconductor Systems: Development of systems with wafer shuttling capabilities and strategic partnerships are enabling the company to target production-scale semiconductor fabs, with potential system values ranging from $500,000 to $1 million, a significant step up from previous lab-scale platforms (~$300,000).
• Medical Device Coatings: Increased focus on high-volume production systems for new applications like balloon catheters, where the company aims to replicate its success in the stent market but with higher ASP machines (~$250,000 vs. $80,000-$100,000).
• Emerging Technologies: Active exploration in areas like thin film batteries (R&D for nano coatings) and protective barrier coatings for lithium batteries, positioning the company for future opportunities.

The "so what" for investors is clear: Sono-Tek's differentiated technology provides a strong competitive moat, enabling it to command higher ASPs, access specialized high-value markets, and offer quantifiable operational benefits to its customers. This technological leadership is foundational to the company's growth strategy and its ability to compete effectively.

Competitive Landscape: Niche Dominance vs. Scale Giants

Sono-Tek operates in a competitive environment, facing rivals offering alternative coating technologies as well as other manufacturers of coating equipment. The competitive landscape in the ultrasonic coating market has seen shifts. Historically, significant U.S. and European direct competitors have shrunk or exited, while China-based competitors have grown, particularly in providing more basic, easily copied ultrasonic kits. These Chinese competitors often compete aggressively on price in the lower-end market.

However, Sono-Tek strategically differentiates itself by focusing on highly complex, custom-engineered large systems that are difficult to replicate and require sophisticated application engineering knowledge – areas where China competitors struggle. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Sono-Tek positions itself as a leader in precision ultrasonic coating for demanding applications.

Compared to larger, more diversified competitors like RPM International (RPM), Nordson Corporation (NDSN), and Graco Inc. (GGG), which offer a broader range of coating technologies and have significantly larger scale, distribution networks, and financial resources:

• Technological Edge: Sono-Tek's ultrasonic technology offers superior precision, material efficiency, and environmental benefits compared to the more traditional spray or dispensing technologies often emphasized by RPM and Graco. While Nordson is strong in precision dispensing and automation, Sono-Tek's specific ultrasonic expertise provides an edge in applications requiring ultra-thin, highly uniform coatings.
• Market Positioning: SOTK targets high-value, niche applications in high-tech industries where precision and performance are paramount, allowing it to command premium pricing and higher ASPs compared to the more commoditized offerings of some competitors.
• Scale and Profitability: Larger competitors like Nordson and Graco generally exhibit higher operating and net profit margins (e.g., Nordson's TTM Gross Margin ~55%, Operating Margin ~25%; Graco's TTM Gross Margin ~53%, Operating Margin ~27%) and superior return on equity/capital compared to SOTK's TTM Gross Margin of 47.91%, Operating Margin of 3.52%, and Net Margin of 5.47%. SOTK's smaller scale can lead to higher customer acquisition costs and potentially limit its ability to compete purely on price in certain segments.
• Growth Trajectory: While larger competitors may have more stable, albeit slower, growth profiles (e.g., RPM ~6% YoY, Nordson ~8% YoY, Graco ~7% YoY), SOTK's strategic shift and focus on high-growth markets have enabled it to achieve a higher revenue growth rate (4% in FY25 on top of 31% in FY24), albeit from a smaller base and with potential for lumpiness due to large system orders.

Sono-Tek's strategic response to this competitive landscape is to leverage its technological differentiation and application expertise to become a trusted partner for customers developing next-generation products. By focusing on complex, high-ASP systems and building strong customer relationships, particularly in emerging high-tech sectors, SOTK aims to carve out and defend its market share against both niche ultrasonic rivals and larger, more diversified coating equipment providers.

Financial Performance and Health: Investing for Growth

Fiscal Year 2025 marked a record year for Sono-Tek, with net sales reaching $20.5 million, a 4% increase from the $19.7 million reported in FY2024. This growth was primarily driven by a significant 64% surge in the Alternative/Clean Energy market, reaching $9.84 million (48% of total sales), as customers scaled up production and purchased high-ASP systems. This growth offset declines in the Medical (-22% to $3.25M) and Industrial (-47% to $1.92M) markets during the year. Geographically, the U.S. and Canada saw strong 15% growth, contributing $12.51 million (61% of sales), while Asia sales declined 16%, largely due to weakness in China.

Despite the record revenue, gross profit slightly decreased by 1% to $9.74 million, resulting in a lower gross margin of 47.5% compared to 50% in FY2024. Management attributed this to product mix and the reclassification of certain labor costs to cost of goods sold. Operating expenses increased slightly by 1% to $8.73 million, reflecting continued investment in R&D and personnel to support future growth initiatives. The combination of lower gross profit and slightly higher operating expenses led to a decrease in operating income to $1.01 million (5% operating margin) from $1.20 million (6% operating margin) in FY2024. Net income followed a similar trend, decreasing to $1.27 million ($0.08 per share) from $1.44 million ($0.09 per share) in the prior year.

Financially, Sono-Tek maintains a robust position. As of February 28, 2025, the company had cash, cash equivalents, and marketable securities totaling $11.93 million, slightly up from $11.85 million at the end of FY2024. Crucially, the company carries no outstanding debt, providing significant financial flexibility. Working capital increased by $1.38 million to $13.50 million.

While operating activities generated $525,000 in cash in FY2025, a decrease from FY2024, this was primarily influenced by the timing of sales and shipments in the fourth quarter leading to higher accounts receivable and lower customer deposits at year-end. Investing activities provided $2.55 million, largely due to the net sale of marketable securities, while capital expenditures were $469,000, supporting ongoing facility and equipment upgrades. This strong balance sheet and cash position enable the company to fund its R&D and growth initiatives organically without relying on external financing.

Outlook and Backlog: Momentum in High-ASP Systems

Sono-Tek exited fiscal year 2025 with a solid equipment and service-related backlog of $8.6 million. While down slightly from the record high of $9.28 million at the end of FY2024, this backlog includes significant high-ASP systems, notably from the clean energy sector (including eight systems from Project Altair scheduled for FY2026 delivery). This provides a strong foundation for the current fiscal year.

Management is encouraged by the path ahead and expects continued revenue growth and profitability in the first half of fiscal year 2026, supported by this solid backlog and steady demand across key markets. While visibility into the full fiscal year 2026 revenue remains limited at this time, primarily due to the rapidly evolving conditions in the clean energy sector and the potential impacts of international tariffs, the company is actively quoting significant orders in other sectors, particularly semiconductor and medical. The expectation is that development expertise gained in clean energy is transferable, supporting the expansion of high-ASP system sales across multiple markets and diversifying revenue streams.

Planned capital expenditures for FY2026 are approximately $435,000, a slight decrease from FY2025, reflecting that significant investments in facilities and growth preparation have already been made over the past three years. The company believes its current facility can support revenue levels significantly higher than current figures, providing room for organic growth without immediate major infrastructure outlays.

Risks and Challenges

Despite the positive momentum and strategic progress, several risks could impact Sono-Tek's performance:

• Customer Concentration: Dependence on a limited number of customers remains a risk. In FY2025, one customer accounted for approximately 11% of net sales. The loss of a major customer or a significant reduction in orders would materially impact revenue.
• Geopolitical and Economic Uncertainty: Global and regional economic conditions, geopolitical instability, and military conflicts can adversely affect customer demand and supply chain reliability. Management noted apprehension in the U.S. clean energy sector regarding order placement due to potential government policy shifts, although demand remains strong in other regions like the EU and parts of Asia.
• Trade Policies and Tariffs: Changes in international trade policies, including the imposition of tariffs, could increase costs for imported components or make exports more expensive, potentially impacting demand and margins. While management has not seen tariffs become a major impact outside of China, this remains a factor to monitor.
• Competition: The company faces competition from alternative technologies and other manufacturers. While its unique technology provides an edge in precision applications, larger competitors have greater scale and financial resources, potentially exerting pricing pressure.
• Managing Growth: Rapid growth could strain management, operational, and financial resources, requiring continuous improvement in systems and processes.
• Supply Chain Resilience: While efforts have been made to broaden and deepen the supply chain, reliance on limited sources for certain components, particularly electronic ones, remains a potential vulnerability.
• Inflationary Pressures: Elevated inflation could increase costs for labor, materials, and shipping, potentially impacting profitability if price increases cannot be fully passed on to customers.

Conclusion

Sono-Tek Corporation's story is one of strategic evolution, leveraging a foundational technological advantage to capture opportunities in dynamic, high-tech markets. The shift towards developing and selling complex, high-ASP production systems is clearly yielding results, as evidenced by record FY2025 revenue and a solid backlog positioning the company for continued growth in the near term. The company's proprietary ultrasonic coating technology provides a distinct competitive moat, enabling it to offer quantifiable benefits in precision, efficiency, and environmental impact, differentiating it from competitors in key applications within the Clean Energy, Medical, and Electronics sectors.

While challenges such as customer concentration, macroeconomic uncertainties, and competitive pressures from larger, more scaled players persist, Sono-Tek's strong balance sheet, ongoing investments in R&D and operational capabilities, and focus on high-value, difficult-to-replicate systems provide a compelling investment thesis. The successful transition of customers from R&D to production scale, particularly in the burgeoning clean energy and medical device markets, coupled with the potential for growing recurring revenue streams from service contracts, signals a promising trajectory. Investors should monitor the company's ability to execute on its backlog, secure new high-ASP orders in target markets, and manage potential impacts from external economic and geopolitical factors, but the strategic foundation and technological leadership suggest continued upside potential.