Form 10QSB for SONO TEK CORP
12-Oct-2007
Quarterly Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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. The following risks are by no means all inclusive but are designed to highlight what we believe are important factors to consider when evaluating our trends and future results.
- Our ability to respond to competition in national and global markets.
- General economic conditions in our markets.
We undertake no obligation to update any forward-looking statement.
Overview
Sono-Tek has developed a unique and proprietary series of ultrasonic atomization nozzles, which are being used in an increasing variety of electronic, medical, industrial, and nanotechnology 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.
We have a well established position in the electronics industry with our SonoFlux spray fluxing equipment. It saves customers from 40% to 80% of the liquid flux required to solder printed circuit boards over more labor intensive methods, such as foam fluxing. Less flux equates to lower material cost, fewer chemicals in the workplace, and less clean-up. Also, the SonoFlux equipment reduces the number of soldering defects, which reduces the amount of rework.
In the past three years, we have focused engineering resources on the medical device market, with emphasis on providing coating solutions for the new generation of drug coated stents. We have sold a significant number of specialized ultrasonic nozzles and MediCoat stent coating systems to large medical device customers. Sono-Tek's stent coating systems are superior compared to pressure nozzles in their ability to uniformly coat the very small arterial stents without creating webs or gaps in the coatings. We also sell a bench-top, fully outfitted stent coating system to a wide range of customers that are manufacturing stents and/or applying coatings to be used in developmental trials. With our success in the medical device market, we have demonstrated that we can grow new markets by developing new applications with our technology.
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We have also committed engineering resources to the development of the WideTrack coating system, a broad based platform for applying a variety of coatings to moving webs of glass, textiles, plastic, metal, food products and packaging materials. The WideTrack is a long term product and market development effort. Thus far, we have made successful inroads with WideTrack systems into the glass, medical textile (bandages) and solar and fuel cell industries.
We are heavily focused on developing the food industry market. This will require a continuation of market and technology development in this area in the years ahead. We believe there is an excellent fit between the food industry and our spraying and coating technology.
Our new product offering, the SonoDry ultrasonic spray dryer, has shown great potential since its introduction earlier this year. The product is being well received on a global basis and we are in the process of completing several sales of these units. The SonoDry series of spray dryers is of particular importance to product and process developers in the following industries: Pharmaceuticals (e.g. for drug actives and intermediates, enzymes and low molecular weight proteins), Foods (e.g. for nutriceuticals, herbal extracts and flavors) and Specialty Chemicals (e.g. for fragrances, Cosmetics ingredients and nano-scale particles).
During the second quarter, our global electronics business continued in a slower mode when compared to more robust periods. One factor has been the domestic housing market and its impact on electronics purchases. An additional factor is that many domestic corporations have moved their manufacturing facilities offshore. It is approximately 47% below the same period last year. Our quarterly revenues and net income have been affected by a slow electronics market which was partially offset by some of our new market initiatives. We are continuing our work on expanding our geographical markets and the creation of technical innovations for our products.
Liquidity and Capital Resources
Working Capital - Our working capital increased $7,000 from a working capital of $4,232,000 at February 28, 2007 to $4,239,000 at August 31, 2007. The Company's current ratio is 7.56 to 1 at August 31, 2007 as compared to 6.8 to 1 at February 28, 2007.
Stockholders' Equity - Stockholder's Equity increased $52,000 from $4,851,000 at February 28, 2007 to $4,903,000 at August 31, 2007. The increase is the result of net income of $32,000 and an adjustment for stock based compensation expense of $20,000.
Operating Activities - Our operations provided $32,000 of cash for the six months ended August 31, 2007, a decrease of $258,000 when compared to the six months ended August 31, 2006. The decrease is primarily a result of a decrease in net income for the current period.
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Investing Activities - We used $64,000 for the purchase of capital equipment during the six months ended August 31, 2007 compared to the use of $103,000 during the six months ended August 31, 2006.
Financing Activities - For the six months ended August 31, 2007, we used $13,000 in financing activities resulting from the repayment of our notes payable. For the six months ended August 31, 2006, we used $10,000 in financing activities resulting from the repayment of notes payable of $12,500 and the proceeds of stock option exercises of $2,500.
Results of Operations
During the six month period ended August 31, 2007, our sales decreased $969,000 or 27% to $2,647,000 as compared to $3,616,000 for the six months ended August 31, 2006. For the three months ended August 31, 2007, our sales decreased $419,000 to $1,415,000 as compared to $1,834,000 for the three months ended August 31, 2006. During the six month period ended August 31, 2007, we continued to see a decrease in sales of both fluxer units and nozzles when compared to the six month period ended August 31, 2006. The decrease in sales of these units was partially offset by sales of our WideTrack units and EVS Systems used for solder recovery.
Our gross profit decreased $545,000 to $1,259,000 for the six months ended August 31, 2007 from $1,804,000 for the six months ended August 31, 2006. The gross profit margin was 48% of sales for the six months ended August 31, 2007 as compared to 50% of sales for the six months ended August 31, 2006. Our gross profit decreased $319,000 to $656,000 for the three months ended August 31, 2007 as compared to $975,000 for the three months ended August 31, 2006. The gross profit margin was 46% of sales for the three months ended August 31, 2007 as compared to 53% of sales for the three months ended August 31, 2006. The decrease in the gross profit margin is due to the mix of products sold in the current quarter.
Research and product development costs increased $56,000 to $433,000 for the six months ended August 31, 2007 from $377,000 for the six months ended August 31, 2006 and $8,000 to $206,000 for the three months ended August 31, 2007 from $198,000 for the three months ended August 31, 2006. The increases were principally due to an increase in engineering personnel in the current periods. The increases are aimed at the development of new products which will benefit future periods.
Marketing and selling costs decreased $166,000 to $494,000 for the six months ended August 31, 2007 from $660,000 for the six months ended August 31, 2006 and $80,000 to $260,000 for the three months ended August 31, 2007 from $340,000 for the three months ended August 31, 2006. The decrease was due to decreased salaries, commissions and travel expenses.
General and administrative costs decreased $54,000 to $385,000 for the six months ended August 31, 2007 from $439,000 for the six months ended August 31, 2006 and $17,000 to $203,000 for the three months ended August 31, 2007 from $220,000 for the three months ended August 31, 2006. The decrease was due to reduced employee salaries and bonuses, bad debt allowance and a reduction in stock based compensation expense.
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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 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-KSB for the year ended February 28, 2007.
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 on its deferred tax asset. The Company reduced the valuation reserve for the deferred tax asset resulting from the net operating losses carried forward due to the Company having demonstrated consistent profitable operations. In the event that actual results differ from these estimates, the Company may need to again adjust such valuation reserve.
Stock-Based Compensation
Prior to fiscal year 2007, the Company accounted for employee stock options under the fair value provisions of SFAS No. 123. On March 1, 2006, the Company adopted SFAS No. 123R, "Share Based Payments." SFAS No. 123R requires companies to expense the value of employee stock options and similar awards for periods beginning after December 15, 2005, and applies to all outstanding and vested stock-based awards at a company's adoption date. Results from prior periods have not been restated in the Company's historical financial statements.
Impact of New Accounting Pronouncements
None.
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SONO-TEK CORPORATION
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 August 31, 2007. 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 second fiscal quarter of 2008 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. |
