UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended:
OR
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SONO-TEK CORPORATION
INDEX
| Page | |
| Part I - Financial Information | |
| Item 1 – Condensed Consolidated Financial Statements: | 1 - 4 |
| Condensed Consolidated Balance Sheets – November 30, 2022 (Unaudited) and February 28, 2022 | 1 |
| Condensed Consolidated Statements of Income – Nine and Three Months Ended November 30, 2022 and 2021 (Unaudited) | 2 |
| Condensed Consolidated Statements of Stockholders’ Equity – Nine and Three Months Ended November 30, 2022 and 2021 (Unaudited) | 3 |
| Condensed Consolidated Statements of Cash Flows – Nine Months Ended November 30, 2022 and 2021 (Unaudited) | 4 |
| Notes to Unaudited Condensed Consolidated Financial Statements | 5 - 11 |
| Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 –19 |
| Item 3 – Quantitative and Qualitative Disclosures about Market Risk | 20 |
| Item 4 – Controls and Procedures | 20 |
| Part II - Other Information | 21 |
| Signatures and Certifications | 22 |
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| November 30, | ||||||||
| 2022 | February 28, | |||||||
| (Unaudited) | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts
receivable (less allowance of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Land | ||||||||
| Buildings, net | ||||||||
| Equipment, furnishings and building improvements, net | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax asset | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value; shares authorized, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated earnings | ||||||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 19,483,944 | $ | 17,625,534 | ||||
See notes to unaudited condensed consolidated financial statements.
1
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Nine Months Ended November 30, | Three Months Ended November 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and product development costs | ||||||||||||||||
| Marketing and selling expenses | ||||||||||||||||
| General and administrative costs | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Income | ||||||||||||||||
| Interest and Dividend Income | ||||||||||||||||
| Net unrealized loss on marketable securities | ( | ) | ( | ) | ||||||||||||
| Paycheck Protection Program Loan Forgiveness | ||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||
| Income Tax Expense | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Basic Earnings Per Share | $ | $ | $ | $ | ||||||||||||
| Diluted Earnings Per Share | $ | $ | $ | $ | ||||||||||||
| Weighted Average Shares - Basic | ||||||||||||||||
| Weighted Average Shares - Diluted | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
2
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three and Nine Months Ended November 30, 2022
| Common Stock Par Value $.01 | Additional Paid – In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, February 28, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||
| Balance, May 31, 2022 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Net Income | ||||||||||||||||||||
| Balance, August 31, 2022 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, November 30, 2022 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
Three and Nine Months Ended November 30, 2021
| Common Stock Par Value $.01 | Additional Paid – In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, February 29, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, May 31, 2021 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, August 31, 2021 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, November 30, 2021 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
3
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Unaudited | ||||||||
| Nine Months Ended November 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation expense | ||||||||
| Inventory reserve | ( | ) | ( | ) | ||||
| Paycheck Protection Program Loan Forgiveness | ( | ) | ||||||
| Unrealized loss on marketable securities | ||||||||
| Deferred tax expense | ( | ) | ||||||
| Decrease (Increase) in: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| (Decrease) Increase in: | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Customer deposits | ||||||||
| Income taxes payable | ||||||||
| Net Cash Provided by Operating Activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment, furnishings and leasehold improvements | ( | ) | ( | ) | ||||
| (Purchase) Sale of marketable securities - net | ( | ) | ||||||
| Net Cash (Used in) Provided by Investing Activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW DISCLOSURE: | ||||||||
| Interest paid | $ | $ | ||||||
| Income Taxes Paid | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
4
SONO-TEK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2022 and 2021
NOTE 1: BUSINESS DESCRIPTION
Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporated in New York on March 21, 1975. We are the world leader in the design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to add functional properties, protect or strengthen surfaces on parts and components for the microelectronics/electronics, alternative energy, medical, industrial and emerging research & development/other markets. We design and manufacture custom-engineered ultrasonic coating systems incorporating our patented technology, in combination with strong applications engineering knowledge, to assist our customers in achieving their desired coating solutions.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended February 28, 2022 (“fiscal year 2022”) contained in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on May 24, 2022. The Company’s current fiscal year ends on February 28, 2023 (“fiscal 2023”).
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying unaudited condensed consolifdated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC (“SIP”) in conformity with generally accepted accounting principles in the United States (“GAAP”). SIP operates as a real estate holding company for the Company’s real estate operations. All intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments - The Company applies Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best information available in the circumstances.
The carrying amounts of financial instruments reported in the accompanying unaudited condensed consolidated financial statements for current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of the financial instruments.
The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:
Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.
5
Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.
The fair values of financial assets of the Company were determined using the following categories at November 30, 2022 and February 28, 2022, respectively:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable Securities – November 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Marketable Securities – February 28, 2022 | $ | $ | $ | $ | ||||||||||||
Marketable Securities include mutual funds, certificates of deposit and US Treasury securities, totaling $8,073,293 and $5,867,990 that are considered to be highly liquid and easily tradeable as of November 30, 2022 and February 28, 2022, respectively. Mutual funds and US Treasury securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 and certificates of deposit are classified as Level 2 within the Company’s fair value hierarchy.
Income Taxes - The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company uses a recognition threshold and a measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of November 30, 2022 and February 28, 2022, there were no accruals for uncertain tax positions.
Inventories - Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method for raw materials, subassemblies and work-in-progress and the specific identification method for finished goods. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market conditions.
Management Estimates - The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently in the process of its analysis of the impact of this guidance on its consolidated financial statements and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
Other than Accounting Standards Update ASU 2016-13 discussed above, all new accounting pronouncements issued but not yet effective have been deemed to be not applicable to the Company. Hence, the adoption of these new accounting pronouncements, once effective, is not expected to have an impact on the Company.
6
Product Warranty - Expected future product warranty expense is recorded when the product is sold.
Revenue Recognition - The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
| · | Identification of the contract, or contracts, with a customer | |
| · | Identification of the performance obligations in the contract | |
| · | Determination of the transaction price | |
| · | Allocation of the transaction price to the performance obligations in the contract | |
| · | Recognition of revenue when, or as, performance obligations are satisfied |
Uncertainties - Since early 2020, when the World Health Organization established the transmissible and pathogenic coronavirus a global pandemic, there have been business slowdowns. The outbreak of such a communicable disease has resulted in a widespread health crisis which has adversely affected general commercial activity and the economies and financial markets of many countries, including the United States. As the outbreak of the disease has continued through fiscal 2022 and into fiscal 2023, the measures taken by the governments of impacted countries have, at times, adversely affected the Company’s business, financial condition, and results of operations. Pandemic related supply shortages and increased energy expenses resulting from the war in Ukraine have recently created worldwide inflationary pressures which may have a material adverse effect on the Company's business, financial condition, and results of operations if such factors continue unabated.
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 manufacture electronic parts that we include in our products.
NOTE 3: REVENUE RECOGNITION
A majority of the Company’s sales revenue is derived primarily from short term contracts with customers which are primarily in effect for less than twelve months. Sales revenue from manufactured equipment transferred at a single point in time accounts for a majority of the Company’s revenue.
Sales revenue is recognized when control of the Company’s manufactured equipment is transferred to its customers, in an amount that reflects the consideration the Company expects to receive based upon the agreed transaction price. The Company’s performance obligations are satisfied when its customers take control of the purchased equipment, which is based on the contract terms. Based on prior experience, the Company reasonably estimates its sales returns and warranty reserves. Sales are presented net of discounts and allowances. Discounts and allowances are determined when a sale is negotiated. The Company does not grant its customers or independent representatives, the ability to return equipment nor does it grant price adjustments after a sale is complete.
The Company does not capitalize any sales commission costs related to the acquisition of a contract. All commissions related to a performance obligation that are satisfied at a point in time are expensed when the customer takes control of the purchased equipment.
The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one-year or less.
At November 30, 2022, the Company had received $
7
At February 28, 2022, the Company had received $
The Company’s sales revenue by product line is as follows:
| Three Months Ended November 30, |
Nine Months Ended November 30, |
||||||||||||||||||||
| 2022 | % of total | 2022 | % of total | 2021 | % of total | 2021 | % of total | ||||||||||||||
| Fluxing Systems | $ | $ | $ | $ | |||||||||||||||||
| Integrated Coating Systems | |||||||||||||||||||||
| Multi-Axis Coating Systems | |||||||||||||||||||||
| OEM Systems | |||||||||||||||||||||
| Other | |||||||||||||||||||||
| TOTAL | $ | $ | $ | $ | |||||||||||||||||
NOTE 4: INVENTORIES
Inventories consist of the following:
| November 30, | February 28, | |||||||
| 2022 | 2022 | |||||||
| Raw materials and subassemblies | $ | $ | ||||||
| Finished goods | ||||||||
| Work in process | ||||||||
| Net inventories | $ | $ | ||||||
The Company maintains an allowance for slow moving inventory for raw materials and finished goods. The recorded allowances
at November 30, 2022 and February 28, 2022, totaled $
NOTE 5: STOCK OPTIONS
Under the 2013 Stock Incentive Plan ("2013 Plan"), options can be granted to officers, directors, consultants and employees of the Company and its subsidiaries to purchase up to shares of the Company's common stock. Under the 2013 Plan options expire ten years after the date of grant. As of November 30, 2022, there were options outstanding under the 2013 Plan, of which are vested.
During the three months ended November 30, 2022,
During the nine months ended November 30, 2022,
The Company accounts for stock-based compensation under ASC 718, “Share Based Payments.” which requires companies to expense the value of employee stock options and similar awards.
During the nine months ended November 30, 2022, the Company granted options to acquire shares to employees exercisable at prices ranging from $ to $ and options to acquire shares to non-employee members of the board of directors with an exercise price of $. The options granted to employees and directors vest over years and expire in years. The options granted during the first nine months of fiscal 2023 had a combined weighted average grant date fair value of $ per share.
8
| Nine Months Ended November 30, 2022 | ||||
| Expected Life | - years | |||
| Risk free interest rate | % - % | |||
| Expected volatility | % - % | |||
| Expected dividend yield | % | |||
Total compensation related to non-vested options not yet recognized as of November 30, 2022 was $ and will be recognized over the next years based on vesting date.
For the three and nine months ended November 30, 2022 and 2021, net income and earnings per share reflect the actual deduction for stock-based compensation expense. For the three months ended November 30, 2022 and 2021, the Company recognized approximately $ and $ of stock based compensation, respectively. For the nine months ended November 30, 2022 and 2021, the Company recognized approximately $ and $ of stock based compensation, respectively. Stock based compensation is included in general and administrative expenses on the unaudited consolidated statements of income.
| Nine Months Ended November 30, | Three Months Ended November 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator for basic and diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Denominator for basic earnings per share – weighted average | ||||||||||||||||
| Effects of dilutive securities | ||||||||||||||||
| Stock options for employees and directors | ||||||||||||||||
| Denominator for diluted earnings per share | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
NOTE 8: REVOLVING LINE OF CREDIT
The Company has a $
As of November 30, 2022, $
9
NOTE 9: CUSTOMER CONCENTRATIONS AND FOREIGN SALES
Export sales to customers located outside the United States and Canada were approximately as follows:
| Nine Months Ended November 30, | Three Months Ended November 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Asia Pacific (APAC) | $ | $ | $ | $ | ||||||||||||
| Europe, Middle East, Asia (EMEA) | ||||||||||||||||
| Latin America | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
In the first nine months of fiscal 2023 and fiscal 2022, sales to foreign customers accounted
for approximately $
During the third quarter of fiscal 2023 and fiscal 2022, sales to foreign customers accounted
for approximately $
The Company had two customers which accounted for
The Company had three customers which accounted for
10
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, news releases, and other written and oral statements. These “forward-looking statements” are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations and could cause actual results to differ materially. These factors include, among other considerations, general economic and business conditions; political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our products; inflationary and supply chain pressures; the duration and scope of the COVID-19 pandemic; the extent and duration of the pandemic’s adverse effect on economic and social activity, consumer confidence, discretionary spending and preferences, labor and healthcare costs, and unemployment rates, any of which may reduce demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us; our ability to sell and provide our services and products, including as a result of continued pandemic related travel restrictions, mandatory business closures, and stay-at home or similar orders; any temporary reduction in our workforce, closures of our offices and facilities and our ability to adequately staff and maintain our operations resulting from the pandemic; the ability of our customers and suppliers to continue their operations as result of the pandemic, which could result in terminations of contracts, losses of revenue; the recovery of the Electronics/Microelectronics and Medical markets following COVID-19 related slowdowns; and further adverse effects to our supply chain; maintenance of increased order backlog, including effects of any COVID-19 related cancellations; the imposition of tariffs; timely development and market acceptance of new products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the ability to enforce patents; maintenance of operating leverage; maintenance of increased order backlog; consummation of order proposals; completion of large orders on schedule and on budget; continued sales growth in the medical and alternative energy markets; successful transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems; and realization of quarterly and annual revenues within the forecasted range of sales guidance.
We undertake no obligation to update any forward-looking statement.
Overview
Founded in 1975, Sono-Tek Corporation designs and manufactures ultrasonic coating systems that apply precise, thin film coatings to a multitude of products for the microelectronics/electronics, alternative energy, medical and industrial markets, including specialized glass applications in construction and automotive. We also sell our products to emerging research and development and other markets. 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.
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 thin layers of functional or protective materials over surfaces such as glass or metals. Our 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 believe product superiority is imperative and that it is attained through the extensive experience we have in the coatings industry, our proprietary manufacturing know-how and skills and the unique work force we have built over the years. Our growth strategy is to leverage our innovative technologies, proprietary know-how, unique talent and experience, and global reach to further advance the use of ultrasonic coating technologies for the microscopic coating of surfaces in a broader array of applications that enable better outcomes for our customers’ products and processes.
We are a global business with approximately 55% of our sales generated from outside the United States and Canada in the first nine months of fiscal 2023. Our direct sales team and our distributor and sales representative network are located in North America, Latin America, Europe and Asia. We continue to expand our sales capabilities by increasing the size of our direct sales force and adding new distributors and sales representatives. In addition, we have established testing labs at our distribution partner sites in China, Taiwan, Germany, Turkey, Korea and Japan, while also expanding our first testing lab that is co-located with our manufacturing facilities in New York. These labs provide significant value for demonstrating to prospective customers the capabilities of our equipment and enabling us to develop custom solutions to meet their needs. Providing customers that visit our labs with a high level of application engineering expertise to develop their unique coating processes is an area of focus in our sales efforts, as we continually expand Sono-Tek’s services to best support the needs of our customers.
11
Over the last decade, we have shifted our business from primarily selling our ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems to original equipment manufacturers (“OEMs”). This strategy has resulted in significant growth of our average unit selling price; with our larger machines often selling for over $300,000 and system prices sometimes reaching over $1,000,000. As a result of this transition, we have broadened our addressable market and we believe that we can grow sales on a larger scale. We expect that we will experience wide variations in both order flow and shipments from quarter to quarter in part due to the increase of larger orders in our sales mix.
Third Quarter Fiscal 2023 Highlights (compared with the third quarter of fiscal 2022 unless otherwise noted) We refer to the three-month periods ended November 30, 2022 and 2021 as the third quarter of fiscal 2023 and fiscal 2022, respectively.
| · | Net sales were $3,586,000, a decrease of $833,000 or 19%, a result of supply chain challenges which include the delayed shipments of five machines with a total value of $487,000. Net sales declined by 5% sequentially from $3,763,000 reported in the second quarter of fiscal 2023. | |
| • | Gross Profit was $1,824,000, a decrease of $335,000 or 16%, due to the sales decrease, partially offset by a favorable product mix and lower installation costs, which caused the gross margin to increase 200 basis points to 51%. | |
| • | Operating expenses increased 3% to $1,721,000, driven by a 25% increase in Research & Development expenditures to $520,000. | |
| • | Operating Income and Income Before Taxes were $103,000 and $133,000, respectfully, as a result of lower Gross Profit and Increased Operating Expenses. | |
| • | Backlog increased 14% to $6,223,000 on November 30, 2022 compared to backlog of $5,325,000 on February 28, 2022 (the end of fiscal year 2022). |
Nine Months Fiscal 2023 Highlights (compared with the first nine months of fiscal 2022 unless otherwise noted) We refer to the nine-month periods ended November 30, 2022 and 2021 as the first nine-months of fiscal 2023 and fiscal 2022, respectively.
| • | Net Sales were $11,401,000, a decrease of $733,000 or 6%, due to a number of delayed shipments resulting from supply chain disruptions, and a significant dip in sales to Asia from the impact of the strong US dollar on Sono-Tek’s regional customers. | |
| • | Gross Profit was $5,827,000, a decrease of $230,000 or 4%, due to the decrease in revenue, partially offset by a favorable product mix which caused the gross margin to increase 120 basis points to 51%. | |
| • | Operating expenses increased 8% to $5,165,000, driven by a 24% increase in Research & Development expenditures to $1,543,000. | |
| • | Operating Income and Income Before Taxes were $662,000 and $686,000, respectfully, as a result of lower Gross Profit and Increased Operating Expenses. | |
| • | As of November 30, 2022, Sono-Tek had $11,249,000 in cash, cash equivalents and marketable securities and no outstanding debt. |
12
RESULTS OF OPERATIONS
Sales:
Product Sales
| Three Months Ended November 30, |
Change | Nine Months Ended November 30, |
Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| Fluxing Systems | $ | 252,000 | $ | 104,000 | 148,000 | 142% | $ | 960,000 | $ | 579,000 | 381,000 | 66% | ||||||||||||||||||||
| Integrated Coating Systems | 193,000 | 60,000 | 133,000 | 222% | 787,000 | 780,000 | 7,000 | 1% | ||||||||||||||||||||||||
| Multi-Axis Coating Systems | 1,493,000 | 2,721,000 | (1,228,000 | ) | (45% | ) | 4,962,000 | 6,692,000 | (1,730,000) | (26% | ) | |||||||||||||||||||||
| OEM Systems | 503,000 | 637,000 | (134,000 | ) | (21% | ) | 1,819,000 | 1,808,000 | 11,000 | 1% | ||||||||||||||||||||||
| Other | 1,145,000 | 897,000 | 248,000 | 28% | 2,873,000 | 2,275,000 | 598,000 | 26% | ||||||||||||||||||||||||
| TOTAL | $ | 3,586,000 | $ | 4,419,000 | (833,000 | ) | (19% | ) | $ | 11,401,000 | $ | 12,134,000 | (733,000) | (6% | ) | |||||||||||||||||
Sales decreased by 19% and 6% during the third quarter and first nine months of fiscal 2023, respectively.
Sales of multi-axis coating systems decreased 45% and 26% during the third quarter and first nine months of fiscal 2023, respectively. The significant revenue decline in multi-axis coating systems was greatly impacted by supply chain shortages for electronic components used in this product line. We are anticipating supply chain challenges for this product line to continue through the remainder of fiscal 2023.
Fluxing system sales increased 142% year over year in the third quarter of fiscal 2023 and 66% for the first nine months of fiscal 2023. This strong growth was positively impacted by our newly launched SelectaFlux X2 product being implemented at several large printed circuit board contract manufacturers, and a transition by several of our customers that are moving manufacturing operations from China to other countries where they are setting up new manufacturing lines requiring new spray fluxers.
Market Sales
| Three Months Ended November 30, |
Change | Nine Months Ended November 30, |
Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| Electronics/Microelectronics | $ | 1,307,000 | $ | 898,000 | 409,000 | 46% | $ | 4,316,000 | $ | 4,605,000 | (289,000 | ) | (6% | ) | ||||||||||||||||||
| Medical | 877,000 | 1,604,000 | (727,000 | ) | (45% | ) | 3,350,000 | 3,418,000 | (68,000 | ) | (2% | ) | ||||||||||||||||||||
| Alternative Energy | 720,000 | 1,459,000 | (739,000 | ) | (51% | ) | 2,027,000 | 2,848,000 | (821,000 | ) | (29% | ) | ||||||||||||||||||||
| Emerging R&D and Other | 102,000 | 256,000 | (154,000 | ) | (60% | ) | 322,000 | 691,000 | (369,000 | ) | (53% | ) | ||||||||||||||||||||
| Industrial | 580,000 | 202,000 | 378,000 | 187% | 1,386,000 | 572,000 | 814,000 | 142% | ||||||||||||||||||||||||
| TOTAL | $ | 3,586,000 | $ | 4,419,000 | (833,000 | ) | (19% | ) | $ | 11,401,000 | $ | 12,134,000 | (733,000 | ) | (6% | ) | ||||||||||||||||
Sales to the industrial market recorded growth of 187% in the third quarter of fiscal 2023, and 142% for the first nine months of fiscal 2023. Sales to the industrial market were positively impacted by three machines valued at $216,000 each that shipped to an industrial manufacturing company, two in the third quarter of fiscal 2023 and one in the first quarter. Three additional machines of the same value are presently in our backlog and are projected to ship to the same company in the fourth quarter of fiscal 2023.
The medical market sales decline reflects the shipment of a large medical system to China in the comparable period of the prior fiscal year.
Sales to the Alternative Energy market and R&D market decreased by 29% and 53%, respectively, for the first nine months of fiscal 2023. The decline was primarily due to, supply chain challenges that have resulted in delayed shipments, caused by the delayed receipt of critical electronic components for our multi-axis coating systems which are commonly purchased by both of these market sectors.
13
Geographic Sales
| Three Months Ended November 30, |
Change | Nine Months Ended November 30, |
Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| U.S. & Canada | $ | 1,585,000 | $ | 988,000 | 597,000 | 60% | $ | 5,176,000 | $ | 3,769,000 | 1,407,000 | 37% | ||||||||||||||||||||
| Asia Pacific (APAC) | 834,000 | 1,901,000 | (1,067,000 | ) | (56% | ) | 2,367,000 | 4,754,000 | (2,387,000 | ) | (50% | ) | ||||||||||||||||||||
| Europe, Middle East, Asia (EMEA) | 731,000 | 1,287,000 | (556,000 | ) | (43% | ) | 2,557,000 | 2,723,000 | (166,000 | ) | (6% | ) | ||||||||||||||||||||
| Latin America | 436,000 | 243,000 | 193,000 | 79% | 1,301,000 | 888,000 | 413,000 | 47% | ||||||||||||||||||||||||
| TOTAL | $ | 3,586,000 | $ | 4,419,000 | (833,000 | ) | (19% | ) | $ | 11,401,000 | $ | 12,134,000 | (733,000 | ) | (6% | ) | ||||||||||||||||
In the third quarter of fiscal 2023, approximately 56% of sales originated outside of the United States and Canada compared with 78% in the prior year period.
In the first nine months of fiscal 2023, approximately 55% of sales originated outside of the United States and Canada compared with 69% in the prior year period.
Strong growth in sales from the US and Latin America was recorded in both the third quarter of fiscal 2023 and the first nine months of fiscal 2023. Sales to Latin America were positively influenced by increased sales of our spray fluxing systems being sold to our Mexico-based customers, a result of several electronic manufacturers shifting operations away from China and sending these manufacturing lines to Mexico. US sales were positively influenced by a continued trend of US companies to onshore a greater percentage of manufacturing operations to combat supply chain challenges and reduce risk associated with political instabilities in several countries.
The large decrease in APAC sales was the result of a strong US dollar that impacted the pricing and ordering pattern for Sono-Tek customers in APAC, as well as the impact of COVID-19 lockdowns in China.
Gross Profit:
| Three Months Ended November 30, |
Change | Nine Months Ended November 30, |
Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| Net Sales | $ | 3,586,000 | $ | 4,419,000 | (833,000 | ) | (19% | ) | $ | 11,401,000 | $ | 12,134,000 | (733,000 | ) | (6% | ) | ||||||||||||||||
| Cost of Goods Sold | 1,762,000 | 2,260,000 | (498,000 | ) | (22% | ) | 5,574,000 | 6,077,000 | (503,000 | ) | (8% | ) | ||||||||||||||||||||
| Gross Profit | $ | 1,824,000 | $ | 2,159,000 | (335,000 | ) | (16% | ) | $ | 5,827,000 | $ | 6,057,000 | (230,000 | ) | (4% | ) | ||||||||||||||||
| Gross Profit % | 51% | 49% | 51% | 50% | ||||||||||||||||||||||||||||
For the third quarter of fiscal 2023, gross profit decreased $335,000, or 16%, compared with the third quarter of fiscal 2022. The gross profit margin was 51% compared with 49% for the prior year period. The increase in the gross profit margin for the third quarter of fiscal 2023 is due to increased sales of products with higher sales margins.
Gross profit decreased $230,000, or 4%, to $5,827,000 for the first nine months of fiscal 2023 compared with $6,057,000 in the first nine months of fiscal 2022. The gross profit margin was 51% compared with 50% for the prior year period. The improvement in the gross profit margin is due to a sales mix with higher margin sales combined with lower shipment related accruals and favorable installation costs.
Operating Expenses:
| Three Months Ended November 30, |
Change | Nine Months Ended November 30, |
Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| Research and product development | $ | 520,000 | $ | 417,000 | 103,000 | 25% | $ | 1,543,000 | $ | 1,244,000 | 299,000 | 24% | ||||||||||||||||||||
| Marketing and selling | 793,000 | 845,000 | (52,000 | ) | (6% | ) | 2,359,000 | 2,350,000 | 9,000 | 0% | ||||||||||||||||||||||
| General and administrative | 408,000 | 405,000 | 3,000 | 1% | 1,263,000 | 1,181,000 | 82,000 | 7% | ||||||||||||||||||||||||
| Total Operating Expenses | $ | 1,721,000 | $ | 1,667,000 | $ | 54,000 | 3% | $ | 5,165,000 | $ | 4,775,000 | $ | 390,000 | 8% | ||||||||||||||||||
14
Research and Product Development:
Research and product development costs increased in the third quarter and the first nine months of fiscal 2023 due to increased salaries and research and development materials and supplies, which are used in the focused growth initiatives we continue to implement. In addition, in the third quarter of fiscal 2022, some of our personnel, previously assigned to research and development projects, were assigned to specific customer sales orders and the associated costs were recorded in inventory, as incurred.
Marketing and Selling:
In the third quarter of fiscal 2023 we experienced decreases in commissions, salaries and related costs. These decreases were partially offset by increased travel and trade show expenses.
Marketing and selling costs increased slightly in the first nine months of fiscal 2023. During this period, commissions decreased due to the decrease in sales. This decrease was partially offset by an increase in travel and trade show expenses. The increased travel and trade show expenses are a result of the global lifting of COVID-19 restrictions. We believe that these expenses will level out over time and return to prior COVID-19 amounts.
General and Administrative:
In the third quarter of fiscal 2023 we experienced a decrease in professional fees which was partially offset by an increase in stock-based compensation expense.
For the first nine months of fiscal 2023, we experienced decreases in professional fees and corporate expenses. These decreases were partially offset by an increase in stock-based compensation expense. The increase in stock-based compensation expense in the first nine months of fiscal 2023 is due to option awards that were issued in the prior fiscal year. Option awards are expensed over three years based on vesting.
Operating Income:
Operating income decreased $388,000 or 79%, to $103,000 in the third quarter of fiscal 2023 compared with $491,000 for the third quarter of fiscal 2022 due to the decrease in gross profit. Operating margin for the third quarter of fiscal 2023 was 2.8% compared with 11.1% in the prior year period.
For the first nine months of fiscal 2023, operating income decreased $620,000 or 48%, to $662,000 compared with $1,282,000 for the first nine months of fiscal 2022, due to the decrease in gross profit. Operating margin for the first nine months of fiscal 2023 was 5.8% compared with 10.6% in the first nine months of fiscal 2022.
Interest and Dividend Income:
For the third quarter of fiscal 2023 we recorded interest and dividend income of $39,000 compared to $2,000 for the prior year period. In the first nine months of fiscal 2023 interest and dividend income increased $52,000 to $65,000 compared with $13,000 for the first nine months of fiscal 2022. The increase in the first nine months of fiscal 2023 is due to the increase in market rates. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At November 30, 2022, the majority of our holdings are rated at or above investment grade.
Income Tax Expense:
We recorded income tax expense of $28,000 for the third quarter of fiscal 2023 compared with $117,000 for the third quarter of fiscal 2022. For the first nine months of fiscal 2023 we recorded income tax expense of $113,000 compared with $314,000 for the first nine months of fiscal 2022.
The decrease in income tax expense in the third quarter and first nine months of fiscal 2023 is due to the decrease in income before income taxes combined with the application of available research and development tax credits partially offset by an increase in permanent timing differences.
Paycheck Protection Program Loan Forgiveness:
In fiscal year 2021, the Company obtained a loan under the Paycheck Protection Program (“PPP”) in the amount of $1,001,640. In the first quarter of fiscal 2022, the Company received notice from the SBA that the loan had been forgiven in full and recorded a gain on forgiveness of $1,005,372, which is recorded on the condensed consolidated statements of income.
The gain on the forgiveness of the PPP Loan is a non-taxable event.
15
Net Income:
Net income decreased by $271,000 or 72% to $105,000 for the third quarter of fiscal 2023 compared with $376,000 for the third quarter of fiscal 2022. The decrease in net income during the third quarter is a result of a decrease in operating income combined with a decrease in income tax expense for the period.
Net income decreased by $1,414,000 or 71% to $573,000 for the first nine months of fiscal 2023 compared with $1,987,000 for the first nine months of fiscal 2022. The decrease in net income in the first nine months of fiscal 2023 is a result of a decrease in operating income and income tax expense combined with the PPP Loan forgiveness recorded in the prior year.
Impact of COVID-19
In December 2019, the COVID-19 outbreak occurred in China and has since spread to other parts of the world. On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak. Along with these declarations, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world. These actions include quarantines, social distancing and “stay-at-home” orders, travel restrictions, mandatory business closures and other mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations.
COVID-19 has also impacted various aspects of the supply chain as our suppliers experience similar business disruptions due to operating restrictions from government mandates. We continue to monitor procurement of raw materials and components used in the manufacturing, distribution and sale of our products, but continued disruptions in the supply chain due to COVID-19 may cause difficulty in sourcing materials or unexpected shortages or delays in delivery of raw materials and components, and may result in increased costs in our supply chain.
We are closely monitoring and assessing the impact of the pandemic on our business. The extent of the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted.
Given the inherent uncertainty surrounding COVID-19, the pandemic may continue to have an adverse impact on our business in the near term. Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, results of operations, cash flow, liquidity, and financial condition.
Liquidity and Capital Resources
Working Capital – Our working capital increased $521,000 to $11,303,000 at November 30, 2022 from $10,782,000 at February 28, 2022. The increase in working capital was mostly the result of the current period’s net income and noncash charges partially offset by purchases of equipment.
We aggregate cash and cash equivalents and marketable securities in managing our balance sheet and liquidity. For purposes of the following analysis, the total is referred to as “Cash.” At November 30, 2022 and February 28, 2022, our working capital included:
| November 30, 2022 | February 28, 2022 | Cash Increase (Decrease) | ||||||||||
| Cash and cash equivalents | $ | 3,176,000 | $ | 4,841,000 | $ | (1,665,000 | ) | |||||
| Marketable securities | 8,073,000 | 5,868,000 | 2,205,000 | |||||||||
| Total | $ | 11,249,000 | $ | 10,709,000 | $ | 540,000 | ||||||
16
The following table summarizes the accounts and the major reasons for the $540,000 increase in “Cash”:
| Impact on Cash | Reason | |||||
| Net income, adjusted for non-cash items | $ | 1,097,000 | ||||
| Accounts receivable increase | (349,000 | ) | Timing of cash receipts, based upon sales terms. | |||
| Inventories increase | (872,000 | ) | Required to support backlog and additional inventory purchases. | |||
| Equipment purchases | (414,000 | ) | Equipment and facilities upgrade. | |||
| Customer deposits increase | 581,000 | Received for new orders. | ||||
| Accounts payable and accrued expenses increase | 357,000 | Timing of disbursements. | ||||
| Other | (33,000 | ) | Timing of disbursements. | |||
| Prepaid and Other Assets decrease | 173,000 | Decreased prepaid expenses. | ||||
| Net increase in cash | $ | 540,000 | ||||
Stockholders’ Equity – Stockholders’ Equity increased $746,000 from $13,741,000 at February 28, 2022 to $14,487,000 at November 30, 2022. The increase is a result of the current period’s net income of $573,000 and $173,000 in additional equity related to stock-based compensation awards.
Operating Activities – We generated $995,000 of cash in our operating activities in the first nine months of fiscal 2023 compared with $1,812,000 of cash in the first nine months of fiscal 2022, a decrease of $817,000. The decrease was mostly the result of increases in accounts receivable and inventories offset by an increase in customer deposits.
Investing Activities – We used $2,659,000 in the first nine months of fiscal 2023 in our investing activities compared with cash generated of $929,000 in the first nine months of fiscal 2022. For the first nine months of fiscal years 2023 and 2022, we used $414,000 and $285,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first nine months of 2023, we invested $2,246,000 in marketable securities compared with $1,214,000 being provided by marketable securities in the first nine months of fiscal 2022.
Net Changes in Cash and Cash Equivalents – In the first nine months of fiscal 2023, our cash balance decreased by $1,665,000 as compared to an increase of $2,750,000 in the first nine months of fiscal 2022. In the first nine months of fiscal 2023, our operating activities generated $995,000 of cash. In addition, we invested $2,246,000 in marketable securities and used $414,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.
Backlog – Our backlog increased $898,000 or 14% to $6,223,000 at November 30, 2022 from $5,325,000 at February 28, 2022 and increased 23% from the $5,049,000 backlog at August 31, 2022, the end of the second quarter of fiscal 2023. The increase in backlog is due to the receipt of additional orders as well as the delay in shipments due to supply chain issues. Orders can be highly variable from quarter to quarter resulting in large fluctuations in backlog, as product shipments are systematically managed for both customer timing requirements and staffing management.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based upon the unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions and conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and may potentially result in materially different results under different assumptions and conditions. The Company believes that critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to the Company’s consolidated financial statements included in Form 10-K for the year ended February 28, 2022.
17
Accounting for Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. We use a recognition threshold and a measurement attribute for financial statement recognition and measurement tax positions taken or expected to be taken in a return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
Inventories - Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method for raw materials, subassemblies and work-in-progress and the specific identification method for finished goods. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market conditions.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
| · | Identification of the contract, or contracts, with a customer | |
| · | Identification of the performance obligations in the contract | |
| · | Determination of the transaction price | |
| · | Allocation of the transaction price to the performance obligations in the contract | |
| · | Recognition of revenue when, or as, performance obligations are satisfied |
Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 is a complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. ASC 718 requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
Impact of New Accounting Pronouncements
Accounting pronouncements issued but not yet effective have been deemed to be not applicable or the adoption of such accounting pronouncements is not expected to have a material impact on the financial statements of the Company.
18
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company does not issue or invest in financial instruments or derivatives for trading or speculative purposes. Substantially all of the operations of the Company are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk. All of our sales transactions are completed in US dollars.
Although the Company's assets included $3,176,000 in cash and $8,073,000 in marketable securities, the market rate risk associated with changing interest rates in the United States is not material.
ITEM 4 – Controls and Procedures
The Company has established and maintains “disclosure controls and procedures” (as those terms are defined in Rules 13a –15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”). Christopher L. Coccio, Chief Executive Officer (principal executive) and Stephen J. Bagley, Chief Financial Officer (principal accounting officer) of the Company, have evaluated the Company’s disclosure controls and procedures as of November 30, 2021. Based on this evaluation, they have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to Management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding timely disclosure.
In addition, there were no changes in the Company’s internal controls over financial reporting during the third fiscal quarter of 2023 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
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PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings |
| None | |
| Item 1A. | Risk Factors |
| There are no material changes from risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended February 28, 2022. | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| None | |
| Item 3. | Defaults Upon Senior Securities |
| None | |
| Item 4. | Mine Safety Disclosures |
| None | |
| Item 5. | Other Information |
| None | |
| Item 6. | Exhibits and Reports |
| 31.1 – 31.2 – Rule 13a - 14(a)/15d – 14(a) Certification | |
| 32.1 – 32.2 – Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101 – The financial information from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2022 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements. | |
| 104 – Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 17, 2023
| SONO-TEK CORPORATION | ||
| (Registrant) | ||
| By: | /s/ Christopher L. Coccio | |
| Christopher L. Coccio | ||
| Chief Executive Officer | ||
| By: | /s/ Stephen J. Bagley | |
| Stephen J. Bagley | ||
| Chief Financial Officer |
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