SOTK 10-Q
Sono Tek Corp (SOTK)
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 |
Commission File No.:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer |
| incorporation or organization) | Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone no., including area code:
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☑
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has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Smaller reporting company | |
| Emerging Growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
| Outstanding as of January 12, 2024 | |
| Class | |
| Common Stock, par value $.01 per share |
SONO-TEK CORPORATION
INDEX
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| November
30, 2023 (Unaudited) | February
28, 2023 | |||||||
| 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, equipment, furnishings and leasehold 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 | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
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SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Nine Months Ended November 30, | Three Months Ended November 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 gain/(loss) on marketable securities | ( | ) | ( | ) | ||||||||||||
| 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.
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SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three and Nine Months Ended November 30, 2023
| Common Stock Par Value $.01 | Additional Paid – In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, February 28, 2023 | $ | $ | $ | $ | ||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||
| Balance, May 31, 2023 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Net Income | ||||||||||||||||||||
| Balance, August 31, 2023 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||
| Cashless exercise of stock options | ( | ) | ||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, November 30, 2023 (unaudited) | $ | $ | $ | $ | ||||||||||||||||
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) | $ | $ | $ | $ | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
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SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended November 30, | ||||||||
| 2023 | 2022 | |||||||
| 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 | ( | ) | ||||||
| Unrealized (gain) loss on marketable securities | ( | ) | ||||||
| Deferred tax benefit - net | ( | ) | ( | ) | ||||
| Decrease (Increase) in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| (Decrease) Increase in: | ||||||||
| Accounts payable | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Sale of marketable securities | ||||||||
| Purchase of marketable securities | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW DISCLOSURE: | ||||||||
| Interest paid | $ | $ | ||||||
| Income Taxes Paid | $ | $ | ||||||
| Non-cash investing transactions: | ||||||||
| Purchases of equipment included in Accounts payable on the balance sheet | $ | |||||||
See notes to unaudited condensed consolidated financial statements.
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SONO-TEK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2023 and 2022
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, 2023 (“fiscal year 2023”) contained in the Company’s 2023 Annual Report on Form 10-K filed with the SEC on May 25, 2023. The Company’s current fiscal year ends on February 29, 2024 (“fiscal 2024”).
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
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. At
November 30, 2023, $
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.
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:
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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, 2023 and February 28, 2023, respectively:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable Securities – November 30, 2023 | $ | $ | $ | $ | ||||||||||||
| Marketable Securities – February 28, 2023 | $ | $ | $ | $ | ||||||||||||
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, 2023 and February
28, 2023, there were
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.
At November 30, 2023 and February 28, 2023, the Company had land stated at cost of $
At November 30, 2023 and February 28, 2023, the Company had buildings, equipment, furnishings
and leasehold improvements totaling, $
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.
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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 has evaluated the impact of this guidance on its consolidated financial statements and the impact is not material to 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.
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 - Although the World Health Organization declared in early May of 2023 that COVID-19 no longer constitutes a public health emergency the Company continues to actively monitor the COVID-19 developments and potential impact on the Company's employees, business and operations. The effects of COVID-19 did not have a significant impact on the Company's result of operations or financial condition for the three months ended November 30, 2023. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, the Company is not able to estimate the effects COVID-19 may have on future results of operations or financial condition.
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.
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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, 2023, the Company had received approximately $
At February 28, 2023, 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, | |||||||||||||||||||||||||||||||
| 2023 | % of total | 2022 | % of total | 2023 | % of total | 2022 | % 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, | |||||||
| 2023 | 2023 | |||||||
| 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, 2023 and February 28, 2023, totaled $
Stock Options - Until May 2023, 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, under the Company’s 2013 Stock Incentive Plan (the "2013 Plan"). Under the 2013 Plan options expire ten years after the date of grant. As of November 30, 2023, there were options outstanding under the 2013 Plan, of which are vested. No additional options may be granted under the 2013 Plan.
In August 2023, the Company’s shareholders approved the Company’s 2023 Stock Incentive Plan (the “2023 Plan”) under which options may be granted to officers, directors, consultants and employees of the Company and its subsidiaries. As of November 30, 2023, there were options outstanding under the 2023 Plan.
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, 2023, the Company granted options to acquire shares to employees exercisable at prices ranging from $ to $ and options to acquire 18,380 shares to non-employee members of the board of directors with an exercise price of $. The options granted to employees and directors vest over three years and expire in ten years. The options granted during the first nine months of fiscal 2024 had a combined weighted average grant date fair value of $ per share.
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| Nine Months
Ended November 30, 2023 | ||||
| Expected Life | - years | |||
| Risk free interest rate | - | |||
| Expected volatility | - | |||
| Expected dividend yield | ||||
For the three and nine months ended November 30, 2023 and 2022, net income and earnings per share reflect the actual deduction for stock-based compensation expense. For the three months ended November 30, 2023 and 2022, the Company recognized approximately $ and $ of stock based compensation expense, respectively. For the nine months ended November 30, 2023 and 2022, the Company recognized approximately $ and $ of stock based compensation expense, respectively. Such amounts are included in general and administrative expenses on the unaudited condensed consolidated statements of income.
| Nine Months Ended November 30, | Three Months Ended
November 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 7: REVOLVING LINE OF CREDIT
The Company has a $
As of November 30, 2023, $
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NOTE 8: 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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Asia Pacific (APAC) | $ | $ | $ | $ | ||||||||||||
| Europe, Middle East, Asia (EMEA) | ||||||||||||||||
| Latin America | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
In the first nine months of fiscal 2024 and fiscal 2023, sales to foreign customers accounted
for approximately $
During the third quarter of fiscal 2024 and fiscal 2023, sales to foreign customers accounted
for approximately $
The Company had no customers that accounted for more than 10% of sales during the first
nine months of fiscal 2024. The Company had one customer which accounted for
The Company had two customers which accounted for
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company did not have any material commitments or contingencies as of November 30, 2023.
The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. As of November 30, 2023, the Company did not have any pending legal actions.
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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; continued abatement of the COVID-19 pandemic and any residual effects; 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 40% of our sales generated from outside the United States and Canada in the first nine months of fiscal 2024. 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.
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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 in part due to the increase of larger orders in our sales mix.
Third Quarter Fiscal 2024 Highlights (compared with the third quarter of fiscal 2023 unless otherwise noted) We refer to the three-month periods ended November 30, 2023 and 2022 as the third quarter of fiscal 2024 and fiscal 2023, respectively.
| · | Net sales increased by 59% or $2,104,000 to $5,690,000. The increase in sales was driven by strong shipments to the Alternative/Clean Energy and Medical markets. | |
| · | Gross Profit increased 60% or $1,102,000 to $2,926,000 and gross margin was 51% for both periods. | |
| · | Operating Income increased 600% or $618,000, to $721,000, due to the increase in gross profit offset by increases in operating expenses. | |
| • | Income before taxes increased over 5-fold or $757,000, from $133,000 to $890,000, reflecting positive operating leverage from the strong quarterly sales. | |
| • | Interest income, dividend income and unrealized gain on marketable securities increased to $170,000 reflecting the current high interest rate environment. | |
| • | Operating expenses increased 28% or $484,000 to $2,205,000, primarily driven by a 49% increase in Research & Development expenditures to $776,000 and a 20% increase in Marketing and Selling expenditures to $955,000. | |
| · | The Alternative / Clean Energy Market grew by 189%, an increase of $1.36 million, in part due to a $766,000 shipment of a production scale system to the solar market; there are three additional systems for the same customer remaining in the backlog. | |
| • | The Medical Market grew by 53%, an increase of $463,000, which was positively impacted by the shipment of two custom implantable device coating machines totaling $292,000 to a repeat customer, with further orders projected from the same customer in fiscal 2025. | |
| • | Despite record sales, Backlog on November 30, 2023 was $10,439,000, a 96% increase, and nearly matching the record high of the previous quarter. |
Nine Months Fiscal 2024 Highlights (compared with the first nine months of fiscal 2023 unless otherwise noted) We refer to the nine-month periods ended November 30, 2023 and 2022 as the first nine-months of fiscal 2024 and fiscal 2023, respectively.
| • | Net Sales for the first nine months of fiscal 2024 increased by 31% or $3,531,000 to $14,932,000, driven by increased sales of multi-axis sales coating systems and integrated coating systems, to both the clean energy and industrial markets. | |
| • | Gross Profit increased 29% to $7,504,000 as a result of increased net sales, and Gross Margin decreased 100 basis points to 50%, influenced by lower sales of OEM products which have higher profit margins. | |
| • | Operating Income increased $533,000 to $1,195,000, an increase of 81%. | |
| • | Income before taxes increased $920,000 or 134% to $1,606,000. | |
| • | Operating expenses increased 22% to $6,309,000, driven by a 44% increase in Research & Development expenditures to $2,222,000. | |
| • | Interest income, dividend income and unrealized gain on marketable securities increased to $411,000 reflecting the current high interest rate environment. | |
| • | As of November 30, 2023, the Company had no outstanding debt and had cash, cash equivalents and marketable securities totaling $12,591,000. | |
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RESULTS OF OPERATIONS
Sales:
Product Sales
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| Fluxing Systems | $ | 62,000 | $ | 252,000 | (190,000 | ) | (75% | ) | $ | 503,000 | $ | 960,000 | (457,000 | ) | (48% | ) | ||||||||||||||||
| Integrated Coating Systems | 1,418,000 | 193,000 | 1,225,000 | 635% | 2,579,000 | 787,000 | 1,792,000 | 228% | ||||||||||||||||||||||||
| Multi-Axis Coating Systems | 2,962,000 | 1,493,000 | 1,469,000 | 98% | 7,648,000 | 4,962,000 | 2,686,000 | 54% | ||||||||||||||||||||||||
| OEM Systems | 268,000 | 503,000 | (235,000 | ) | (47% | ) | 1,078,000 | 1,819,000 | (741,000 | ) | (41% | ) | ||||||||||||||||||||
| Other | 980,000 | 1,145,000 | (165,000 | ) | (14% | ) | 3,124,000 | 2,873,000 | 251,000 | 9% | ||||||||||||||||||||||
| TOTAL | $ | 5,690,000 | $ | 3,586,000 | 2,104,000 | 59% | $ | 14,932,000 | $ | 11,401,000 | 3,531,000 | 31% | ||||||||||||||||||||
Total sales for the third quarter and first nine months of fiscal 2024 grew by 59% and 31%, respectively, driven by increased demand for our Multi-Axis Coating systems which are commonly used in the clean energy sector. Sales of our Multi-Axis Coating systems grew by 98%, or $1.47M, to $2.96M in the third quarter of fiscal 2024. In addition, Integrated Coating System sales accelerated by 635%, or $1.2M, to $1.4M due to continued success with our newly developed float glass coating platform and a newly completed custom built system for an important strategic customer in the solar market.
Following uncharacteristically high revenue for Printed Circuit Board “PCB” Fluxing systems for our fiscal year ended February 28, 2023, PCB Fluxing sales dipped by 75% and 48%, respectively, for the third quarter and first nine months of fiscal 2024. Also, sales to our OEM Printed Circuit Board customers that integrate our ultrasonic nozzles into their own spray fluxers declined, causing OEM sales to decrease by 47% and 41%, respectively, for the third quarter and first nine months of fiscal 2024. We believe the PCB spray fluxer market has slowed and returned to what was closer to our historical revenue norms. The dip in OEM sales was largely offset by an increase in spare parts and service related revenue, which is a growing revenue stream that falls in the Other product category.
Market Sales
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| Electronics/Microelectronics | $ | 1,374,000 | $ | 1,307,000 | 67,000 | 5% | $ | 3,724,000 | $ | 4,316,000 | (592,000 | ) | (14% | ) | ||||||||||||||||||
| Medical | 1,340,000 | 877,000 | 463,000 | 53% | 3,452,000 | 3,350,000 | 102,000 | 3% | ||||||||||||||||||||||||
| Alternative Energy | 2,083,000 | 720,000 | 1,363,000 | 189% | 4,735,000 | 2,027,000 | 2,708,000 | 134% | ||||||||||||||||||||||||
| Emerging R&D and Other | 152,000 | 102,000 | 50,000 | 49% | 315,000 | 322,000 | (7,000 | ) | (2% | ) | ||||||||||||||||||||||
| Industrial | 741,000 | 580,000 | 161,000 | 28% | 2,706,000 | 1,386,000 | 1,320,000 | 95% | ||||||||||||||||||||||||
| TOTAL | $ | 5,690,000 | $ | 3,586,000 | 2,104,000 | 59% | $ | 14,932,000 | $ | 11,401,000 | 3,531,000 | 31% | ||||||||||||||||||||
Sales to the Alternative/Clean Energy market recorded growth of 189% in the third quarter of fiscal 2024, and 134% for the first nine months of fiscal 2024, which were positively impacted by a growing number of our customers transitioning from our R&D systems to production scale systems that carry much higher average selling prices.
Electronics market revenue decreased for the first nine months of fiscal year 2024, influenced by softening sales of our PCB spray fluxers.
Medical sales rebounded strongly with 53% growth in the third quarter of fiscal 2024, and 3% growth for the first nine months of FY 2024.
Industrial sales remain very strong, showing growth of 95% for the first nine months of fiscal 2024, influenced by shipment of two next gen float glass coating systems totaling approximately $700,000, and the last two machines of a multi-system order to a US based customer for $432,000.
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Geographic Sales
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| U.S. & Canada | $ | 3,421,000 | $ | 1,585,000 | 1,836,000 | 116% | $ | 8,988,000 | $ | 5,176,000 | 3,812,000 | 74% | ||||||||||||||||||||
| Asia Pacific (APAC) | 681,000 | 834,000 | (153,000 | ) | (18% | ) | 1,790,000 | 2,367,000 | (577,000 | ) | (24% | ) | ||||||||||||||||||||
| Europe, Middle East, Asia (EMEA) | 1,476,000 | 731,000 | 745,000 | 102% | 3,057,000 | 2,557,000 | 500,000 | 20% | ||||||||||||||||||||||||
| Latin America | 112,000 | 436,000 | (324,000 | ) | (74% | ) | 1,097,000 | 1,301,000 | (204,000 | ) | (16% | ) | ||||||||||||||||||||
| TOTAL | $ | 5,690,000 | $ | 3,586,000 | 2,104,000 | 59% | $ | 14,932,000 | $ | 11,401,000 | 3,531,000 | 31% | ||||||||||||||||||||
In the first nine months of fiscal 2024, approximately 40% of sales originated outside of the United States and Canada compared with 55% in the first nine months of fiscal 2023.
In the third quarter of fiscal 2024, approximately 40% of sales originated outside of the United States and Canada compared with 56% in the third quarter of fiscal 2023.
We continue to record strong sales from the U.S. and Canada, growing 116% and 74%, respectively, in the third quarter of fiscal 2024 and the first nine months of fiscal 2024. U.S. government initiatives such as the CHIPS ACT and the Inflation Reduction Act have influenced these strong sales, as well as the continuing trend of onshoring for high technology products.
Asia sales dropped 18% and 24% respectively, for the third quarter of fiscal 2024 and first nine months of fiscal 2024. This dip was due to decreased sales to China, while other areas of Asia remain more resilient showing moderate growth.
Gross Profit:
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| Net Sales | $ | 5,690,000 | $ | 3,586,000 | 2,104,000 | 59% | $ | 14,932,000 | $ | 11,401,000 | 3,531,000 | 31% | ||||||||||||||||||||
| Cost of Goods Sold | 2,764,000 | 1,762,000 | 1,002,000 | 57% | 7,428,000 | 5,574,000 | 1,854,000 | 33% | ||||||||||||||||||||||||
| Gross Profit | $ | 2,926,000 | $ | 1,824,000 | 1,102,000 | 60% | $ | 7,504,000 | $ | 5,827,000 | 1,677,000 | 29% | ||||||||||||||||||||
| Gross Profit % | 51% | 51% | 50% | 51% | ||||||||||||||||||||||||||||
For the third quarter of fiscal 2024, gross profit increased $1,102,000, or 60%, compared with the third quarter of fiscal 2023. The gross profit margin was 51% for both periods. Continued strong gross profit margins are maintaining despite a reduction in high margin OEM product sales, that are offset with increased sales from the US and Canada which most commonly do not have distributor discounts involved.
Gross profit increased $1,677,000, or 29%, to $7,504,000 for the first nine months of fiscal 2024 compared with $5,827,000 in the first nine months of fiscal 2023. The gross profit margin was 50% compared with 51% for the prior year period. Continued strong gross profit margins are maintaining despite a reduction in high margin OEM product sales, that are mostly offset with increased sales from the US and Canada which most commonly do not have distributor discounts involved.
Operating Expenses:
| Three Months Ended November 30, | Change | Nine Months Ended November 30, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| Research and product development | $ | 776,000 | $ | 520,000 | 256,000 | 49% | $ | 2,222,000 | $ | 1,543,000 | 679,000 | 44% | ||||||||||||||||||||
| Marketing and selling | 955,000 | 793,000 | 162,000 | 20% | 2,700,000 | 2,359,000 | 341,000 | 14% | ||||||||||||||||||||||||
| General and administrative | 474,000 | 408,000 | 66,000 | 16% | 1,387,000 | 1,263,000 | 124,000 | 10% | ||||||||||||||||||||||||
| Total Operating Expenses | $ | 2,205,000 | $ | 1,721,000 | $ | 484,000 | 28% | $ | 6,309,000 | $ | 5,165,000 | $ | 1,144,000 | 22% | ||||||||||||||||||
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Research and Product Development:
Research and product development costs increased in the third quarter and the first nine months of fiscal 2024 due to increased salaries and research and development materials and supplies, which are used in the focused growth initiatives we continue to implement.
Over the past twelve months the number of full-time employees engaged primarily in our research and product development efforts increased by approximately 14%. We added headcount in this area to accelerate the development of future custom machine solutions and higher value subsystems that we expect to be the cornerstone of our future business.
Marketing and Selling:
Marketing and selling expenses increased in the third quarter of fiscal 2024 due to increased salaries and increased travel and trade show expenses.
Marketing and selling costs increased in the first nine months of fiscal 2024 due to increased salaries and increased travel and trade show expenses. These increases were partially offset by a decrease in commission expense. In the first nine months of fiscal 2024, the decrease in commission expense is due to a decrease in international sales being generated by our external distributors, which are commissioned at a higher rate than our in-house sales team.
Over the past twelve months the number of full-time employees engaged in our sales and marketing efforts increased by approximately 13%. We have primarily added more technical personnel to support the growing diversity and complexity of our customers’ requirements for thin film coating applications.
General and Administrative:
General and administrative expenses increased in the third quarter of fiscal 2024 due to increased salaries and fees for attendance at corporate investor conferences. These increases were partially offset by a decrease in stock based compensation expense.
General and administrative expenses increased in the first nine months of fiscal 2024 due to increased salaries, professional fees and corporate expenses. These increases were partially offset by a decrease in stock based compensation.
Operating Income:
In the third quarter of fiscal 2024, operating income increased $618,000, or 600%, to $721,000 compared with $103,000 for the third quarter of fiscal 2023. Operating margin for the third quarter of fiscal 2024 was 13% compared with 3% in the prior year period. The current period’s increase in operating income is a result of an increase in revenue and gross profit offset by an increase in operating expenses.
In the first nine months of fiscal 2024, operating income increased $533,000, or 81%, to $1,195,000 compared with $662,000 for the first nine months of fiscal 2023. Operating margin for the first nine months of fiscal 2024 was 8% compared with 6% in the prior year period. In the first nine months of fiscal 2024, the increase in operating income is a result of an increase in revenue and gross profit offset by an increase in operating expenses.
Interest and Dividend Income:
Interest and dividend income increased by $111,000 to $150,000 in the third quarter of fiscal 2024 as compared with $39,000 for the third quarter of fiscal 2023. In the first nine months of fiscal 2024 interest and dividend income increased by $315,000 to $380,000 as compared with $65,000 for the first nine months of fiscal 2023. Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities. At November 30, 2023, the majority of our holdings are rated at or above investment grade.
Income Tax Expense:
We recorded income tax expense of $200,000 for the third quarter of fiscal 2024 compared with $28,000 for the third quarter of fiscal 2023. For the first nine months of fiscal 2024 we recorded income tax expense of $321,000 compared with $113,000 for the first nine months of fiscal 2023.
The increase in income tax expense in the third quarter and first nine months of fiscal 2024 is due to the increase in income before income taxes offset by the application of available research and development tax credits.
15
Net Income:
Net income increased by $585,000 or 557% to $690,000 for the third quarter of fiscal 2024 compared with $105,000 for the third quarter of fiscal 2023. The increase in net income during the third quarter is primarily a result of an increase in gross profit and interest and dividend income partially offset by an increase in operating expenses and an increase in income tax expense.
Net income increased by $712,000 or 124% to $1,285,000 for the first nine months of fiscal 2024 compared with $573,000 for the first nine months of fiscal 2023. The increase in net income in the first nine months of fiscal 2024 is primarily a result of an increase in gross profit and interest and dividend income partially offset by an increase in operating expenses and an increase in income tax expense.
Impact of COVID-19
With the exception of some lingering supply chain challenges, the residual effects of the COVID-19 pandemic did not have a significant impact on the Company's results of operations or financial condition for the three months ended November 30, 2023.
Liquidity and Capital Resources
Working Capital – Our working capital increased $955,000 to $12,072,000 at November 30, 2023 from $11,117,000 at February 28, 2023. 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, 2023 and February 28, 2023, our working capital included:
| November
30, 2023 | February
28, 2023 | Cash Increase (Decrease) | ||||||||||
| Cash and cash equivalents | $ | 2,982,000 | $ | 3,355,000 | $ | (373,000 | ) | |||||
| Marketable securities | 9,609,000 | 8,090,000 | 1,519,000 | |||||||||
| Total | $ | 12,591,000 | $ | 11,445,000 | $ | 1,146,000 | ||||||
The following table summarizes the accounts and the major reasons for the $1,146,000 increase in “Cash”:
| Impact on Cash | Reason | |||||
| Net income, adjusted for non-cash items | $ | 1,644,000 | To reconcile increase in cash. | |||
| Accounts receivable increase | (128,000 | ) | Timing of cash receipts. | |||
| Inventories increase | (1,051,000 | ) | Increase in work in progress and finished goods for customer orders. | |||
| Customer deposits increase | 305,000 | Received for new orders. | ||||
| Accounts payable increase | 372,000 | Timing of disbursements. | ||||
| Accrued expenses increase | 292,000 | Timing of disbursements. | ||||
| Prepaid and Other Assets decrease | 172,000 | Decreased prepaid expenses. | ||||
| Income taxes payable decrease | (133,000 | ) | Timing of disbursements. | |||
| Equipment purchases | (327,000 | ) | Equipment and facilities upgrade. | |||
| Net increase in cash | $ | 1,146,000 | ||||
Stockholders’ Equity – Stockholders’ Equity increased $1,432,000 from $14,634,000 at February 28, 2023 to $16,066,000 at November 30, 2023. The increase is a result of the current period’s net income of $1,285,000 and $147,000 in additional equity related to stock-based compensation awards.
16
Operating Activities – We generated $1,442,000 of cash in our operating activities in the first nine months of fiscal 2024 compared with $995,000 of cash in the first nine months of fiscal 2023, an increase of $447,000. The increase was mostly the result of increases in accounts payable, accrued expenses and customer deposits offset by increases in inventories and accounts receivable.
Investing Activities – We used $1,815,000 in the first nine months of fiscal 2024 in our investing activities compared with using $2,659,000 in the first nine months of fiscal 2023. For the first nine months of fiscal years 2024 and 2023, we used $327,000 and $414,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first nine months of 2024 and 2023, we invested $1,488,000 and $2,245,000 in our marketable securities.
Net Changes in Cash and Cash Equivalents – In the first nine months of fiscal 2024, our cash balance decreased by $373,000 as compared to a decrease of $1,665,000 in the first nine months of fiscal 2023. In the first nine months of fiscal 2024, our operating activities generated $1,442,000 of cash, we invested $1,488,000 in marketable securities and used $327,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.
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, 2023.
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.
17
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 $2,982,000 in cash and $9,609,000 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”). R. Stephen Harshbarger, 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, 2023. 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 2024 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, 2023. | |
| 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, 2023 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. |
19
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 16, 2024
| SONO-TEK CORPORATION | ||
| (Registrant) | ||
| By: | /s/ R. Stephen Harshbarger | |
| R. Stephen Harshbarger | ||
| Chief Executive Officer | ||
| By: | /s/ Stephen J. Bagley | |
| Stephen J. Bagley | ||
| Chief Financial Officer |
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