UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-16035
SONO-TEK CORPORATION
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(Exact name of small business issuer as specified in its charter)
New York 14-1568099
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2012 Rt. 9W, Milton, NY 12547
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone no., including area code: (845) 795-2020
Indicate by check mark whether the small business issuer (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
small business issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES |X| NO |_|
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
Class June 15, 2007
----- -------------
Common Stock, par value $.01 per share 14,360,541
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements: 1 - 3
Consolidated Balance Sheets - May 31, 2007 (Unaudited) and
February 28, 2007 1
Consolidated Statements of Income - Three Months Ended
May 31, 2007 and 2006 (Unaudited) 2
Consolidated Statements of Cash Flows - Three Months Ended May 31, 2007
and 2006 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 6
Item 2 - Management's Discussion and Analysis or Plan of Operations 7 - 10
Item 3 - Controls and Procedures 11
Part II - Other Information 12
Signatures and Certifications 13 - 19
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, February 28,
2007 2007
----------- -----------
Unaudited
ASSETS
Current Assets
Cash and cash equivalents .................................... $ 2,301,508 $ 2,268,976
Accounts receivable (less allowance of $18,500 and
$18,500 at May 31 and February 28, respectively) ......... 687,194 946,833
Inventories .................................................. 1,553,021 1,406,231
Prepaid expenses and other current assets .................... 102,659 69,107
Deferred tax asset ........................................... 270,000 270,000
----------- -----------
Total current assets ................................ 4,914,382 4,961,147
----------- -----------
Equipment, furnishings and leasehold improvements
(less accumulated depreciation of $928,197 and
$896,773 at May 31 and February 28, respectively) ........... 298,723 301,360
Intangible assets, net .......................................... 29,709 30,744
Other assets .................................................... 7,171 7,171
Deferred tax asset .............................................. 446,239 411,239
----------- -----------
TOTAL ASSETS .................................................... $ 5,696,224 $ 5,711,661
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................. $ 144,865 $ 209,202
Accrued expenses ............................................. 501,290 476,140
Current maturities of long term debt ......................... 27,870 27,373
Deferred Tax Liability ....................................... 16,239 16,239
----------- -----------
Total current liabilities .................................... 690,264 728,954
Long term debt, less current maturities ......................... 44,308 51,506
Deferred Tax Liability .......................................... 80,000 80,000
----------- -----------
Total liabilities ................................... 814,572 860,460
----------- -----------
Commitments and Contingencies ................................... -- --
Stockholders' Equity
Common stock, $.01 par value; 25,000,000 shares authorized,
14,360,541 shares issued and outstanding .................. 143,606 143,606
Additional paid-in capital ................................... 8,318,838 8,308,301
Accumulated deficit .......................................... (3,580,792) (3,600,706)
----------- -----------
Total stockholders' equity .......................... 4,881,652 4,851,201
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 5,696,224 $ 5,711,661
=========== ===========
See notes to consolidated financial statements.
1
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended May 31,
2007 2006
------------ ------------
Net Sales .................................... $ 1,232,643 $ 1,781,744
Cost of Goods Sold ........................... 629,133 953,123
------------ ------------
Gross Profit ..................... 603,510 828,621
------------ ------------
Operating Expenses
Research and product development costs .. .... 227,035 179,510
Marketing and selling expenses ............... 234,044 320,488
General and administrative costs ............. 182,693 219,186
------------ ------------
Total Operating Expenses ......... 643,772 719,184
------------ ------------
Operating (Loss) Income ...................... (40,262) 109,437
------------ ------------
Interest Expense ............................. (1,235) (1,294)
Interest Income .............................. 24,767 13,857
Other Income ................................. 2,831 2,831
------------ ------------
26,363 15,394
------------ ------------
(Loss) Income Before Income Taxes ............ (13,899) 124,831
Income Tax (Benefit) ......................... (33,813) --
------------ ------------
Net Income ................................... $ 19,914 $ 124,831
============ ============
Basic Earnings Per Share ..................... $ 0.00 $ 0.01
============ ============
Diluted Earnings Per Share ................... $ 0.00 $ 0.01
============ ============
Weighted Average Shares - Basic .............. 14,360,541 14,358,140
============ ============
Weighted Average Shares - Diluted ............ 14,436,298 14,468,868
============ ============
See notes to consolidated financial statements.
2
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended May 31,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................... $ 19,914 $ 124,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 32,459 18,838
Provision for doubtful accounts ................. -- 3,650
Stock based compensation expense ................ 10,538 23,879
Decrease (Increase) in:
Accounts receivable ........................... 259,639 (99,906)
Inventories ................................... (146,790) (164,574)
Prepaid expenses and other current assets ..... (33,552) (7,340)
Deferred tax asset ............................ (35,000) --
Increase (Decrease) in:
Accounts payable and accrued expenses ......... (39,187) 151,370
----------- -----------
Net Cash Provided By Operating Activities ......... 68,021 50,748
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furnishings ................. (28,788) (18,721)
----------- -----------
Net Cash Used In Investing Activities ............. (28,788) (18,721)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants .. -- 2,548
Repayments of notes payable ........................... (6,701) (6,367)
----------- -----------
Net Cash Used In Financing Activities ............. (6,701) (3,819)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 32,532 28,208
CASH AND CASH EQUIVALENTS
Beginning of year ..................................... 2,268,976 1,740,804
----------- -----------
End of period ......................................... $ 2,301,508 $ 1,769,012
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid ......................................... $ 1,294 $ 1,294
=========== ===========
Income taxes paid .................................... $ 1,187 $ --
=========== ===========
See notes to consolidated financial statements.
3
SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
Three Months Ended May 31, 2007 and 2006
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying consolidated financial statements of Sono-Tek
Corporation, a New York Corporation (the "Company"), include the accounts of the
Company and its wholly owned subsidiary, Sono-Tek Cleaning Systems, Inc., a New
Jersey Corporation ("SCS") which the Company acquired on August 3, 1999, whose
operations have been discontinued. There have been no operations of this
subsidiary since Fiscal Year Ended February 28, 2002. All significant
intercompany accounts and transactions are eliminated in consolidation.
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.
Fair Value of Financial Instruments - The carrying amounts reported in the
balance sheet for cash, receivables, accounts payable and accrued expenses
approximate fair value based on the short-term maturity of these instruments.
Interim Reporting - The attached summary consolidated financial information does
not include all disclosures required to be included in a complete set of
financial statements prepared in conformity with accounting principles generally
accepted in the United States of America. Such disclosures were included with
the financial statements of the Company at February 28, 2007, and included in
its report on Form 10-KSB. Such statements should be read in conjunction with
the data herein.
The financial information reflects all adjustments, which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. The preparation of financial statements in conformity with
generally accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
for such interim periods are not necessarily indicative of the results to be
expected for the year.
Intangible Assets - Include cost of patent applications that are deferred and
charged to operations over seventeen years for domestic patents and twelve years
for foreign patents. The accumulated amortization is $55,384 and $54,350 at May
31, 2007 and February 28, 2007, respectively. Annual amortization expense of
such intangible assets is expected to be $4,272 per year for the next five
years.
4
NOTE 2: INVENTORIES
Inventories at May 31, 2007 are comprised of:
Finished goods $ 435,728
Work in process 565,110
Consignment 9,770
Raw materials and subassemblies 746,611
----------
Total 1,757,219
Less: Allowance (204,198)
----------
Net inventories $1,553,021
==========
NOTE 3: STOCK OPTIONS AND WARRANTS
Stock Options - Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"),
options can be granted to officers, directors, consultants and employees of the
Company and its subsidiaries to purchase up to 1,500,000 of the Company's common
shares. The 2003 Plan supplemented and replaced the 1993 Stock Incentive Plan
(the "1993 Plan"), under which no further options may be granted. Options
granted under the 1993 Plan expire on various dates through 2013. As of May 31,
2007 there were 119,000 options outstanding under the 1993 Plan and 862,875
options outstanding under the 2003 plan.
Under both the 1993 and 2003 Stock Incentive Plans, option prices must be at
least 100% of the fair market value of the common stock at time of grant. For
qualified employees, except under certain circumstances specified in the plans
or unless otherwise specified at the discretion of the Board of Directors, no
option may be exercised prior to one year after date of grant, with the balance
becoming exercisable in cumulative installments over a three year period during
the term of the option, and terminating at a stipulated period of time after an
employee's termination of employment.
NOTE 4: STOCK BASED COMPENSATION
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.
During the transition period of the Company's adoption of SFAS 123R, the
weighted-average fair value of options has been estimated on the date of grant
using the Black-Scholes options-pricing model. The weighted-average
Black-Scholes assumptions are as follows:
2007 2006
---------------------------------
Expected life 4 years 4 years
Risk free interest rate 4.35% - 5.07% 4% - 4.25%
Expected volatility 39% - 78% 40%
Expected dividend yield 0% 0%
5
In computing the impact, the fair value of each option is estimated on the date
of grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what the Company has
recorded in the current period.
For the quarters ended May 31, 2007 and 2006, net income and earnings per share
reflect the actual deduction for stock-based compensation expense. The impact of
applying SFAS 123R approximated $10,538 and $23,879 in additional compensation
expense during the quarters ended May 31, 2007 and 2006, respectively. Such
amount is included in general and administrative expenses on the statement of
operations. The expense for stock-based compensation is a non-cash expense item.
NOTE 5: EARNINGS PER SHARE
The denominator for the calculation of diluted earnings per share at May 31,
2007 and 2006 are calculated as follows:
May 31, 2007 May 31, 2006
------------ ------------
Denominator for basic earnings per share 14,360,541 14,358,140
Dilutive effect of stock options 75,757 110,728
---------- ----------
Denominator for diluted earnings per share 14,436,298 14,468,868
========== ==========
NOTE 6: OTHER INCOME
As previously reported on Form 8-K, filed on July 5, 2005, the Company
determined that a former employee had misappropriated approximately $250,000 of
the Company's monies, primarily through unauthorized check writing from the
Company's accounts over a period of three calendar years. The Company had
previously expensed substantially all of the misappropriated funds over the
years.
The Company has recovered approximately 69% of these funds to date. The Company
is pursuing appropriate remedies to recover the balance of the funds. As
previously discussed, the Company can offer no assurances that it will be
successful in its attempts to collect the balance of the remaining restitution.
6
SONO-TEK CORPORATION
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 level 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.
7
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 plan to
increase our marketing efforts into the broader textile and food industry
markets. This will require a continuation of market and technology development
in these areas in the years ahead. Some of these WideTrack applications involve
nano-technology based liquids. We believe there is an excellent fit between the
thin, precise films required in nano-technology coating applications and our
ultrasonic nozzle systems.
We are continuing to see a decline in our US based electronics business. It is
approximately 50% below previous levels, as a result of the trend toward
production moving offshore, coupled with a slower economy, due to reduced
housing starts and reduced competitiveness of our US based automotive customers.
In conclusion, our quarterly revenues and net income have been affected by the
decline in the electronics market. 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 decreased $8,000 from a working capital of
$4,232,000 at February 28, 2007 to $4,224,000 at May 31, 2007. The Company's
current ratio is 7.12 to 1 at May 31, 2007 as compared to 6.8 to 1 at February
28, 2007.
Stockholders' Equity - Stockholder's Equity increased $31,000 from $4,851,000 at
February 28, 2007 to $4,882,000 at May 31, 2007. The increase is the result of
net income of $20,000 and an adjustment for stock based compensation expense of
$11,000.
Operating Activities - Our operations provided $68,000 of cash for the three
months ended May 31, 2007, an increase of $17,000 when compared to the three
months ended May 31, 2006.
Investing Activities - We used $29,000 for the purchase of capital equipment
during the three months ended May 31, 2007 compared to the use of $19,000 during
the three months ended May 31, 2006.
Financing Activities - For the three months ended May 31, 2007, we used $7,000
in financing activities resulting from the repayment of our notes payable. For
the three months ended May 31, 2006, we used $4,000 in financing activities
resulting from the repayment of notes payable of $7,000 and the proceeds of
stock option exercises of $3,000.
8
Results of Operations
For the three months ended May 31, 2007, our sales decreased $549,000 or 31% to
$1,233,000 as compared to $1,782,000 for the three months ended May 31, 2006.
During the quarter ended May 31, 2007, sales of both fluxer units and nozzles
decreased when compared to the quarter ended May 31, 2006. The decrease in sales
of these units was partially offset by an increase in sales of our stent coating
systems and WideTrack units.
Our gross profit decreased $225,000 to $604,000 for the three months ended May
31, 2007 from $829,000 for the three months ended May 31, 2006. The decrease in
gross profit is due to a decrease in sales. The gross profit margin was 49% of
sales for the three months ended May 31, 2007 as compared to 46.5% of sales for
the three months ended May 31, 2006. The improvement in the gross profit margin
is due to the mix of products sold and a decrease in manufacturing costs.
Research and product development costs increased $47,000 to $227,000 for the
three months ended May 31, 2007 from $180,000 for the three months ended May 31,
2006. The increase was principally due to an increase in engineering personnel
and increased purchases of research and development materials in the current
period.
Marketing and selling costs decreased $86,000 to $234,000 for the three months
ended May 31, 2007 from $320,000 for the three months ended May 31, 2006. The
decrease was due to decreased commissions and travel expenses.
General and administrative costs decreased $36,000 to $183,000 for the three
months ended May 31, 2007 from $219,000 for the three months ended May 31, 2006.
The decrease was due to reduced insurance expense, employee bonuses and a
reduction in stock based compensation expense.
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 the one
described below. For a detailed discussion on the application of this 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.
9
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.
10
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 and President (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 May 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 first fiscal quarter of 2008 that have materially
affected, or are reasonably likely to materially affect, internal controls over
financial reporting.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
(a) Exhibits
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.
12
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: June 22, 2007
SONO-TEK CORPORATION
(Registrant)
/s/ Christopher L. Coccio
By: ____________________________________
Christopher L. Coccio
Chief Executive Officer and President
/s/ Stephen J. Bagley
By: ____________________________________
Stephen J. Bagley
Chief Financial Officer
13