UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended:
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed
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| Smaller reporting company | |
| Emerging Growth company |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
| Outstanding as of January 10, 2022 | |
| Class | |
| Common Stock, par value $.01 per share |
SONO-TEK CORPORATION
INDEX
| Page | |
| Part I - Financial Information | |
| Item 1 – Condensed Consolidated Financial Statements: | 1 - 4 |
| Condensed Consolidated Balance Sheets – November 30, 2021 (Unaudited) and February 28, 2021 | 1 |
| Condensed Consolidated Statements of Income – Nine and Three Months Ended November 30, 2021 and 2020 (Unaudited) | 2 |
| Condensed Consolidated Statements of Stockholders’ Equity – Nine and Three Months Ended November 30, 2021 and 2020 (Unaudited) | 3 |
| Condensed Consolidated Statements of Cash Flows – Nine Months Ended November 30, 2021 and 2020 (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, | ||||||||
| 2021 | February 28, | |||||||
| (Unaudited) | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable (less allowance of $56,123) | ||||||||
| Inventories, net | ||||||||
| 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 | ||||||||
| Long term debt, less current maturities | ||||||||
| 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 | $ | $ | ||||||
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, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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 Expense | ( | ) | ( | ) | ||||||||||||
| Interest and Dividend Income | ||||||||||||||||
| Other Income | ||||||||||||||||
| 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, 2021
| Common
Stock Par Value $.01 | Additional Paid – In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, February 28, 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) | $ | $ | $ | $ | ||||||||||||||||
Three and Nine Months Ended November 30, 2020
| Common
Stock Par Value $.01 | Additional Paid – In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, February 29, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, May 31, 2020 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, August 31, 2020 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, November 30, 2020 (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, | ||||||||
| 2021 | 2020 | |||||||
| 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 | ( | ) | ||||||
| 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 | ( | ) | ( | ) | ||||
| Capital expenditure grant proceeds | ||||||||
| Sale of marketable securities | ||||||||
| Net Cash Provided by Investing Activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from note payable | ||||||||
| Repayment of long term debt | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ||||||||
| NET 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, 2021 and 2020
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, 2021 (“fiscal year 2021”) contained in the Company’s 2021 Annual Report on Form 10-K filed with the SEC on May 28, 2021. The Company’s current fiscal year ends on February 28, 2022 (“fiscal 2022”).
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable, net - In the normal course of business, the Company extends credit to customers. Accounts receivable, less the allowance for doubtful accounts, reflect the net realizable value of receivables and approximate fair value. The Company records a bad debt expense/allowance based on management’s estimate of uncollectible accounts. All outstanding accounts receivable accounts are reviewed for collectability on an individual basis.
Cash and Cash Equivalents - Cash and cash equivalents consist of money market mutual funds, short term commercial paper and short-term certificates of deposit with original maturities of 90 days or less.
Consolidation - The accompanying unaudited condensed consolidated 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.
Equipment, Furnishings and Leasehold Improvements - Equipment, furnishings
and leasehold improvements are stated at cost. Depreciation of equipment and furnishings is computed by use of the
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.
5
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.
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, 2021 and February 28, 2021, respectively:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable Securities – November 30, 2021 | $ | $ | $ | $ | ||||||||||||
| Marketable Securities – February 28, 2021 | $ | $ | $ | $ | ||||||||||||
Marketable Securities include mutual funds, certificates of deposit
and US Treasury securities, totaling $
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, 2021 and February 28, 2021, there were no uncertain tax positions.
Intangible Assets - Include costs of patent applications which are
deferred and charged to operations over years for domestic patents and years for foreign patents. The accumulated amortization
of patents is $
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.
Land and Buildings - Land and buildings are stated at cost. Buildings are being depreciated by use of the straight-line method based on an estimated useful life of forty years.
Long-Lived Assets - The Company periodically evaluates the carrying value of long-lived assets, including intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment losses were identified or recorded in the nine months ended November 30, 2021 and November 30, 2020 on the Company’s long-lived assets.
6
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 December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU became effective for the Company on March 1, 2021 and did not have a significant impact on the Company’s consolidated financial statements.
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”) 2019-12 and 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.
Product Warranty - Expected future product warranty expense is recorded when the product is sold.
Research and Product Development Expenses - Research and product development expenses represent engineering and other expenditures incurred for developing new products, for refining the Company's existing products and for developing systems to meet unique customer specifications for potential orders or for new industry applications and are expensed as incurred.
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.
Shipping and Handling Costs - Shipping and handling costs are included in cost of sales in the accompanying unaudited consolidated statements of operations.
ASC 718 requires the recognition of the fair value of stock compensation expense on a straight line basis over the requisite service period, based on the terms of the award in net income. The Company accounts for forfeitures as they occur.
7
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, the measures taken by the governments of impacted countries have adversely affected the Company’s business, financial condition, and results of operations. The pandemic had a slightly adverse impact on sales and the demand for products in fiscal 2021, resulting in sales that were less than expected at the beginning of fiscal 2021.
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. The Company applies the transition practical expedient in paragraph ASC 606-10-65-1(f)(3) and does not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue.
At November 30, 2021, the Company had received $
At February 28, 2021, 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, | |||||||||||||||||||||||||||||||
| 2021 | % of total | 2020 | % of total | 2021 | % of total | 2020 | % 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, | |||||||
| 2021 | 2021 | |||||||
| Raw materials and subassemblies | $ | $ | ||||||
| Finished goods | ||||||||
| Work in process | ||||||||
| Total | ||||||||
| Less: Allowance | ( | ) | ( | ) | ||||
| Net inventories | $ | $ | ||||||
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 after the date of grant. As of November 30, 2021, there were options outstanding under the 2013 Plan, of which are vested.
8
Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"), until May 2013, options were available to 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. As of November 30, 2021, there were options outstanding and vested under the 2003 Plan, under which no additional options may be granted.
During the three months ended November 30, 2021,
The Company adopted 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, 2021, 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 and expire in . The options granted during the first nine months of fiscal 2022 had a combined weighted average grant date fair value of $ per share.
| Nine Months Ended November 30, 2021 | |
| 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, 2021 was $ and will be recognized over the next years based on vesting date.
At November 30, 2021, the intrinsic value of the outstanding stock options was approximately $.
For the three months ended November 30, 2021 and 2020, the Company recorded stock-based compensation expense of approximately $ and $, respectively. For the nine months ended November 30, 2021 and 2020, the Company recorded stock-based compensation expense of approximately $ and $, respectively. Such amounts are included in general and administrative expenses on the unaudited consolidated statements of income.
9
| Nine Months Ended November 30, | Three Months Ended November 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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: LONG TERM DEBT
Long-term debt consists of the following:
| November 30, | February 28, | |||||||
| 2021 | 2021 | |||||||
| Note Payable, bank, unsecured, Paycheck Protection Program funding, initially scheduled to be payable in monthly installments of principal and interest of $ | ||||||||
| Total long-term debt | $ | $ | ||||||
10
NOTE 9: REVOLVING LINE OF CREDIT
The Company has a $
As of November 30, 2021, $
NOTE 10: 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, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Asia Pacific (APAC) | $ | $ | $ | $ | ||||||||||||
| Europe, Middle East, Asia (EMEA) | ||||||||||||||||
| Latin America | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
In the first nine months of fiscal 2022 and fiscal 2021, sales to foreign customers accounted
for approximately $
During the third quarter of fiscal 2022 and fiscal 2021, sales to foreign customers accounted
for approximately $
The Company had three customers which accounted for
The Company had four customers which accounted for
11
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; 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 continued recovery of the Microelectronics, Medical and Alternative Energy 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; the continued strong sales of the multi-axis coatings systems; 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 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 69% of our sales generated from outside the United States and Canada in the first nine months of fiscal 2022. 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 visiting our labs with a high level of application engineering expertise to develop their unique coating processes is our focus, as we continually expand Sono-Tek’s services to best support the needs of our customers.
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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.
Third Quarter Fiscal 2022 Highlights (compared with the third quarter of fiscal 2021 unless otherwise noted) We refer to the three-month periods ended November 30, 2021 and 2020 as the third quarter of fiscal 2022 and fiscal 2021, respectively.
| · | Net sales were $4,419,000, up 15% or $592,000, driven by strong sales to Asia for medical device coating machines and clean energy coating systems. |
| · | Gross Profit increased 12% to $2,159,000 due to the increase in sales. |
| • | Gross Margin was 48.9% compared with 50.5% for the prior year period due to changes in product mix. |
| · | Operating income increased 10% to $491,000 due to the increase in gross profit, partially offset by increases in operating expenses. |
| · | Income before taxes increased 9% to $493,000. |
| • | Backlog on November 30, 2021 reached another record high of $6,505,000, an increase of 3% compared with backlog of $6,332,000 on August 31, 2021 (the end of the second quarter of fiscal 2022) and increased 69% compared to backlog of $3,851,000 on February 28, 2021 (the end of fiscal year 2021). |
Nine Months Fiscal 2022 Highlights (compared with the first nine months of fiscal 2021 unless otherwise noted) We refer to the nine-month periods ended November 30, 2021 and 2020 as the first nine-months of fiscal 2022 and fiscal 2021, respectively.
| • | Net Sales were $12,134,000, an increase of 13%, primarily driven by sales of several recently developed new products for the medical market as well as continued expansion of Sono-Tek systems used in the clean energy sector. |
| • | Gross Profit increased 18% to $6,057,000 due to higher sales and a favorable product mix. |
| • | Gross Margin expanded 230 basis points to 49.9% primarily due to a favorable product mix and lower than expected warranty and installation costs. |
| • | Operating Income increased 54% to $1,282,000 due to the increase in gross profit, partially offset by increases in operating expenses. |
| • | Income before taxes increased 50% to $1,295,000, excluding the benefit from PPP loan forgiveness of $1.0 million. |
| • | As of November 30, 2021, we had no outstanding debt. | |
| • | Cash (as defined), increased $1,537,000 from February 28, 2021, nearly half of which was due to an increase in customer deposits of $729,000, bringing total deposits to $1,896,00 at November 30, 2021. The increase in customer deposits is primarily due to our record backlog and the growing percentage of orders for costly, complex systems in the backlog. |
RESULTS OF OPERATIONS
Sales:
Product Sales
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||
| Fluxing Systems | $ | 104,000 | $ | 242,000 | (138,000 | ) | (57% | ) | $ | 579,000 | $ | 680,000 | (101,000 | ) | (15% | ) | ||||||||||||||||
| Integrated Coating Systems | 60,000 | 1,071,000 | (1,011,000 | ) | (94% | ) | 780,000 | 2,920,000 | (2,140,000 | ) | (73% | ) | ||||||||||||||||||||
| Multi-Axis Coating Systems | 2,721,000 | 1,249,000 | 1,472,000 | 118% | 6,692,000 | 4,147,000 | 2,545,000 | 61% | ||||||||||||||||||||||||
| OEM Systems | 637,000 | 523,000 | 114,000 | 22% | 1,808,000 | 1,177,000 | 631,000 | 54% | ||||||||||||||||||||||||
| Other | 897,000 | 742,000 | 155,000 | 21% | 2,275,000 | 1,812,000 | 463,000 | 26% | ||||||||||||||||||||||||
| TOTAL | $ | 4,419,000 | $ | 3,827,000 | 592,000 | 15% | $ | 12,134,000 | $ | 10,736,000 | 1,398,000 | 13% | ||||||||||||||||||||
We achieved sales growth of 15% and 13% during the third quarter and first nine months of fiscal 2022, respectively.
For the third quarter of fiscal 2022, sales of multi-axis coating systems were strong, increasing approximately $1.5 million or 118% year-over-year, driven by continued demand from the alternative clean energy sector for membrane coating machines, as well as sales of recently introduced new medical device coating systems, both of which use Sono-Tek multi-axis technology.
Integrated coatings systems sales decreased by approximately $1.0 million or 94%, in the third quarter. This was due to the shipments of two large orders in last year’s third quarter, for a textile coating machine and a solar cell coating machine, neither of which repeated in the current period.
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For the first nine months of the fiscal year, multi-axis coating systems showed the strongest growth, up approximately $2.5 million or 61%. Sono-Tek’s multi-axis coating systems are heavily used in our growing semiconductor, advanced clean energy, and specialty medical coating, markets where we have been focusing our sales efforts. We expect strong growth in the fourth quarter of fiscal 2022 in multi-axis coatings systems as well due to the planned shipment of a large six-axis robot machine that is scheduled to ship during the quarter and is valued at over $1.5M.
OEM System sales continue to achieve the highest levels seen in our history, reaching approximately $1.8 million in the first nine months of fiscal 2022, a year-over-year increase of 54%. These sales are primarily to the semiconductor and PCB electronics markets.
Integrated coating systems sales were down approximately $2.1 million due to lower sales to the textile industry and float glass markets, both of which are highly variable quarter to quarter. We expect this trend to continue through the fourth quarter of fiscal year 2022, although overall, multi-axis coating system sales are anticipated to more than offset the decrease of integrated coating systems.
Market Sales
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||
| Electronics/Microelectronics | $ | 898,000 | $ | 1,455,000 | (557,000 | ) | (38% | ) | $ | 4,605,000 | $ | 4,504,000 | 101,000 | 2% | ||||||||||||||||||
| Medical | 1,604,000 | 831,000 | 773,000 | 93% | 3,418,000 | 2,484,000 | 934,000 | 38% | ||||||||||||||||||||||||
| Alternative Energy | 1,459,000 | 783,000 | 676,000 | 86% | 2,848,000 | 2,004,000 | 844,000 | 42% | ||||||||||||||||||||||||
| Emerging R&D and Other | 256,000 | 207,000 | 49,000 | 24% | 691,000 | 723,000 | (32,000 | ) | (4% | ) | ||||||||||||||||||||||
| Industrial | 202,000 | 551,000 | (349,000 | ) | (63% | ) | 572,000 | 1,021,000 | (449,000 | ) | (44% | ) | ||||||||||||||||||||
| TOTAL | $ | 4,419,000 | $ | 3,827,000 | 592,000 | 15% | $ | 12,134,000 | $ | 10,736,000 | 1,398,000 | 13% | ||||||||||||||||||||
In the third quarter, sales to the Medical and Alternative Energy markets recorded significant growth of 93% and 86%, respectively, primarily driven by strong sales to APAC in these markets. Included in these sales was a newly developed full system solution for drug delivery coating onto a consumable medical device that shipped to China. During the third quarter, sales to the Alternative Energy market also continued to record strong growth, with the shipment of several machines for coating membranes used in fuel cells and carbon capture applications. The micro-electronics market dipped in the third quarter of fiscal 2022. However, we expect this market sector to rebound in the fourth quarter of fiscal 2022 due to the planned delivery of a large six-axis robot for the semiconductor industry that is scheduled to ship during the quarter.
Geographic Sales
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||
| U.S. & Canada | $ | 988,000 | $ | 1,165,000 | (177,000 | ) | (15% | ) | $ | 3,769,000 | $ | 4,076,000 | (307,000 | ) | (8% | ) | ||||||||||||||||
| Asia Pacific (APAC) | 1,901,000 | 1,039,000 | 862,000 | 83% | 4,754,000 | 3,416,000 | 1,338,000 | 39% | ||||||||||||||||||||||||
| Europe, Middle East, Asia (EMEA) | 1,287,000 | 1,216,000 | 71,000 | 6% | 2,723,000 | 2,414,000 | 309,000 | 13% | ||||||||||||||||||||||||
| Latin America | 243,000 | 407,000 | (164,000 | ) | (40% | ) | 888,000 | 830,000 | 58,000 | 7% | ||||||||||||||||||||||
| TOTAL | $ | 4,419,000 | $ | 3,827,000 | 592,000 | 15% | $ | 12,134,000 | $ | 10,736,000 | 1,398,000 | 13% | ||||||||||||||||||||
In the third quarter of fiscal 2022, approximately 78% of sales originated outside of the United States and Canada compared with 70% in the prior year period.
Strong sales in third quarter of fiscal 2022 were primarily driven from sales to APAC, reflecting the continuing transition of several countries emerging from COVID-19 lockdowns to bring their manufacturing operations back online. APAC shipments during the third quarter included two significant fuel cell membrane coating systems that were sold to different customers in South Korea that totaled over $550,000, as well as continued strong demand for our balloon catheter coating systems that we sold into several different areas of APAC.
In the first nine months of fiscal 2022, approximately 69% of sales originated outside of the United States and Canada compared with 62% in the prior year period.
Sales to the U.S. & Canada slightly dipped for the first nine months of fiscal 2022, primarily due to a decrease of shipments of float glass coating machinery in comparison to the prior fiscal nine month period. Sales of large industrial float glass machines typically vary from period to period.
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We continue to adapt and refocus its sales efforts to those countries that are operational during COVID-19 peaks and dips. This strategy has helped to soften the impact of the pandemic on our operations and will continue to be part of our go-to-market strategy for the foreseeable future.
Gross Profit:
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||
| Net Sales | $ | 4,419,000 | $ | 3,827,000 | 592,000 | 15% | $ | 12,134,000 | $ | 10,736,000 | 1,398,000 | 13% | ||||||||||||||||||||
| Cost of Goods Sold | 2,260,000 | 1,896,000 | 364,000 | 19% | 6,077,000 | 5,624,000 | 453,000 | 8% | ||||||||||||||||||||||||
| Gross Profit | $ | 2,159,000 | $ | 1,931,000 | 228,000 | 12% | $ | 6,057,000 | $ | 5,112,000 | 945,000 | 18% | ||||||||||||||||||||
| Gross Profit % | 48.9% | 50.5% | 49.9% | 47.6% | ||||||||||||||||||||||||||||
For the third quarter of fiscal 2022, gross profit increased $228,000, or 12%, compared with the third quarter of fiscal 2021. The gross profit margin was 48.9% compared with 50.5% for the prior year period. The decrease in the gross profit margin for the third quarter of fiscal 2022 is due to increased sales of products with lower sales margins, and an increase in overseas sales which are typically sold through our international distribution partners at distributor discounted prices.
Gross profit increased $945,000, or 18%, to $6,057,000 for the first nine months of fiscal 2022 compared with $5,112,000 in the first nine months of fiscal 2021. The gross profit margin was 49.9% compared with 47.6% for the prior year period. The improvement in the gross profit margin is due to increased sales and a sales mix with higher sales margins combined with lower than expected warranty and installation costs.
Operating Expenses:
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||
| Research and product development | $ | 417,000 | $ | 407,000 | 10,000 | 2% | $ | 1,244,000 | $ | 1,242,000 | 2,000 | 0% | ||||||||||||||||||||
| Marketing and selling | 845,000 | 766,000 | 79,000 | 10% | 2,350,000 | 2,155,000 | 195,000 | 9% | ||||||||||||||||||||||||
| General and administrative | 405,000 | 311,000 | 94,000 | 30% | 1,181,000 | 883,000 | 298,000 | 34% | ||||||||||||||||||||||||
| Total Operating Expenses | $ | 1,667,000 | $ | 1,484,000 | $ | 183,000 | 12% | $ | 4,775,000 | $ | 4,280,000 | $ | 495,000 | 12% | ||||||||||||||||||
Research and Product Development:
Research and product development costs increased slightly in the third quarter of fiscal 2022 primarily due to increased salaries and related costs.
Research and product development costs increased slightly in the first nine months of fiscal 2022 primarily due to increased salaries and related costs which were partially offset by decreased research and development materials expense.
Marketing and Selling:
In the third quarter of fiscal 2022 and the first nine months of fiscal 2022, we experienced increases in commissions, salaries and related costs and travel expenses. During the first nine months of fiscal 2022, these increases were partially offset by decreased trade show expenses. Due to the COVID-19 outbreak, domestic and international trade shows have been substantially eliminated throughout the industry.
In the third quarter of fiscal 2022, we expended approximately $254,000 for commissions as compared with $195,000 for the third quarter of fiscal 2021, an increase of $59,000. In the first nine months of fiscal 2022, we expended approximately $641,000 for commissions compared with $441,000 for the first nine months of fiscal 2021, an increase of $200,000. The increase in commission expense in the third quarter and first nine months of fiscal 2022 is due to an increase in external commissioned sales through our overseas distributors.
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General and Administrative:
In the third quarter of fiscal 2022 and first nine months of fiscal 2022, we experienced increases in salaries, professional fees, corporate expenses, and stock-based compensation expense. In August 2021, our stock was approved for listing on the Nasdaq Capital Market. The expenses associated with obtaining the Nasdaq listing are primarily responsible for the increases in professional fees and corporate expenses incurred in the third quarter and the first nine months of fiscal 2022. In the second quarter of fiscal 2022, we expensed $75,000 in application and entry fees related to procuring our Nasdaq listing.
Operating Income:
Operating income increased $44,000 or 10%, to $491,000 in the third quarter of fiscal 2022 compared with $447,000 for the third quarter of fiscal 2021. Growth in revenue and gross profit were key factors in the improvement of operating income in the third quarter of fiscal 2022. Operating margin for the third quarter of fiscal 2022 was 11.1% compared with 11.7% in the prior year period.
For the first nine months of fiscal 2022, operating income increased $450,000 or 54%, to $1,282,000 compared with $832,000 for the first nine months of fiscal 2021. Growth in revenue and gross profit were key factors in the improvement of operating income in the first half of fiscal 2022. Operating margin for the first nine months of fiscal 2022 was 10.6% compared with 7.8% in the first nine months of fiscal 2021.
Interest and Dividend Income:
For the third quarter of fiscal 2022 we recorded interest and dividend income of $2,000 as compared to $1,000 for the prior year period. In the first nine months of fiscal 2022 interest and dividend income decreased $14,000 to $13,000 as compared with $27,000 for the first nine months of fiscal 2021. The decrease in the first nine months of fiscal 2022 is due to the decline in market rates. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At November 30, 2021, the majority of our holdings are rated at or above investment grade.
Income Tax Expense:
We recorded income tax expense of $117,000 for the third quarter of fiscal 2022 compared with $132,000 for the third quarter of fiscal 2021. For the first nine months of fiscal 2022 we recorded income tax expense of $314,000 compared with $199,000 for the first nine months of fiscal 2021. The increase in income tax expense in the first nine months of fiscal 2022 is due to a decrease in available research and development tax credits combined with the increase in income before taxes.
Paycheck Protection Program Loan Forgiveness:
During fiscal 2021, we entered into a loan transaction pursuant to which we received proceeds of $1,001,640 (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying companies and is administered by the U.S. Small Business Administration (the “SBA”).
The PPP Loan was evidenced by a promissory note (the “Note”), between the Company and M&T Bank, (the “Bank”). The Note had a two-year term, accrued interest at the rate of 1.0% per annum, and was prepayable at any time without payment of any premium. No payments of principal or interest were due during the six-month period beginning on the date of the Note. Beginning on the seventh month following the date of the Note, we were required to make 18 monthly payments of principal and interest in the amount of $56,370.
Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, at least 75 percent of the PPP Loan proceeds must be used for eligible payroll costs. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.
The Company applied for forgiveness of the PPP Loan in December 2020. On April 1, 2021, the Company received notice from the Bank that the Bank had received confirmation from the SBA that the application for forgiveness of the PPP Loan had been approved. The loan forgiveness request in the amount of $1,001,640 was applied to the Company’s entire outstanding PPP Loan balance with the Bank.
During the nine months ended November 30, 2021, the Company recorded a gain on the forgiveness of the PPP Loan and accrued interest in the amount of $1,005,372. The gain on the forgiveness of the PPP Loan is a non-taxable event.
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Net Income:
Net income increased by $56,000 or 17.5% to $376,000 for the third quarter of fiscal 2022 compared with $320,000 for the third quarter of fiscal 2021. The increase in net income during the third quarter is a result of an increase in operating income combined with a decrease in income taxes for the period.
Net income increased by $1,321,000 or 198.2% to $1,987,000 for the first nine months of fiscal 2022 compared with $666,000 for the first nine months of fiscal 2021. The increase in net income in the first nine months of fiscal 2022 is a result of an increase in operating income combined with the PPP Loan forgiveness offset by an increase in income taxes.
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.
In response to the pandemic and these actions, we began implementing changes in our business in March 2020 to protect our employees and customers. These changes include adjusting our policies on social distancing, flexing our workforce hours, enhanced cleaning and sanitary procedures, limiting travel when appropriate, and restricting access of non-employees to our facility when necessary. These policies continue to be modified and adjusted dependent upon government regulations and CDC guidelines.
While these measures are necessary and appropriate, they may result in additional costs and may adversely impact our business and financial performance. As our response to the pandemic evolves, we may incur additional costs and will potentially experience adverse impacts to our business, each of which may be significant. In addition, an extended period of remote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks, including, but not limited to, cybersecurity risks and increased vulnerability to security breaches, cyber-attacks, computer viruses, ransomware, or other similar events and intrusions. We may experience, decreases in demand and customer orders for our products in all sales channels, as well as temporary disruptions and closures of our facilities due to decreased demand and government mandates.
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 have implemented plans to reduce spending in certain areas of our business, including reductions or delays in capital expenditures, reduced trade show participation costs, reduced travel expenditures and may need to take additional actions to reduce spending in the future.
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 $1,137,000 to $10,039,000 at November 30, 2021 from $8,902,000 at February 28, 2021. 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.
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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, 2021 and February 28, 2021, our working capital included:
| November 30, 2021 | February 28, 2021 | Cash Increase (Decrease) | ||||||||||
| Cash and cash equivalents | $ | 6,834,000 | $ | 4,084,000 | $ | 2,750,000 | ||||||
| Marketable securities | 3,350,000 | 4,563,000 | (1,213,000 | ) | ||||||||
| Total | $ | 10,184,000 | $ | 8,647,000 | $ | 1,537,000 | ||||||
The following table summarizes the accounts and the major reasons for the $1,537,000 increase in “Cash”:
| Impact on Cash | Reason | |||||
| Net income, adjusted for non-cash items | $ | 1,404,000 | ||||
| Accounts receivable decrease | 194,000 | Timing of cash receipts. | ||||
| Inventories increase | (184,000 | ) | Required to support backlog. | |||
| Equipment purchases | (285,000 | ) | Equipment and facilities upgrade. | |||
| Customer deposits increase | 729,000 | Received for new orders. | ||||
| Accounts payable and accrued expenses decrease | (432,000 | ) | Timing of disbursements. | |||
| Taxes payable increase | 90,000 | Timing of disbursements. | ||||
| Proceeds from exercise of stock options | 9,000 | Received from stock options. | ||||
| Other - net | 12,000 | Timing of disbursements. | ||||
| Net increase in cash | $ | 1,537,000 | ||||
Stockholders’ Equity – Stockholders’ Equity increased $2,088,000 from $10,951,000 at February 28, 2021 to $13,039,000 at November 30, 2021. The increase is a result of the current period’s net income of $1,987,000, proceeds from exercise of stock options of $9,000, and $92,000 in additional equity related to stock-based compensation awards.
Operating Activities – We generated $1,812,000 of cash in our operating activities in the first nine months of fiscal 2022 compared with $713,000 of cash in the first nine months of fiscal 2021. The increase in cash generated by operating activities was mostly the result of a decrease in accounts receivable and an increase in customer deposits. These sources of cash were partially offset by an increase in inventories and decreases in accounts payable and accrued expenses and income taxes payable.
Investing Activities – For the first nine months of fiscal 2022, our investing activities generated $929,000 of cash compared with $767,000 in the first nine months of fiscal 2021. For the first nine months of fiscal years 2022 and 2021, we used $285,000 and $327,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first nine months of 2022, our marketable securities provided $1,214,000 of cash compared with $997,000 in the first nine months of fiscal 2021.
In the first nine months of fiscal 2021, we received $100,000 in grant proceeds from the utility which provides our electricity as a result of our completion of certain energy efficiency related improvements.
Financing Activities – In the first nine months of fiscal years 2022 and 2021, we used $0 and $127,000, respectively, for the repayment of our note payable.
During the first nine months of fiscal 2021, we borrowed $1,001,640 from a bank under the Paycheck Protection Program.
In the third quarter of fiscal 2022, we received $9,000 from the exercise of stock options.
Net Increase in Cash and Cash Equivalents – In the first nine months of fiscal 2022, our cash balance increased by $2,750,000 as compared to $2,354,000 in the first nine months of 2021. In the first nine months of fiscal 2022, our operating activities generated $1,812,000 of cash and our marketable securities generated $1,213,000 of cash. In addition, we received $9,000 from the exercise of stock options and we used $285,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.
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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, 2021.
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.
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.
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 $6,834,000 in cash and $3,350,000 in marketable securities, the market rate risk associated with changing interest rates in the United States is not material.
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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 2022 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 |
| Not Required for Smaller Reporting Companies | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| None | |
| Item 3. | Defaults Upon Senior Securities |
| None | |
| Item 4. | 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, 2021 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 12, 2022
| 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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