SONO TEK CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
We discuss expectations regarding our future performance, such as our business
outlook, in our annual and quarterly reports, press 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. These factors include,
among other considerations, general economic and business conditions; political,
regulatory, competitive and technological developments affecting our operations
or the demand for our products; timely development and market acceptance of new
products; adequacy of financing; capacity additions, the ability to enforce
patents and the ability to achieve increased sales volume and continued
We undertake no obligation to update any forward-looking statement.
We have developed a unique and proprietary series of ultrasonic atomizing
nozzles, which are being used in an increasing variety of applications in the
six major industries that we serve: electronics, advanced energy (solar and fuel
cells), medical device, glass, textiles and food applications. These nozzles are
electrically driven and create a fine, uniform, low velocity spray of atomized
liquid particles, in contrast to common pressure nozzles. These characteristics
create a series of commercial applications that benefit from the precise,
uniform, thin coatings that can be achieved. When combined with significant
reductions in liquid waste and less overspray than can be achieved with ordinary
pressure nozzle systems, there is lower environmental impact and lower energy
During the past four years we have invested significant time, monies and efforts
to enhance our market diversity. Based on our core ultrasonic coating
technology, we increased our portfolio of products, the industries we serve and
the countries in which we operate.
A majority of our sales originate outside the United States, and we are
geographically present directly and through distributors and trade
representatives in North and Latin America, Europe and Asia. The infrastructure
upon which this diversified market approach is based, includes a newly equipped
process development laboratory, a strengthened sales organization with
application engineers, an engineering team with additional talent and the
latest, most sophisticated design software tools, as well as an expanded, highly
trained installation and service organization.
The new products which we introduced, the new markets that we penetrated, and
the regions in which we now operate, are a strong foundation for our future
sales growth and enhanced profitability.
An outcome of our rapid growth and diversification program over the past several
years, is that we are now capable of offering a unique and superior family of
customized products to the six major industries we serve. All of these systems
are based on our core technology of ultrasonic spray coating. Many of these
systems have been commercially proven in 24/7 working schedules, under harsh and
challenging industrial manufacturing environments, where they provide value in a
continuous and reliable fashion.
1. Electronics Industry.
We serve this industry by providing manufacturers of electronic printed circuit
boards with state-of-the-art solder fluxers. Our ultrasonic spray fluxers reduce
the amount of fluxing chemical needed, enhance the quality of the boards, and
provide our customers with a better product at reduced costs of operations, when
compared with conventional foam fluxers and pressure assisted fluxers.
We are recognized as a standard setter in the industry, and our systems are
incorporated by various original equipment manufacturers (OEMs), in their own
manufacturing lines for making electronic printed circuit boards. Some examples
of our products marketed to the electronics industry include: SonoFlux 2000F,
SonoFlux 2000FP, SonoFlux XL, SonoFlux EZ and SonoFlux Servo.
We also offer to the same customer base, EVS solder recovery systems, through
our exclusive distribution agreement with EVS International Ltd ("EVS") for the
territory of the United States and Canada.
In addition, we have an established customer base in the semiconductor industry.
The semiconductor industry utilizes our ultrasonic atomizing nozzles for the
application and deposition of photo-resist onto semiconductor wafers. A
particular sector of the semiconductor manufacturing industry,
micro-electro-mechanical systems, "MEMS", has proven the ability to use our
technology to apply micron thick coatings to these complex wafers.
2. Advanced Energy Industry.
Manufacturers of solar cells and fuel cells share two major technical and
business challenges: enhancing the energy efficiency of their products and
manufacturing their products in a cost effective way. Extremely uniform, thin
layer coatings are at the heart of the solution for these advanced energy
Our precision coating systems are now presented in scientific conferences and
trade shows pertaining to advanced energy around the world for the superior
surface uniformity and density they provide, which are directly related to
enhanced energy efficiency. Our systems afford our energy industry clients with
the capabilities of saving up to 80% of the expensive catalysts and
nano-materials used in these manufacturing processes. Some examples of our
products marketed to the advanced energy industry include: ExactaCoat,
FlexiCoat, Hypersonic and SonoFlow CSP.
3. Medical Device Industry.
Our ultrasonic coating technology is being used by medical device manufacturers
worldwide. The leading applications for this industry are coating of arterial
stents with precise and uniform micronic layers of polymers and drugs; coating
of various implantable devices with lubricous materials and coating of blood
collection tubes with anti-coagulants. These applications are typically
performed under strict regulatory supervision of governmental agencies in
different countries, and the continuing demand for our systems from these
customers is indicative of the high quality performance that our systems provide
Some examples of our products marketed to the medical device industry include:
MediCoat I; Medicoat II; Medicoat PSI; AccuMist; MicroMist; Balloon Catheter
4. Glass Industry.
The manufacture of float glass occurs under extremely harsh conditions of
elevated temperatures. Our ultrasonic coating technology provides this
manufacturing process with the means of precise and uniform application of
anti-stain, and other specialty chemical agents, on the hot glass. Our customers
benefit from an improved quality product, enhanced productivity and
significantly reduced expenditures on annual maintenance, often resulting in a
return on investment of less than one year. Based on this equipment's recent
successful performance, our systems are now specified by many global glass
manufacturers as their equipment of choice. The equipment we offer to the glass
industry is the WideTrack - wide area modular coating system.
5. Textiles Industry.
This industry applies expensive chemicals such as flame retardant, anti-stain,
anti-microbial as well as moisture barriers, which are currently applied using
inefficient dip or padding methods, resulting in significant waste of material,
energy and water. We have demonstrated to several leading textile manufacturers
the technical advantages and financial benefits of our WideTrack coating system
for their specific operations, and we are hopeful that these manufacturers will
prioritize the WideTrack in their future capital investment budgets.
6. Food Industry.
The food industry is traditionally a slow adapter of new technologies.
Accordingly, we focus our efforts on a select few global food companies, where
our technical advantages and economic benefits could translate into successful
market penetration and sales growth. We have introduced our ultrasonic coating
systems to various segments of the food industry, with our primary focus on
coating of flavors, nutriceuticals and anti-microbial agents. Most of our food
industry equipment is designed on the WideTrack platform.
We have core technology and have developed and market the following products:
1. SonoFlux 2000F - spray fluxer product - designed for high volume operations
with standard width lines requiring low maintenance using a variety of solder
fluxes, including rosin flux. It is designed to be used by electronic circuit
board manufacturers to apply solder flux to fixed width circuit boards. The
major customers for the SonoFlux 2000F are OEMs that produce their own
electronic circuit boards.
2. SonoFlux 2000FP, SonoFlux XL and SonoFlux EZ- spray fluxer product - applies
solder flux to electronic printed circuit boards that vary from two inches to
up to 24 inches in width in a cost-effective and uniform manner. They are
designed to be used by either OEMs or contract manufacturers of electronic
circuit assemblies. All SonoFlux products provide substantial benefits in
terms of reduced use of fluxing agents, reduced need for maintenance and
reduced cost of operations compared to foam fluxers and competitive pressure
nozzle fluxing products.
3. SonoFlux Servo - a newer spray fluxer capable of providing flux to both wide
areas of a circuit board as well as selective fluxing. We also sell a
selective fluxing apparatus known as Selectaflux.
4. MediCoat and MediCoat II for stent coating - table-top and stand alone,
fully-contained systems designed to apply thin layers of polymer and drug
coatings to arterial stents with high precision. The system incorporates
motion control of the stent during the coating process and produces coatings
having excellent uniformity. The MediCoat systems use either the Accumist or
MicroMist nozzle systems, which are precision nozzle configurations used in
applications where precise patterns and coatings are required. These products
provide customers the ability to achieve a minimal amount of waste of
expensive drug polymer coatings and high uniformity of drug addition from
stent to stent. MediCoat II is similar to the MediCoat, but it has higher
throughput capabilities more suited for a production environment. We have
recently developed additional medical coating platforms to address developing
market segments for drug coated balloons, catheters and other implantable
5. WideTrack - Wide area modular coating system - designed to be used in
applications that require efficient web-coating or wide area spraying
capability. One module can cover substrates from 6 inches to 24 inches wide,
depending on the application. Much greater widths can be achieved by linking
modules together, and these systems have been applied in glass lines of up to
four meters wide. A large number of systems have been sold over the past six
years, and this application holds promise for the future due to cost and
environmental savings demonstrated at customer sites. It uses non-clogging
ultrasonic atomizing nozzles to produce a low velocity, highly controllable
spray. The WideTrack System offers significant advantages over conventional
pressure-spray methods in a broad range of applications such as non-woven
fabrics, float glass, or odd-shaped industrial or consumer products. Since the
ultrasonic spray can be easily controlled, it is possible to use fewer
chemicals and less water and energy in applying coatings to glass, textiles,
food products and packaging materials than with traditional nozzles. This also
results in reduced environmental impact due to less overspray.
6. Exactacoat/Flexicoat - We offer a line of robotic XYZ coating equipment for
applications involving 3D coatings for fuel cell membranes and solar energy
panels. This equipment is offered in bench-top configurations as our
Exactacoat product and standalone as our Flexicoat product. These platforms
position and move our nozzle systems in a precise three dimensional
application pattern. We also have a newer product, the Hypersonic, a high
speed reciprocator spraying system for this market. These coaters are
extremely efficient especially when combined with our novel ultrasonic syringe
pump (patent pending) to agitate and suspend the carbon based suspensions
needed in fuel cell applications.
Other Product Offerings - EVS Solder Recovery System
We have an exclusive distribution relationship with EVS to distribute EVS's line
of solder recovery systems and spare parts. The territory for this distribution
relationship is the United States and Canada. EVS manufactures the EVS6000,
EVS3000 and the EVS1000 solder recovery systems which are used to reclaim solder
from the dross which accumulates in the wave-solder equipment of circuit board
manufacturers. The customer base for distribution of these systems is
synergistic with our existing customer base for spray fluxer sales in the
printed circuit board industry.
Rental Real Estate Operations
In December 2010, we purchased the industrial park where our facilities are
located in Milton, NY. The park is an improved 3.13 acre parcel of land
comprised of five buildings of office/industrial space, with 50,000 square feet
of gross leasable floor area. We currently utilize 24,000 square feet of the
park for our operations. We presently lease 16,000 square feet of the park to
unrelated third parties and 10,000 square feet is currently vacant and available
For financial reporting purposes, we report the results of the park as rental
real estate operations.
Liquidity and Capital Resources
Working Capital - Our working capital increased $285,000 from $4,680,000 at
February 28, 2013 to $4,965,000 at August 31, 2013. The increase in working
capital is due to the current period's net income of $179,000, offset by cash
outflows of $18,000 for patent and other asset costs, $25,000 for the purchase
of equipment and furnishings and $62,000 for the repayments of notes payable. We
incurred non-cash expenses for depreciation and amortization of $164,000, stock
based compensation expense of $10,000, $6,000 for our accounts receivable
reserve and $31,000 for our inventory reserve. The Company's current ratio is
3.66 to 1 at August 31, 2013 as compared to 5.3 to 1 at February 28, 2013.
Stockholders' Equity - Stockholder's Equity increased $189,000 from $5,992,000
at February 28, 2013 to $6,181,000 at August 31, 2013. The increase is a result
of net income of $179,000, and an adjustment for stock based compensation
expense of $10,000.
Operating Activities - Our operating activities provided $598,000 of cash for
the six months ended August 31, 2013 as compared to using $264,000 for the six
months ended August 31, 2012. During the six months ended August 31, 2013,
accounts receivable increased $330,000, inventory increased $193,000, prepaid
expenses increased $52,000, accounts payable and accrued expenses increased
$260,000, customer deposits increased $442,000 and income taxes payable
increased $80,000. In addition, we incurred non-cash expenses of $164,000 for
depreciation and amortization, $10,000 for stock based compensation expense,
$6,000 for bad debt expense and increased our inventory reserve by $31,000.
The increase in our accounts receivable balance during the six months ended
August 31, 2013 is due to a relatively high level of sales in August 2013. Our
customer deposits increased during the six months ended August 31, 2013 due to
advance payments for orders that are scheduled to ship this current fiscal year.
Investing Activities - During the six months ended August 31, 2013, our
investing activities provided $26,000 as compared to using $798,000 for the six
months ended August 31, 2012. We used $25,000 for the purchase of capital
equipment and $18,000 for patent application costs. In addition, we received
$39,000 from the sale of capital equipment and $31,000 from the sale of
marketable securities. During the six months ended August 31, 2012, we used
$61,000 for the purchase of capital equipment, $32,000 for patent application
costs and $704,000 for the purchase of marketable securities.
Financing Activities - During the six months ended August 31, 2013, we used
$62,000 for the repayment of our notes payable. For the six months ended August
31, 2012, we used $60,000 for the repayment of our notes payable and had
proceeds from stock option exercises of $20,000
On September 27, 2013, the Company signed a mortgage commitment letter with a
bank to refinance its existing mortgage which is collateralized by the Company's
land and buildings. The proposed mortgage would be for $1,900,000, and would
bear interest at 4.34% per annum. The existing mortgage bears interest at 5.5%
and has a remaining term of 17.5 years. The term of the loan would be for ten
years and would be collateralized by land and buildings. In addition, the
mortgage will require a ten year lease between Sono-Tek Corp and Sono-Tek
Industrial Park, the Company's wholly owned subsidiary which holds title to the
property. The actual interest rate will be set at closing. Completion of the
mortgage is subject to an acceptable appraisal and environmental review.
Net Increase in Cash - For the six months ended August 31, 2013, our cash
balance increased $562,000. During the six months ended August 31, 2013, our
operating activities provided $598,000 of cash, our investing activities
provided $26,000 of cash and we used $62,000 in our financing activities.
Results of Operations
Ultrasonic Spraying Systems Segment:
For the six months ended August 31, 2013, our sales decreased $329,000 or 6% to
$4,873,000 as compared to $5,202,000 for the six months ended August 31, 2012.
During the six month period ended August 31, 2013, we experienced a decrease in
sales of our fluxer units, stent coating units and XYZ units. We did, however,
see an increase in sales of our nozzles and related generator units, widetrack
units and servo units.
For the three months ended August 31, 2013, our sales increased $136,000 to
$2,519,000 or 6% as compared to $2,383,000 for the three months ended August 31,
2012. During the three month period ended August 31, 2013, we experienced a
decrease in sales of our fluxer units. The decrease in these sales was offset by
an increase in sales of our XYZ units, servo units and nozzles and related
For the six months ended August 31, 2013, our gross profit decreased $141,000 to
$2,317,000 from $2,458,000 for the six months ended August 31, 2012. The gross
profit margin was 48% of sales for the six months ended August 31, 2013 and 47%
of sales for the six months ended August 31, 2012. The increase in our gross
profit margin for the six months ended August 31, 2013 is due to an increase in
sales of our nozzles and generators and widetrack units.
For the three months ended August 31, 2013, our gross profit increased $67,000
to $1,210,000 from $1,143,000 for the three months ended August 31, 2012. The
gross profit margin was 48% of sales for the three months ended August 31, 2013
and 2012. Our gross profit margin remained level at 48% due to the mix of
products sold during the quarter and a reduction of labor costs in our
manufacturing and service departments.
Research and product development costs decreased $30,000 to $457,000 for the six
months ended August 31, 2013 from $487,000 for the six months ended August 31,
2012. The decrease is due to reduced salary expense. For the three months ended
August 31, 2013 and 2012, these costs remained level at $232,000 and $233,000.
Marketing and selling expenses decreased $217,000 to $989,000 for the six months
ended August 31, 2013 from $1,206,000 for the six months ended August 31, 2012.
During the six months ended August 31, 2013, we experienced a decrease in
international commission expense of $231,000 and decreased trade show and
advertising expenses of $39,000. The decrease in commission and trade show
expenses was offset by an increase in salaries.
For the three months ended August 31, 2013, marketing and selling expenses
decreased $53,000. During the three months ended August 31, 2013, we experienced
decreases in commissions and trade show expenses.
General and administrative costs decreased $151,000 to $523,000 for the six
months ended August 31, 2013 from $674,000 for the six months ended August 31,
2012. These costs decreased $62,000 to $254,000 for the three months ended
August 31, 2013 from $316,000 for the three months ended August 31, 2012. The
decrease was due to decreased corporate expenses, decreased salaries, decreased
professional fees, decreased stock based compensation expense and a decrease in
outside consulting fees related to strategic opportunities and enhanced growth
Rental Real Estate Operations:
For the six months ended August 31, 2013, our real estate operations generated
$39,000 in rental income from unrelated third parties and incurred $70,000 in
operating expenses and $54,000 in interest expense, resulting in a net loss of
$85,000 for the six months ended August 31, 2013.
For the three months ended August 31, 2013, our real estate operations generated
$19,000 in rental income from unrelated third parties and incurred $36,000 in
operating expenses and $27,000 in interest expense, resulting in a net loss of
$44,000 for the three months ended August 31, 2013. We are presently working
with an independent real estate broker to lease our vacant warehouse space.
Condensed Consolidated Results:
We had net income of $179,000 for the six months ended August 31, 2013 as
compared to net income of $71,000 for the six months ended August 31, 2012.
During the three months ended August 31, 2013, we had net income of $105,000 as
compared to net income of $60,000 for the three months ended August 31, 2012.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operations are based upon the 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
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, 2013.
Accounting for Income Taxes
As part of the process of preparing the Company's consolidated financial
statements, the Company is required to estimate its income taxes. Management
judgment is required in determining the provision for the deferred tax asset.
During the fiscal year ended February 28, 2009, the Company increased the
valuation reserve for the deferred tax asset. In the event that actual results
differ from these estimates, the Company may need to again adjust such valuation
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 the Company's 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 are not
expected to have a material impact on the financial statements of the Company.
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