Sono-Tek Corporation (the “Company”, “Sono-Tek”,
“We” or “Our”) is the world leader in the design and manufacture of ultrasonic coating systems for applying precise,
thin film coatings to add functional properties, protect or strengthen surfaces on parts and components for the microelectronics/electronics,
alternative energy, medical, industrial and emerging research & development/other markets. We design and manufacture custom-engineered
ultrasonic coating systems incorporating our patented technology, in combination with strong applications engineering knowledge, to assist
our customers in achieving their desired coating solutions.
Our ultrasonic nozzle systems use high frequency ultrasonic vibrations that atomize
liquids into minute drops that can be applied to surfaces at low velocity providing microscopic layers of protective and other useful
materials over a wide variety of surfaces, including glass and metals. Our equipment solutions are environmentally-friendly, efficient
and highly reliable. They enable dramatic reductions in overspray, savings in raw materials, water and energy usage and provide improved
process repeatability, transfer efficiency, high uniformity and reduced emissions. We serve a variety of industries and applications and
have a broad base of customers.
The applications that are employing our unique coating technology and expertise have
been expanding as the advantages of ultrasonic coatings are more broadly recognized. The original application of our technology was to
coat the inner surface of blood collection tubes used for medical diagnostic testing. Our products enable the application of a thin and
uniform coating of material that prevents coagulation of blood. Following that initial breakthrough, our technology was then used for
applying uniform flux coatings to printed circuit boards, a critical part of the fabrication process for all electronic devices. A later
application for much larger surfaces was to address the many challenges that glass manufacturers faced. They needed a solution for specialized
glass applications in the construction and automotive industries. Among other things, our ultrasonic nozzles are used to provide coatings
that improve durability, create filters, increase clarity, reduce reflection, enable conductivity, and enhance safety. We have invested
significant resources to enhance our market diversity by leveraging our core ultrasonic coating technology. As a result, we have increased
our portfolio of products, the industries we serve, and the countries in which we sell our products.
We were founded by the inventor of the ultrasonic nozzle, Dr. Harvey Berger, and incorporated
in New York on March 21, 1975. We became a public company in 1987 and our stock is traded on the Nasdaq Capital Market. Our corporate
offices are located in Milton, New York where our production facilities are co-located. We also have a sales and service office in Singapore
and an application process development laboratory in Guangzhou, China. We are ISO 9001 qualified since registering in September 1998 and
have been recertified annually since then.
Our fiscal year ends on February 28. We refer to the fiscal year ended February 28, 2022
as “fiscal 2022” and use similar protocol for previous fiscal years.
Our Products, Markets and Customers
Our products are used in a wide range of applications. We provide our customers a broad
offering of ultrasonic spray coating equipment solutions custom suited for their requirements and we continually expand our offerings
to address new applications. Our products include fully integrated Multi-Axis Coating Systems, Integrated Coating Systems, Fluxing Systems,
OEM Systems and other related systems. We invest heavily in research and development to continually bring to market new solutions for
our customers, to increase our market share and to solve high value problems in manufacturing.
Our Multi-Axis Coating Systems, Integrated Coating Systems and Fluxing Systems provide
complete fully integrated solutions for our customers, while we created the Universal Align to offer our customers subsystems that integrate
our nozzles and generators that they can then incorporate into their original equipment.
We have built our brand and reputation on providing high quality, highly reliable products
that provide consistent performance for critical applications in demanding operating environments. Our surface coating solutions are used
in 24/7 work schedules, under harsh and challenging manufacturing environments, where they provide value in a continuous and dependable
fashion.
We target the following markets where our product quality and consistency and application
knowledge are valued by our customers:
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Micro-Electronics/Electronics: |
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Printed circuit boards: Ultrasonic flux application removes oxidation and is more efficient than standard, historic processes |
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Semiconductors: Applications of micron-thin photo-resist layers onto complex wafers |
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Sensors: Application of chemical, biological or other detection coatings as well as physical photoelectric elements for conversion of input and output signals |
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Display/panel glass on personal electronic devices: for sensitivity to temperature, imprint, pressure and for physical protection |
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Medical: Our systems are used in this industry to apply micron layers of polymers and drugs, biomedical materials and anti-coagulants. |
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Implanted medical devices such as: |
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Bandages/protective wraps |
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Flat (“float”) glass used for windows in buildings and vehicles |
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Textiles: high performance value adding coatings such as anti-microbial, anti-stain, flame retardant and moisture barriers |
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Food packaging and food safety: anti-microbial coatings |
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Food: coatings of flavors, ingredients and other additives |
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Alternative Energy: Our systems provide coatings of chemicals and other materials that act as catalysts, barriers, facilitators of symbiosis or other interactions between surfaces. |
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Emerging Research and Development / Other Markets |
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Research and development efforts at universities, research institutions and government agencies that are not part of our already established markets |
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A variety of other small industries using our coating technology, that have not yet matured into a developed marketplace for our ultrasonic coating machines |
Our principal customers include original equipment manufacturers, distributors and end
users of our products in the industries that we serve.
Our products are sold primarily through our direct sales personnel, select independent
distributors and through sales representatives around the world that are trained on our technologies and products. Our distributors are
typically experts in their industries and recognize the significant value that our technology provides their customers. We provide extensive
training and on-site support with our direct sales force and application engineers, who also respond to leads generated by our web site
and the trade shows in which we participate. To grow sales, we continue to strengthen our laboratory and applications engineering personnel
and support our worldwide process development labs with additional ultrasonic coating equipment, in conjunction with sponsoring various
technical training seminars for our distribution network.
We also provide application consulting services enabling our customers to rely on our surface
coating expertise and specific customer process optimization. We offer these services both in our application process development laboratory
and at our customers’ sites where we can assist in the design and development of customized coating systems.
We are a global business and our geographical sales mix can vary from year to year depending
on the timing of orders from customers. In fiscal 2022, 68% of our sales were from outside the U.S. and Canada.
Our Strengths
From our core strengths and capabilities we:
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Have built a strong reputation in the industry based on our ability to solve our customers’ complex problems and provide custom engineered, value-added solutions. |
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Are renowned for our product quality, customer service and responsiveness and critical thinking that enables a strong problem-solving culture throughout our organization. |
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Have expanded our ability to provide coating services for low to mid-volume demand to support our customers’ product development and testing. |
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Are continually developing new technologies and solutions to address an ever-changing marketplace. |
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Have built a strong balance sheet with no debt, which we believe, provides us with the financial flexibility to pursue our strategic plans for growth, including aggressive pursuit of organic and other development opportunities. |
Our Strategy
Our strategy is to further advance the use of ultrasonic coating technologies for the microscopic
coating of surfaces in a broader array of applications which enable better outcomes for our customers’ products and processes. We
believe product superiority is imperative and that it is attained through the extensive experience that we have in the coatings industry,
our proprietary manufacturing know-how and skills, and our unique work force that we have built over the years.
We intend to leverage our innovative technologies, proprietary know-how, unique talent
and experience, and global reach to:
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Grow the business globally by reaching new markets and further penetrating the markets and customers we currently serve; |
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Increase our earnings power through lean manufacturing processes, automation and continuous improvement; |
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Develop new and unique technologies that solve our customers’ most challenging problems; |
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Meet or exceed our customers’ expectations; and |
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Provide an acceptable return to our shareholders. |
To accomplish these objectives, we believe that we must judiciously deploy our monetary
and human capital in order to expand our presence in our targeted markets and create broader offerings for our customers.
Availability of Raw Materials
Historically, we have not been adversely impacted by the availability of raw materials
or components used in the manufacture of our products. All raw materials used in our products are readily available from many different
domestic suppliers. We purchase circuit board assemblies and sheet metal components from a wide range of suppliers throughout the world.
We carefully manage our inventory using lean manufacturing
processes. We provide a limited warranty on all of our products that covers parts and labor for a period of one year from the date
of sale. We have recently experienced scattered supply chain hold-ups of raw
materials and components. To insulate our production against shortages and slow deliveries of these items, we have deployed some of
our cash to ensure that we have additional raw materials and components on hand for use when needed, and this has been
successful.
Research and Development
We believe that our long-term growth is dependent upon the development and commercialization
of ultrasonic coating technologies to solve customers’ high value problems across a wide spectrum of applications in various industries,
while also advancing the utility of our core technology. During fiscal 2022 and fiscal 2021, we spent $1,730,000 and $1,645,000, respectively,
on research and development activities related to new products and services and the ongoing improvement of existing products and services.
As a percentage of sales, research and development expenses were 10.1% and 11.1% in fiscal 2022 and 2021, respectively.
Intellectual Property
Our business is based in part on the technology covered by our U.S. patents. We also rely
on unpatented know-how in the design and production of our nozzle systems, subsystems and complete solutions. We have executed non-disclosure
and non-compete agreements with all of our employees to safeguard our intellectual property. We execute reciprocal non-disclosure agreements
with our key customers to safeguard any jointly developed intellectual property.
Competition
We operate in competitive markets in many of our industry segments. We compete against
alternative coating technologies, as well as global and regional manufacturers of nozzles and other products based on price, quality,
product features, application engineering and follow-up service. We maintain our competitive position by providing highly effective solutions
that meet our customers’ requirements and needs. In several emerging markets, we encounter less competition compared to more established
markets based on the uniqueness of our ultrasonic technology in these applications.
Information Regarding Sales Outside the United States
and Canada and Significant Customers
During fiscal 2022 and fiscal 2021, sales to customers outside the U.S. and Canada accounted
for approximately $11,653,000, or 68% of total revenue, and $9,678,000, or 65% of total revenue, respectively.
Our two largest customers accounted for 24% of revenue in fiscal 2022.
Employees
As of February 28, 2022, we employed 67 full-time and 14 part-time employees. We believe
that relations with our employees are generally good.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934,
as amended. Therefore, we file “reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”).
The SEC maintains a website at www.sec.gov that contains the reports, proxy statements and other information for registrants that file
electronically, as we do. Additionally, these reports may be read and copied at the Public Reference Room of the SEC at 100 F Street,
N.E., Washington, DC 20549. Information regarding the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330.
We maintain a website at http://www.sono-tek.com. On our site, we provide copies of our
Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge as soon as reasonably practicable after filing electronically such material
with the SEC. Copies are also available, without charge, from Sono-Tek Corporation, 2012 Route 9W, Milton, NY 12547.
ITEM 1A |
RISKS RELATED TO OUR BUSINESS AND OPERATIONS |
The COVID-19 pandemic could have a material adverse effect on our business, results
of operations and financial condition in the future.
Our business could be adversely affected by the
effects of a widespread outbreak of contagious disease, including the outbreak of respiratory illness caused by the novel coronavirus
(COVID-19) first identified in Wuhan, Hubei Province, China. The COVID-19 pandemic has resulted in authorities worldwide implementing
numerous measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, border controls, limitations
on business activity, social distancing requirements, quarantines, and shelter-in-place orders. These measures have caused, and are continuing
to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. The impact of the pandemic on our business
and operations and our ability to execute our strategic plans remains uncertain and will depend on many unpredictable factors outside
of our control, including, without limitation, the extent, trajectory and duration of the pandemic; the development, availability and
distribution of vaccines and other effective treatments to treat the COVID-19 virus and any new variants thereof; the emergence of new
variants that are more contagious, symptomatic or fatal and the time the medical community requires to respond to such variants; the imposition
of and compliance with protective public safety measures; the impact of the pandemic on the global economy; and the related impacts on
our development pipeline and demand for our products.
In 2020, we initiated several precautions in accordance
with local regulations and guidelines to mitigate the spread of COVID-19 across our businesses. These precautions have impacted the way
we carry out our business, including limiting travel to and attendance at trade shows and visiting existing and prospective customers,
additional sanitation and cleaning procedures in our production and other facilities, temperature and symptom confirmations, remote working
when possible, and implementation of social distancing and staggered worktime requirements for our employees who must work on-site. If
we are required to continue such measures for an extended period of time, it could impact the ability of our employees to collaborate
efficiently. In addition, the loss or unavailability of our production staff or other key employees and executives, as a result of sickness
of employees or their families or the responsibility of employees to manage family obligations while working from home, could negatively
impact our business and operations and our ability to operate or execute our business strategy. Continued employee telecommuting activity
also increases the risk of a security breach of our information technology systems. The changed environment under which we are operating
could have an impact on our internal controls over financial reporting.
Moreover, the ongoing impacts of the COVID-19
pandemic could result in interruptions or delays in the operations of regulatory authorities, which may impact review or approval timelines;
delays in necessary interactions with other agencies and contractors due to limitations in employee resources or forced furlough of government
employees; termination of, or difficulties in procuring or maintaining, arrangements with third parties upon whom we depend such as manufacturers,
including contract manufacturing organizations, suppliers and other strategic partners; and disruptions or restrictions on our ability
to pursue partnerships and other business transactions. As a result of the COVID-19 pandemic, we have not experienced significant disruption
or delays in our global supply chain. If the COVID-19 pandemic worsens, however, we may experience supply disruptions due to temporary
closures, production slowdowns, staffing shortages, logistics, delays and disruptions in the manufacture and/or shipment of our products.
The effects of a prolonged pandemic could result
in a continued negative impact on investment in our principal markets. In addition, if COVID-19 impacts the financial position of our
customers, we may have difficulty collecting receivables and our business and results of operations could be exposed
to risks associated with uncollectible accounts or defaults on contractual payment obligations by our collaboration partners. If we are
unable to generate sufficient cash from operations due to impacts of the COVID-19 pandemic or otherwise, we may need to raise additional
funds. The duration and severity of any further economic or market impact of the pandemic remains uncertain, and there can be no assurance
that it will not have an adverse effect on our liquidity and capital resources, including our ability to access capital markets, in the
future, on terms that are favorable to us, or at all.
We do not have long-term commitments for significant revenues
with most of our customers and may be unable to retain existing customers, attract new customers or replace departing customers with new
customers that can provide comparable revenues and profit margins.
Because we generally do not obtain firm, long-term
volume purchase commitments from our customers, most of our sales are derived from individual purchase orders. We remain dependent upon
securing new purchase orders in the future in order to sustain and grow our revenues. Accordingly, there is no assurance that our revenues
and business will grow in the future. Our failure to maintain and expand our customer relationships could materially and adversely affect
our business and results of operations.
In recent years, a few major customers and distributors have
accounted for a significant portion of our revenue. Our revenue could decline if we are unable to maintain or develop relationships with
additional customers or distributors and our results of operations could be adversely affected if any one of these customers is unable
to meet their financial obligations to us.
For the year ended February 28, 2022, our two
largest customers accounted for approximately 24% of our net sales. For the year ended February 28, 2021, our three largest customers
accounted for approximately 28% of our net sales. If we are unable to diversify our customer base, our future results will be heavily
dependent on these customers and distributors. Our dependence on a limited number of customers and distributors means that the loss of
a major customer or distributor or any reduction in orders by a major customer or distributor would materially reduce our net sales and
adversely affect our results of operations. We expect that sales to relatively few customers will continue to account for a significant
percentage of our net sales for the foreseeable future; however, these customers or our other customers, may not use our products at current
levels in the future, if at all. Customer purchase orders may be delayed or cancelled, and order volume levels can be changed with loss
of deposit as the only penalty. We may not be able to replace cancelled, delayed, or reduced purchase orders with new orders. If any one
of these customers reduces its demand for our products, it will likely have a material adverse effect on our operations.
Furthermore, a significant portion of our accounts
receivables is concentrated with a few major customers, who may not be able to meet their financial obligations to us. The failure
of any such customers to pay amounts owed to us in a timely fashion or at all could have an adverse effect on our results of operations. The
Company is also exposed to credit risk on its accounts receivable, and this risk is heightened during periods when economic conditions
worsen. The Company's outstanding receivables are not covered by collateral or credit insurance. The Company's exposure to credit and
collectability risk on its receivables may also be higher in certain international markets, and its ability to mitigate such risks may
be limited. While the Company has procedures to monitor and limit exposure to credit risk on its receivables, there can be no assurance
such procedures will effectively limit our credit risk and avoid losses.
We will need to raise additional funds to develop our business,
which may adversely affect our future growth.
We may finance a portion of our anticipated
future growth and possibly future strategic acquisitions through public or private equity offerings or debt financings. Additional funds
may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required
to delay or reduce the scope of, our plans to grow our revenues or to consummate one or more strategic acquisitions or otherwise
to scale back our business plans. In addition, we could be forced to reduce or forego attractive business opportunities. To the extent
that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing,
if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable,
even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and
terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest
rates.
We may be adversely affected by global and regional economic
conditions and military, legislative, regulatory and political developments.
We sell our products around the world, and we
expect to continue to derive a substantial portion of sales from outside the U.S. The uncertain macroeconomic environment caused by the
outbreak of COVID-19 may adversely affect our results and could have a negative impact on demand for our products. In addition, we are
currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical
instability due to the ongoing military conflict between Russia and Ukraine. Our business, financial condition and results of operations
could be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in
Ukraine or any other geopolitical tensions.
Customers or suppliers may experience cash flow
problems and as a result, may modify, delay or cancel plans to purchase our products, and suppliers may significantly and quickly increase
their prices or reduce their output. Additionally, if customers are not successful in generating sufficient revenue or are precluded from
securing financing, they may not be able to pay, or may delay payment of, amounts owed to us. Any inability of current and/or potential
customers to purchase our products and/or to pay us for our products may adversely affect our sales, earnings and cash flow. Sales and
earnings could also be affected by our ability to manage the risks and uncertainties associated with the application of local legal requirements
or the enforceability of laws and contractual obligations, trade protection measures, changes in tax laws, regional political instability,
war, terrorist activities, severe or prolonged adverse weather conditions and natural disasters as well as health epidemics or pandemics.
Our success will depend, to a large degree, on the expertise
and experience of the members of our management team, the loss of whom could have a material adverse effect on our business.
Our success is, to a large degree, dependent upon
the expertise and experience of the management team and its ability to attract and retain qualified personnel who are technically proficient.
The loss of the services of one or more of such personnel could have a material adverse effect on our business. Our business may be adversely
affected if we are unable to continue to attract and retain such personnel.
We will need to add qualified additional personnel as we expand
our business, and we may not be able to employ such persons, which could affect our ability to expand and have a material adverse effect
on our business.
In order to expand our product offerings
and customer base, we will need to hire additional qualified personnel. We may not be able to identify such persons, and even if we identify
them, we may not have the funds or ability to employ them, which could have a material adverse effect on our business.
Although we have not experienced any material
disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market. A sustained
labor shortage or increased turnover rates within our employee base, whether caused by COVID-19 or as a result of general macroeconomic
factors, could lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees,
and could negatively affect our ability to complete our projects according to the required schedule or otherwise efficiently operate our
business. If we are unable to hire and retain employees capable of performing at a high level, or if mitigation measures we may take to
respond to a decrease in labor availability, such as overtime and third-party outsourcing, have unintended negative effects, our business
could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by COVID-19
or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity
or cash flows.
If we are unable to manage our expected growth, our business
may be materially and adversely affected.
We expect to expand our operations, including
by expanding our internal resources, making acquisitions and entering into new markets, and we intend to continue to focus on rapid growth,
including organic growth and possibly acquisitions. The growth of our business could place significant strain on our management, operational
and financial resources. To manage our future growth, we could be required to improve existing or implement new operational or financial
systems, procedures and controls or expand, train and manage a growing employee base. Our failure to accomplish any of these tasks could
materially and adversely affect our business. Even if we are successful in integrating future acquisitions into our existing operations,
we may not derive the benefits, such as operational or administrative synergies, that we expected from such acquisitions, which may result
in the investment of our capital resources without realizing the expected returns on such investment.
Our inability to protect our intellectual property rights could
negatively affect our business and results of operations.
Our ability to compete effectively depends in
part upon developing, maintaining and/or protecting intellectual property rights relevant to our ultrasonic nozzles and coating processes.
We rely principally on a combination of patent protection, trade secret laws, confidentiality and non-disclosure agreements, and trusted
business relationships to establish, maintain and protect the intellectual property rights relevant to our business. These measures, however,
may not be adequate in every given case to permit us to gain or retain any competitive advantage, particularly in those countries where
the laws do not protect our proprietary rights as fully as in the United States.
Where we consider it appropriate, we may seek
patent protection in the United States on technologies used in, or relating to, our ultrasonic nozzles, applications and manufacturing
processes. The issuance of a patent is not conclusive as to its scope, validity and enforceability. Thus, any patent or patent application
which may issue into a patent held by us could be challenged, invalidated or held unenforceable in litigation or proceedings before the
U.S. Patent and Trademark Office and/or other patent tribunals or circumvented by others. No consistent policy regarding the breadth of
patent claims has emerged to date in the United States, and the landscape could become more uncertain in view of future rule changes by
the United States Patent and Trademark Office, the introduction of patent reform legislation and decisions in patent law cases by United
States federal courts. The patent landscape outside the United States is even less predictable. As a result, the validity and enforceability
of patents cannot be predicted with certainty. In addition, we may fail to apply for patents on important technologies or product candidates
in a timely fashion, if at all, and our existing and future patents may not be sufficiently broad to prevent others from utilizing our
technologies or from developing competing products or technologies.
Our patent strategy involves complex legal and
factual questions. Our ability to maintain and solidify our proprietary technology may depend in part upon our success in obtaining patent
rights and enforcing those rights once granted or licensed. Our issued patents and those that may be issued in the future may be challenged,
invalidated, rendered unenforceable or circumvented, which could limit our ability to prevent competitors from marketing similar or related
products, or shorten the term of patent protection that we may have for our products, processes and enabling technologies. In addition,
the rights granted under any issued patents may not provide us with competitive advantages against competitors with similar technology.
Furthermore, our competitors may independently develop similar technologies, duplicate technology developed by us or otherwise possess
intellectual property rights that could limit our ability to manufacture our products and operate our business.
We also rely on trade secret protection for our
confidential and proprietary information. Trade secrets, however, can be difficult to protect. We may not be able to maintain our technology
or know-how as trade secrets, and competitors may develop or acquire equally valuable or more valuable technology or know-how related
to the manufacture of comparable ultrasonic nozzles. We also seek to protect our confidential and proprietary information, in part, by
requiring all employees, consultants and business partners to execute confidentiality and/or nondisclosure agreements upon the commencement
of any employment, consulting arrangement or engagement with us. These agreements generally require that all confidential and proprietary
information developed by the employee, consultant, or business partner, or made known to the employee, consultant or business partner
by us, during the course of the relationship with us, be kept confidential and not disclosed to third parties. These agreements may be
breached and may not provide adequate remedies in the event of breach. To the extent that our employees, consultants, or business partners
use intellectual property owned by others in their work for and/or with us, disputes could arise as to the rights in related or resulting
technologies, know-how or inventions. Moreover, while we also require customers and vendors to execute agreements containing confidentiality
and/or nondisclosure provisions, we may not have obtained such agreements from all of our customers and vendors. In addition, our trade
secrets may otherwise become known or be independently discovered by competitors, customers, or vendors. Such customers or vendors may
also be subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential.
Moreover, others may independently develop and
obtain patents covering technologies that are similar or superior to the product forms, applications, or manufacturing processes that
we employ. If that happens, we may need to obtain licenses for these technologies and may not be able to obtain licenses on reasonable
terms, if at all, which could limit our ability to manufacture our future products and operate our business. In addition, third parties
could utilize our intellectual property rights in territories where we do not have intellectual property protection. Such third parties
may then try to import products made using our intellectual property rights into the United States or other countries, which could have
a material adverse effect on our business.
We could become subject to intellectual property litigation
that could be costly, limit or cancel our intellectual property rights, divert time and efforts away from business operations, require
us to pay damages and/or otherwise have an adverse material impact on our business.
The success of our business is highly dependent
on protecting our intellectual property rights. Unauthorized parties may attempt to copy or otherwise obtain and use our products and/or
enabling technologies. Policing the unauthorized use of our intellectual property rights is difficult and expensive, as is enforcing these
rights against unauthorized use by others. Identifying unauthorized use of our intellectual property rights is difficult because we may
be unable to monitor the processes and/or materials being employed by other parties. The steps we have taken may not prevent unauthorized
use of our intellectual property rights, particularly in foreign countries where enforcement of intellectual property rights may be more
difficult than in the United States.
Our continued commercial success will also depend
in part upon not infringing the patents or violating the intellectual property rights of third parties. We are aware of patents and patent
applications generally relating to aspects of our technologies filed by, and issued to, third parties. Nevertheless, we cannot determine
with certainty whether such patents or patent applications of other parties may materially affect our ability to conduct our business.
There may be existing patents of which we are unaware that we may inadvertently infringe, resulting in claims against us or our customers.
In the event that the manufacture, use and/or sale of our products or processes is challenged, or if our product forms or processes conflict
with the patent rights of others, third parties could bring legal actions against us or our customers in the United States, Asia, Europe
or other countries, claiming damages and seeking to enjoin the manufacturing and/or marketing of our products. Additionally, it is not
possible to predict with certainty what patent claims may issue from any relevant third-party pending patent applications. Third parties
may be able to obtain patents with claims relating to our product forms, applications and/or manufacturing processes which they could
attempt to assert against us or our customers.
In either case, litigation may be necessary to
enforce, protect or defend our intellectual property rights or to determine the validity and scope of the intellectual property rights
of others. Any litigation could be unsuccessful, cause us to incur substantial costs, divert resources and the efforts of our personnel
away from daily operations, harm our reputation and/or result in the impairment of our intellectual property rights. In some cases, litigation
may be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product revenues and against
which our patents may provide little or no deterrence. If we are found to infringe any patents, we could be required to (1) pay substantial
monetary damages, including lost profits, reasonable royalties and/or treble damages if an infringement is found to be willful and/or
(2) totally discontinue or substantially modify any products or processes that are found to be in violation of another party’s intellectual
property rights. If our competitors are able to use our technology without payment to us, our ability to compete effectively could be
harmed.
The markets within which we compete are highly competitive.
Many of our competitors have greater financial and other resources than we do and one or more of these competitors could use their greater
financial and other resources to gain market share at our expense.
If our business continues to develop as expected,
we anticipate that our revenues will continue to grow. If, due to capital constraints or otherwise, we are unable to fulfill our existing
backlog in a timely manner and/or procure and timely fulfill our anticipated future backlog, our customers and potential customers may
decide to use competing systems or products. If we are unable to fulfill the demand for products and systems in a timely manner, our customers
and potential customers may choose to purchase products from our competitors. In addition, we could face new competition from large international
or domestic companies with established industrial brands and distribution networks that enter our end markets. Demand for our products
may also be affected by our ability to respond to changes in design and functionality, to respond to downward pricing pressure, and to
provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitive pressures,
we could lose market share, which could have an adverse impact on our results. We cannot assure that we will be able to compete successfully
in our markets or compete effectively against current and new competitors as our industry continues to evolve.
Rapid technological changes may prevent us from remaining current
with our technological resources and maintaining competitive product and service offerings.
The markets in which we and our customers operate
are characterized by rapid technological change. Significant technological changes could render our existing and potential new products,
systems and technology obsolete. Our future success will depend, in large part, upon our ability to:
| · | effectively identify and develop leading technologies; |
| · | continue to develop our technical expertise; |
| · | enhance our current products and systems with new, improved and
competitive technology; and |
| · | respond to technological changes in a cost-effective and timely
manner. |
If we are unable to successfully respond to technological
change or if we do not respond to it in a cost-effective and timely manner, then our business will be materially and adversely affected.
We cannot assure you that we will be successful in responding to changing technology. In addition, technologies developed by others may
render our products, systems and technology uncompetitive or obsolete. Even if we do successfully respond to technological advances, the
integration of new technology may require substantial time and expense, and we cannot assure you that we will succeed in adapting our
products, systems and technology in a timely and cost-effective manner.
If we are unable to continue to develop new and enhanced products
and systems that achieve market acceptance in a timely manner, our competitive position and operating results could be harmed.
Our future success will depend on our ability
to continue to develop new and enhanced ultrasonic nozzles and coating systems and related products that achieve market acceptance in
a timely and cost-effective manner. The markets in which we and our customers operate are characterized by frequent introductions of new
and enhanced products and services, evolving industry standards and regulatory requirements, government incentives and changes in customer
needs. The successful development and market acceptance of our products and systems, depends on a number of factors, including:
| · | the impact of the COVID-19 pandemic on the global markets; |
| · | the changing requirements and preferences of the potential customers
in our markets; |
| · | the accurate prediction of market requirements, including regulatory
issues; |
| · | the timely completion and introduction of new products and systems
to avoid obsolescence; |
| · | the quality, price and performance of new products and systems; |
| · | the availability, quality, price and performance of competing
products and systems; |
| · | our customer service and support capabilities and responsiveness; |
| · | the successful development of our relationships with existing
and potential customers; and |
| · | changes in industry standards. |
We may experience financial or technical difficulties
or limitations that could prevent us from introducing new or enhanced products or systems. Furthermore, any of these new or enhanced products
and systems could contain problems that are discovered after they are introduced. We may need to significantly modify the design of these
products and systems to correct problems. Rapidly changing industry standards and customer preferences and requirements may impede market
acceptance of our products and systems.
Development and enhancement of our products and
systems will require significant additional investment and could strain our management, financial and operational resources. The lack
of market acceptance of our products or systems or our inability to generate sufficient revenues from this development or enhancement
to offset their development costs could have a material adverse effect on our business. In addition, we may experience delays or other
problems in releasing new products and systems and enhancements, and any such delays or problems may cause customers to forego purchases
of our products and systems and to purchase those of our competitors.
We cannot provide assurance that products and
systems that we have recently developed or that we develop in the future will achieve market acceptance. If our new products and systems
fail to achieve market acceptance, or if we fail to develop new or enhanced products and systems that achieve market acceptance, our growth
prospects, operating results and competitive position could be adversely affected.
We manufacture and assemble all our products at one facility.
Any prolonged disruption in the operations of this facility would result in a decline in our sales and profitability.
We manufacture and assemble our products and systems
at our production facility located in Milton, New York. Any prolonged disruption in the operations of our manufacturing and assembly facility,
whether due to the COVID-19 pandemic, equipment or information technology infrastructure failure, labor difficulties, destruction of or
damage to this facility as a result of a hurricane, earthquake, fire, flood, other catastrophes, and other operational problems would
result in a decline in our sales and profitability. In the event of a business interruption at our facility, we may be unable to shift
manufacturing and assembly capabilities to alternate locations, accept materials from suppliers or meet customer shipment needs, among
other severe consequences. Such an event could have a material and adverse impact on our financial condition and results of our operations.
Failure to obtain adequate supplies of components and raw materials
or failure to obtain components or raw materials at affordable prices could negatively affect our ability to supply products to our customers
and negatively affect our profit margins.
We use a variety of components and raw materials
in the manufacture of our products. As other industries develop products utilizing similar components and raw materials that we use, we
may not be able to obtain adequate supplies of components and raw materials required for the manufacture of our existing and future products
that would prevent us from supplying products to our customers and materially affect our business. Furthermore, any increased demand for,
the raising of tariff rates on, or an increase of non-tariff trade barriers that apply to the components and raw materials that we use
could increase the price we must pay to obtain them and could adversely affect our profitability, which would have an adverse effect on
our financial results.
Recently, we have encountered challenges in our
supply of various materials and components, and electronic components in particular, due to well-documented shortages and constraints
in the global supply chain. Lead times for ordered components may vary significantly, and some components used to manufacture our products
are provided by a limited number of sources. We have experienced lengthened lead times throughout our supply chain as a result of supply
chain constraints and material shortages that have occurred in the recent months, and may continue through fiscal year 2023. This has
been exacerbated by the recent resurgence of the COVID-19 pandemic in certain parts of China, which has resulted in the temporary closure
of manufacturing facilities, including those that make electronic parts like those that we included in our products, in certain parts
of China.
We may rely on sub-contractors to meet current demand for our
products, and we may need to obtain additional manufacturing capacity in order to increase production of our existing products or to produce
our proposed new products, the failure of which could have a material adverse effect on our operations.
We may not have sufficient internal manufacturing
capacity to meet the current demand for our products, and we may need to rely on subcontractors to enable us to meet this demand.
Since we may rely on our subcontractors for a significant amount of our production capacity, the loss of the services of our subcontractors
would have a material adverse effect on our business. Our plans for the growth of our business rely upon increasing sales of our existing
products and systems and developing and marketing new products. We may not have adequate internal manufacturing facilities to substantially
increase production of our products and obtaining additional manufacturing capacity in-house could require substantial capital expenditures.
We may not have the capital resources to obtain or construct new facilities to expand manufacturing capacity and meet increasing demand
for our products, which could have a material adverse effect on our operations. Conversely, any significant decrease in demand for our
products could create idle plant capacity and an inability to cover fixed costs, which could adversely impact our results of operations
and financial condition.
We are exposed to risks related to our international sales,
and the failure to manage these risks could harm our business.
In addition to our sales to customers within the
U.S. and Canada, we may become increasingly dependent on sales to customers outside the U.S. and Canada as we pursue expanding our business
with customers worldwide. In the fiscal years ended February 28, 2022 and 2021, our sales outside of the U.S. and Canada accounted for
approximately 68% and 65%, respectively, of total revenue. We continue to expect that a significant portion of our future revenues will
be from international sales. As a result, the occurrence of any international, political, economic, or geographic event could result in
a significant decline in revenue. There are significant risks associated with conducting operations internationally, requiring significant
financial commitments to support such operations. These numerous and sometimes conflicting laws and regulations include internal control
and disclosure rules, data privacy and filtering requirements, anti-corruption laws, such as the Foreign Corrupt Practices Act, and other
local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations, among others.
Violations of these laws and regulations could
result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business
and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international
expansion efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented
policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors,
or agents will not violate our policies.
Some of the risks and challenges of
conducting business internationally include:
| · | the impact of COVID-19 on the global markets; |
| · | requirements or preferences for domestic products or solutions, which could reduce demand
for our products; |
| · | unexpected changes in regulatory requirements; |
| · | restrictions on the import or export of critical technology; |
| · | management communication and integration problems resulting from cultural and geographic
dispersion; |
| · | the burden of complying with a variety of laws and regulations in various countries; |
| · | difficulties in enforcing contracts; |
| · | the uncertainty of protection for intellectual property rights
in some countries; |
| · | application of the income tax laws and regulations of multiple
jurisdictions, including relatively low-rate and relatively high-rate jurisdictions, to our sales and other transactions, which results
in additional complexity and uncertainty; |
| · | tariffs and trade barriers, export regulations and other regulatory and contractual limitations
on our ability to sell products; |
| · | failure to comply with both U.S. and foreign laws, including
export and antitrust regulations, the Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices; |
| · | heightened risk of unfair or corrupt business practices in certain
geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities
in, financial statements; |
| · | potentially adverse tax consequences, including multiple and possibly overlapping tax structures; |
| · | general economic and geopolitical conditions, including war and acts of terrorism; |
| · | lack of the availability of qualified third-party financing; and |
| · | currency exchange controls. |
While these factors and the impacts of these factors
are difficult to predict, any one or more of them could adversely affect our business, financial condition and results of operations in
the future.
Any liability damages resulting from technical faults or failures
of our products could be substantial and could materially adversely affect our business and results of operations.
Our products are used by customers and integrated
into customers’ machines and systems, and therefore a malfunction or the inadequate design of our products could result in product
liability claims. Any liability for damages resulting from technical faults or failures could be substantial and could materially adversely
affect our business and results of operations. In addition, a well-publicized actual or perceived problem could adversely affect the market’s
perception of our products, which would materially impact our financial condition and operating results.
Inflationary Pressures and Rising Prices for Goods and Services.
Inflation rose sharply at the end of 2021 and
has continued rising in 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout
2022. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not as able to leverage economics
of scale to mitigate cost pressures compared to larger businesses. Inflation has the potential to adversely affect our liquidity, business,
financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate
increases in the prices we charge our customers. The existence of inflation in the economy has resulted in, and may continue to result
in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and
other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take
measures to mitigate the impact of this inflation, if these measures are not effective our business, financial condition, results of operations
and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing
of when these beneficial actions impact our results of operations and when the cost inflation is incurred.
We could become liable for damages resulting from our manufacturing
activities, which could have a material adverse effect on our business or cause us to cease operations.
The nature of our manufacturing operations exposes
us to potential claims and liability for environmental damage, personal injury, loss of life and damage to, or destruction of, property.
Our manufacturing operations are subject to numerous laws and regulations that govern environmental protection and human health and safety.
These laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in
the future. Our manufacturing operations may not comply with future laws and regulations, and we may be required to make significant unanticipated
capital and operating expenditures to bring our operations within compliance with such evolving regulations. If we fail to comply with
applicable environmental laws and regulations, manufacturing guidelines, and workplace safety requirements, governmental authorities may
seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits, and private parties may seek
damages from us. Under such circumstances, we could be required to curtail or cease operations, conduct site remediation or other corrective
action, or pay substantial damage claims for which may not have sufficient or any insurance coverage for claims.
If we fail to maintain an effective system of internal control
over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose
confidence in our financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002
requires our management to assess the effectiveness of our internal control over financial reporting and to disclose in our filing if
such controls were unable to provide assurance that a material error would be prevented or detected in a timely manner. We have an ongoing
program to review the design of our internal controls framework in keeping with changes in business needs, implement necessary changes
to our controls design and test the system and process controls necessary to comply with these requirements. If in the future, our internal
controls over financial reporting are determined to be not effective resulting in a material weakness or significant deficiency, investor
perceptions regarding the reliability of our financial statements may be adversely affected which could cause a decline in the market
price of our stock and otherwise negatively affect our liquidity and financial condition.
We may have risks associated with security of our information
technology systems.
We make significant efforts to maintain the security
and integrity of our information technology systems and data. Despite significant efforts to create security barriers to such systems,
it is virtually impossible for us to entirely mitigate this risk. There is a risk of industrial espionage, cyber-attacks, misuse or theft
of information or assets, or damage to assets by people who may gain unauthorized access to our facilities, systems, or information. Such
cybersecurity breaches, misuse, or other disruptions could lead to the disclosure of confidential information; improper usage and distribution
of our intellectual property; theft, manipulation, and destruction of private and proprietary data; and production downtimes. Although
we actively employ measures to prevent unauthorized access to our information systems, preventing unauthorized use or infringement of
our rights is inherently difficult. These events could adversely affect our financial results and any legal action in connection with
any such cybersecurity breach could be costly and time-consuming and may divert management’s attention and adversely affect the
market’s perception of us and our products. In addition, we must frequently expand our internal information system to meet increasing
demand in storage, computing and communication, which may result in increased costs. Our internal information system is expensive to expand
and must be highly secure due to the sensitive nature of our customers’ information that we transmit. Building and managing the
support necessary for our growth places significant demands on our management and resources. These demands may divert such resources from
the continued growth of our business and implementation of our business strategy.
RISKS RELATED TO OUR COMMON STOCK
Future equity financings would dilute your ownership and could
adversely affect your common stock ownership rights in comparison with those of other security holders.
Our board of directors has the power to issue
additional shares of common without stockholder approval. Our stockholders do not have preemptive rights to any common stock issued by
us in the future; therefore, stockholders may experience additional dilution of their equity investment if we issue additional shares
of common stock in the future, including shares issuable under equity incentive plans, or if we issue securities that are convertible
into shares of our common stock.
If additional funds are raised through the issuance
of equity securities, the percentage of ownership of our existing stockholders will be reduced, and such newly issued securities may have
rights, preferences or privileges senior to those of existing stockholders. If we issue additional common stock or securities convertible
into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such
stock issuances might result in a reduction of the market value of our common stock, which could make our stock unattractive to existing
stockholders.
Provisions in our articles of incorporation and bylaws could
discourage changes in the composition of our board of directors which could hinder an acquisition of us by a third party, even if the
acquisition would be favorable to you, thereby adversely affecting existing stockholders.
Our articles of incorporation and bylaws contain
provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our board of directors
and our Company, even when these attempts may be in the best interests of stockholders. For example, our articles of incorporation and
bylaws provide for a classified board of directors which could delay or prevent changes in our control or management, including transactions
in which stockholders might otherwise receive a premium for their shares over then-current market prices. These provisions may also limit
the ability of stockholders to approve transactions that they may deem to be in their best interests.
There is limited trading volume of our common stock, which could
make it difficult for you to liquidate an investment in our common stock in a timely manner.
Since August 27, 2021, our common stock has been traded
on the Nasdaq Capital Market under the symbol SOTK. Because there is limited volume in our common stock, investors may not be able to
liquidate their investments when they desire to do so.
In addition, if we fail to meet the criteria set
forth in SEC and Nasdaq Capital Market rules and regulations, various requirements would be imposed by law on broker-dealers who sell
our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers
from recommending or selling our common stock, which may further affect its liquidity.
If securities analysts do not publish research or reports about
our business or if they downgrade us or our sector, the price of our common stock could decline.
The trading market for our common stock will depend
in part on research and reports that industry or financial analysts publish about us or our business. Furthermore, if one or more of the
analysts who cover us downgrades us, the industry in which we operate, or the stock of any of our competitors, the price of our common
stock may decline. If one or more of these analysts ceases coverage altogether, we could lose visibility, which could also lead to a decline
in the price of our common stock.
Our operating results can fluctuate significantly from period
to period, which makes our operating results difficult to predict and can cause our operating results, in any particular period, to be
less than comparable periods and expectations from time to time.
Our operating results have fluctuated significantly
from quarter-to-quarter, period-to-period and year-to-year during our operating history and are likely to continue to fluctuate in the
future due to a variety of factors, many of which are outside of our control. Certain factors that may affect our operating results include,
without limitation, those set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations
—Critical Accounting Policies” in this Annual Report on Form 10-K.
Because we have little or no control over many
of these factors, our operating results are difficult to predict. Any adverse change in any of these factors could negatively affect our
business and results of operations.
Our revenues, net income and other operating results
are heavily dependent upon the size and timing of customer orders and projects, and the timing of the completion of those projects. The
timing of our receipt of large individual orders, and of project completion, is difficult for us to predict. Because our operating expenses
are based on anticipated revenues over the mid- and long-term and because a high percentage of our operating expenses are relatively fixed,
a shortfall or delay in recognizing revenues can cause our operating results to vary significantly from quarter-to-quarter and can result
in significant operating losses or declines in profit margins in any particular quarter. If our revenues fall below our expectations in
any particular quarter, we may not be able, or it may not be prudent for us, to reduce our expenses rapidly in response to the revenue
shortfall, which can result in us suffering significant operating losses or declines in profit margins in that quarter.
Due to these factors and the other risks discussed
in this Annual Report on Form 10-K, you should not rely on quarter-to-quarter, period-to-period or year-to-year comparisons of our results
of operations as an indication of our future performance. Quarterly, period and annual comparisons of our operating results are not necessarily
meaningful or indicative of future performance. As a result, it is likely that, from time to time, our results of operations or our revenue
backlog could fall below historical levels or the expectations of public market analysts and investors, which could cause the trading
price of our common stock to decline significantly.
The market price of our common stock has been and may continue
to be volatile.
The market price of our common stock has been
volatile and fluctuates widely in response to various factors that are beyond our control. The price of our common stock is not necessarily
indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time-to-time experienced
significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations
may also materially and adversely affect the market price of our common stock. Factors such as the following could cause the market price
of our common stock to fluctuate substantially:
| • | the underlying price of the commodities, materials, equipment that affect our key markets; |
| • | announcements of capital budget changes by major customers; |
| • | the introduction of new products by our competitors; |
| • | announcements of technology advances by us or our competitors; |
| • | current events affecting the political and economic environment in the United States, Europe or Asia; |
| • | conditions or industry trends, including demand for our products, services and technological advances; |
| • | changes to financial estimates by us or by any securities analysts who might cover our stock; |
| • | additions or departures of our key personnel; |
| • | seasonal, economic, or financial conditions; |
| • | our quarterly operating and financial results; or |
| • | litigation or public concern about the safety of our products; |
| • | the impact of inflation; |
The realization of any of these risks and other
factors beyond our control could cause the market price of our common stock to decline significantly. The stock market in general experiences,
from time to time, extreme price and volume fluctuations. Periodic and/or continuous market fluctuations could result in extreme volatility
in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility may be worse if the trading
volume of our common stock is low.
Future sales of our common stock, or the perception that future
sales may occur, may cause the market price of our common stock to decline.
If any significant number of our outstanding shares
are sold, such sales could have a depressive effect on the market price of our stock. We are unable to predict the effect, if any, that
the sale of shares, or the availability of shares for future sale, will have on the market price of the shares prevailing from time to
time. Sales of substantial numbers of shares in the public market, or the perception that such sales could occur, could depress prevailing
market prices for the shares. Such sales may also make it more difficult for us to sell equity securities or equity-related securities
in the future at a time and price that we deem appropriate.
The Company is considered a “smaller
reporting company” and is exempt from certain disclosure requirements, which could make our common stock less
attractive to potential investors.
Rule 12b-2 of the Securities Exchange Act of 1934
("Exchange Act") defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed
issuer, or a majority-owned subsidiary of a parent, that is not a smaller reporting company, and that had a public float of less than
$250 million as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide
number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold,
or the average of the bid and asked prices of common equity, in the principal market for the common equity.
As a “smaller reporting company,”
we are not required and may not include a Compensation Discussion and Analysis section in our proxy statements; we provide only three
years of business information; and have other “scaled” disclosure requirements that are less comprehensive than issuers that
are not “smaller reporting companies,” which could make our stock less attractive to potential investors and could make it
more difficult for shareholders to sell their shares.
We have no current plan to pay dividends on our common stock,
and investors may lose the entire amount of their investment.
We have no current plans to pay dividends
on our common stock; therefore, investors will not receive any funds absent a sale of their shares. We cannot assure investors of a positive
return on their investment when they sell their shares, nor can we assure that investors will not lose the entire amount of their investment.
GENERAL RISK FACTORS
We will continue to incur significant costs as a result of operating
as a public company, and our management may be required to devote substantial time to compliance initiatives that ultimately could have
a material adverse effect on our financial condition and results of operations.
As a public company, we expect to continue to
incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented
by the SEC, have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure
and financial controls as well as mandating certain corporate governance practices. Our management and other personnel will continue to
devote a substantial amount of time and financial resources to these compliance initiatives.
As a “smaller reporting company” we
are able to take advantage of certain exceptions to disclosure requirements, including, but not limited to, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements and the exemption from providing a “Compensation Discussion
and Analysis” section in our proxy statements; providing only three years of business information; and other “scaled”
disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies.
If we fail to staff our accounting and finance
function adequately or maintain internal control systems adequate to meet the demands that are placed upon us as a public company, we
may be unable to report our financial results accurately or in a timely manner and our business and stock price may suffer. The costs
of being a public company, as well as diversion of management’s time and attention, may have a material adverse effect on our future
business, financial condition and results of operations.
Changes in U.S. Generally Accepted Accounting Principles (“GAAP”)
could adversely affect our financial results and may require significant changes to our internal accounting systems and processes.
We prepare our consolidated financial
statements in conformity with GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board
(“FASB”), the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. The
FASB periodically issues new accounting standards on a variety of topics. For information regarding new accounting standards, please
refer to Note 1 and 2, “Description of Business and Significant Accounting Policies – Recent Accounting
Pronouncements,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial
Statements and Supplementary Data,” of this Annual Report on Form 10-K. These and other such standards generally result
in different accounting principles, which may significantly impact our reported results or could result in variability of our
financial results.
In preparing our financial statements we make certain assumptions,
judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly
impact our financial results.
We make assumptions, judgments and
estimates for a number of items, including the fair value of financial instruments, long-lived assets and other intangible assets;
the realizability of deferred tax assets; the recognition of revenue and the fair value of stock option awards; and others. We also
make assumptions, judgments and estimates in determining the accruals for revenue recognition, product warranties, employee-related
liabilities, including commissions and variable compensation, and in determining the allowance or provisions for uncertain tax
positions, doubtful accounts, excess or obsolete inventory, and legal contingencies. These assumptions, judgments and estimates are
drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of
the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could
significantly impact our financial results.
Our business could be negatively affected as a result of actions
of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, shareholder activists have become
involved in numerous public companies. Shareholder activists frequently propose to involve themselves in the governance, strategic direction
and operations of the Company. Such proposals may disrupt our business and divert the attention of our Board of Directors, management
and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of
potential business opportunities, interfere with our ability to execute our strategic plan, be exploited by our competitors, cause concern
to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all
of which could adversely affect our business. A proxy contest for the election of directors at our annual meeting could also require us
to incur significant legal fees and proxy solicitation expenses. In addition, actions of activist shareholders may cause significant fluctuations
in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying
fundamentals and prospects of our business.