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: November 30, 2004
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
(Exact name of small business issuer as specified in its charter)
New York 14-1568099
------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2012 Rt. 9W, Milton, NY 12547
(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 January 7, 2005
----- ---------------
Common Stock, par value $.01 per share 13,788,323
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements: 1 - 3
Consolidated Balance Sheets - November 30, 2004 (Unaudited) and
February 29, 2004 1
Consolidated Statements of Operations - Nine Months and Three Months Ended
November 30, 2004 and 2003 (Unaudited) 2
Consolidated Statements of Cash Flows - Nine Months Ended November 30, 2004
and 2003 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 10
Item 2 - Management's Discussion and Analysis or Plan of Operations 11 - 17
Item 3 - Controls and Procedures 18
Part II - Other Information 19 - 20
Signatures and Certifications 21 -24
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
November 30, February 29,
2004 2004
Unaudited Audited
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 416,676 $ 189,987
Accounts receivable (less allowance of $24,046 and $13,675
At November 30 and February 29, respectively) 851,954 813,835
Inventories 1,354,631 905,469
Prepaid expenses and other current assets 65,237 83,599
Deferred tax asset 117,000 117,000
----------- -----------
Total current assets 2,805,498 2,109,890
----------- -----------
Equipment, furnishings and leasehold improvements
(less accumulated depreciation of $700,233 and
$675,795 at November 30 and February 29, respectively) 65,754 57,835
Intangible assets, net 23,983 31,050
Other assets 7,171 6,542
Deferred tax asset 468,000 468,000
----------- -----------
TOTAL ASSETS $ 3,370,406 $ 2,673,317
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 376,111 $ 245,981
Accrued expenses 513,677 441,117
Line of Credit 312,000 312,000
Subordinated mezzanine debt 450,000 282,144
Current maturities of long term debt 38,499 42,189
----------- -----------
Total current liabilities 1,690,287 1,323,431
Subordinated mezzanine debt 150,000 557,856
Long term debt, less current maturities -- 16,960
----------- -----------
Total liabilities 1,840,287 1,898,247
----------- -----------
Commitments and Contingencies -- --
Put Warrants 188,223 188,223
Stockholders' Equity
Common stock, $.01 par value; 25,000,000 shares
authorized, 11,444,506 and 10,494,156 shares
issued and outstanding at November 30 and
February 29, respectively 114,446 104,942
Additional paid-in capital 6,620,316 6,465,436
Accumulated deficit (5,392,866) (5,983,531)
----------- -----------
Total stockholders' equity 1,341,896 586,847
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,370,406 $ 2,673,317
=========== ===========
See notes to consolidated financial statements.
1
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended November 30, Three Months Ended November 30,
Unaudited Unaudited
2004 2003 2004 2003
------------------------------- -------------------------------
Net Sales $ 4,391,653 $ 2,395,002 $ 1,670,284 $ 945,745
Cost of Goods Sold 2,008,596 1,018,895 786,349 417,821
------------ ------------ ------------ ------------
Gross Profit 2,383,057 1,376,107 883,935 527,924
------------ ------------ ------------ ------------
Operating Expenses
Research and product development costs 361,781 269,812 133,933 86,983
Marketing and selling expenses 755,078 477,647 249,270 189,677
General and administrative costs 594,154 420,157 224,939 145,028
------------ ------------ ------------ ------------
Total Operating Expenses 1,711,013 1,167,616 608,142 421,688
------------ ------------ ------------ ------------
Operating Income 672,044 208,491 275,793 106,236
Interest Expense (82,171) (130,209) (23,839) (38,004)
Interest and Other Income 6,793 8,105 2,988 250
------------ ------------ ------------ ------------
Income from Operations Before Income Taxes 596,666 86,387 254,942 68,482
Income Tax Expense 6,000 1,110 6,000 0
------------ ------------ ------------ ------------
Net Income $ 590,666 $ 85,277 $ 248,942 $ 68,482
============ ============ ============ ============
Basic Earnings Per Share $ 0.05 $ 0.01 $ 0.02 $ 0.01
============ ============ ============ ============
Diluted Earnings Per Share $ 0.05 $ 0.01 $ 0.02 $ 0.01
============ ============ ============ ============
Weighted Average Shares - Basic 11,134,960 9,200,161 11,378,017 9,200,161
============ ============ ============ ============
Weighted Average Shares - Diluted 13,014,931 10,582,278 13,297,293 10,943,467
============ ============ ============ ============
See notes to consolidated financial statements.
2
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended November 30,
Unaudited
2004 2003
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 590,666 $ 85,277
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 31,853 36,595
Imputed interest expense 0 17,608
Provision for doubtful accounts 9,000 (1,629)
Decrease (Increase) in:
Accounts receivable (47,119) (247,354)
Inventories (449,162) (74,332)
Prepaid expenses and other current assets 17,846 (28,285)
Increase in:
Accounts payable and accrued expenses 202,690 242,424
--------- ---------
Net Cash Provided By Operating Activities 355,774 30,304
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Patent Application Costs (346) (1,137)
Purchase of equipment and furnishings (31,840) (6,257)
Other (633) 0
--------- ---------
Net Cash Used In Investing Activities (32,819) (7,394)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 117,684 1,564
Proceeds from issuance of stock 46,700 0
Conversion of debt to equity 20,636 0
Loan payments/exchanges (20,636) 0
Repayments of notes payable and loans (260,650) (44,605)
--------- ---------
Net Cash Used In Financing Activities (96,266) (43,041)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 226,689 (20,131)
CASH AND CASH EQUIVALENTS
Beginning of period 189,987 265,658
--------- ---------
End of period $ 416,676 $ 245,527
========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 90,416 $ 103,964
========= =========
See notes to consolidated financial statements.
3
SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
Nine Months Ended November 30, 2004 and 2003
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") that the Company acquired on August 3, 1999. SCS is a
non-operating entity. All significant intercompany accounts and transactions are
eliminated in consolidation.
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 29, 2004, 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 results for such interim periods are not necessarily
indicative of the results to be expected for the year.
Stock-Based Employee Compensation - The Company accounts for stock-based
compensation plans utilizing the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and the
Financial Accounting Statement of Financial Accounting Standards No. 123 and No.
148 (SFAS 123 and SFAS 148), "Accounting for Stock-Based Compensation". Under
SFAS 123, the Company will continue to apply the provisions of APB 25 to its
stock-based employee compensation arrangements, and is only required to
supplement its financial statements with additional pro-forma disclosures. The
Company has elected to provide the related pro-forma disclosures utilizing an
intrinsic value method of accounting for such stock based compensation.
The estimated fair value of options granted during Fiscal Year 2004 was $.22 per
share and the estimated fair value of options granted during the nine months
ended November 30, 2004 was $1.56 per share. The Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the 2003 and 1993 Plans. Had compensation cost for the Company's stock option
plan been determined based on the intrinsic value at the option grant dates for
awards in accordance with the accounting provisions of SFAS 123, the Company's
net income and basic and diluted earnings per share for the three and nine month
periods ended November 30, 2004 and 2003 would have been changed to the pro
forma amounts indicated below:
4
Nine Months Ended Three Months Ended
November 30, November 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Profit:
As reported $590,666 $85,277 $248,942 $68,482
Deduct: Total stock based
employee compensation
under intrinsic value based
method for all
awards, net of tax effects 547,560 5,868 182,520 1,956
-------- ------- -------- -------
Pro forma $ 43,106 $79,409 $ 66,422 $66,526
======== ======= ======== =======
Basic and diluted earnings per share:
As reported $ 0.05 $ 0.01 $ 0.02 $ 0.01
Pro forma $ 0.00 $ 0.01 $ 0.01 $ 0.01
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 $44,399 and $41,132 at
November 30, 2004 and February 29, 2004, respectively.
Deferred financing fees of $35,523 at August 31, 2004 are being amortized over
the term of the related debt. Accumulated amortization was $35,523 at November
30, 2004.
NOTE 2: INVENTORIES
Inventories at November 30, 2004 are comprised of:
Finished goods $ 386,850
Work in process 680,066
Consignment 5,379
Raw materials and subassemblies 549,585
----------
Total 1,621,880
Less: Allowance (267,249)
----------
Net inventories $1,354,631
==========
NOTE 3: RELATED PARTY TRANSACTIONS
Subordinated Mezzanine Debt
One of the Company's directors and a significant shareholder and another
significant shareholder are participants with Norwood Venture Corporation in its
subordinated mezzanine financing.
5
NOTE 4: SUBORDINATED MEZZANINE DEBT
Norwood Ventures Corporation, a mezzanine lender to the Company, loaned $850,000
to the Company at various times from September 30, 1999 to April 30, 2001.
Coincident with these loans were the issuance of 2,077,777 detachable stock
purchase warrants (the "Put Warrants") to purchase the Company's common stock at
values from $.10 to $.15 per share. During the fiscal year ended February 29,
2004, 24,444 warrants were exercised and $10,000 of the principal of this loan
was repaid. During the nine months ended November 30, 2004, the Company
exchanged 49,133 shares of common stock valued at $.42 per share for a reduction
of $20,636 of this debt. Additionally, $219,364 of principal was repaid during
the nine month period ended November 30, 2004. The outstanding balance of the
loan was $600,000 at November 30, 2004 and 2,053,333 warrants with an aggregate
exercise price of $272,556 remain outstanding. Monthly principal repayments of
$42,000 per month are required commencing November 30, 2005 until the unpaid
balance of the loan is repaid. The Company, at its option can make prepayments
at anytime.
The Put Warrant holders may, commencing after the delivery of the February 29,
2008 audited financial statements and terminating one year thereafter, require
the Company to purchase such warrants at a price equal to the result calculated
by subtracting the aggregate exercise of the warrants to the extent remaining
from the product of the greatest of:
a) the fair market value of the Company as determined by an independent
appraiser as at the end of the Company's fiscal year end February
29, 2008 (the "Company's 2008 Fiscal Year"),
b) five times EBITDA for the Company's 2008 Fiscal Year or, if higher,
average EBITDA for such year and the fiscal year of the Company
immediately prior to such year, or
c) the book value of the Company as at the end of the Company's 2008
Fiscal Year,
multiplied by the fraction of (the "Put Fraction") the numerator of which is the
total number of shares of common stock the Put Warrant holders would own upon
such exercise of the warrants and the denominator of which would be the total
number of common shares outstanding upon the exercise of all equity rights to
acquire common stock.
Depending on the fair value of the Company based on the above computations from
the Company's 2008 Fiscal Year results will determine if the Company will be
required, assuming such Put Warrant holders exercise their put warrants, to pay
up to $272,556 for the warrants. These warrants are exercisable for the purchase
of up to 2,053,333 shares of common stock.
The put provision above may be terminated if the Company's stock trades at an
average daily volume of 50,000 shares and at an average price above $1.50 per
share for a period of 180 consecutive days.
6
See subsequent events footnote for additional information regarding repayment of
a major portion of this debt, elimination of the Put provision and exercise of
the warrants,
NOTE 6: 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 November
30, 2004, there were 145,662 options outstanding under the 1993 Plan.
During Fiscal Year 2004, the Company granted options for 20,000 shares
exercisable at $.19 per share to a director of the Company and options for
10,000 shares at $.25 to a consultant to the Company. There were no options
granted to employees of the Company. During Fiscal Year 2004, compensation
expense of $1,564 was recognized based on the fair value of the options granted
to a consultant. During the nine month period ended November 30, 2004, 540,000
stock options exercisable at prices from $.95 to $1.75 per share were granted to
officers of the Company, 59,000 options exercisable at prices from $.95 to $1.33
per share were granted to qualified employees of the Company, 40,000 options at
$1.06 per share to directors of the Company and 50,000 options exercisable at
prices from $1.06 to $1.95 to consultants.
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.
Warrants - On October 28, 2004, the Company issued two warrants for the purchase
of 285,714 shares of common stock exercisable at market ($1.75) to the Empire
State Development Corporation for the purpose of facilitating additional equity
investment in the Company. Such warrants may be exercised until October 28, 2005
and were issued in reliance of the exemption of Section 4(2) of the Securities
Act of 1933. There were no warrants issued during Fiscal 2004.
7
NOTE 7: EARNINGS PER SHARE
The denominator for the calculation of diluted earnings per share at November
30, 2004 and 2003 are calculated as follows:
November 30, 2004 November 30, 2003
----------------- -----------------
Denominator for basic earnings per share 11,134,960 9,200,161
Dilutive effect of warrants 1,878,293 1,161,111
Dilutive effect of stock options 1,679 221,006
---------- ----------
Denominator for diluted earnings per share 13,014,931 10,582,278
========== ==========
NOTE 8: NEW ACCOUNTING DEVELOPMENTS
FASB 151 - Inventory Costs
In November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
FASB 152 - Accounting for Real Estate Time-Sharing Transactions
In December 2004, the FASB issued FASB Statement No. 152, which amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.
8
FASB 153 - Exchanges of Nonmonetary Assets
In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary assets. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
FASB 123 (revised 2004) - Share-Based Payments
In December 2004, the FASB issued a revision to FASB Statement No. 123,
Accounting for Stock Based Compensation. This Statement supercedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plans.
A nonpublic entity will measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of those instruments, except in certain circumstances.
A public entity will initially measure the cost of employee services received in
exchange for an award of liability instruments based on its current fair value;
the fair value of that award will be re-measured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period. A
nonpublic entity may elect to measure its liability awards at their intrinsic
value through the date of settlement.
9
The grant-date fair value of employee share options and similar instruments will
be estimated using the option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for the
same or similar instruments are available).
Excess tax benefits, as defined by this Statement, will be recognized as an
addition to paid-in-capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense unless there are excess tax benefits from previous awards
remaining in paid-in capital to which it can be offset.
The notes to the financial statements of both public and nonpublic entities will
disclose information to assist users of financial information to understand the
nature of share-based payment transactions and the effects of those transactions
on the financial statements.
For public entities that file as small business issuers the effective date will
be as of the beginning of the first interim or annual reporting period that
begins after December 15, 2005, Management intends to comply with this Statement
at the scheduled effective date for the relevant financial statements of the
Company.
NOTE 9: SUBSEQUENT EVENTS
On December 3, 2004, the Company sold 76,750 units each consisting of four
shares of common stock and one warrant to purchase one additional share of
common stock at $1.75 during the two year period ending December 3, 2006.
Proceeds of this offering of $530,000 were used to repay $450,000 of Norwood
Venture Corporation outstanding debt and the balance was used for working
capital. Due to the repayment made on the Norwood loan during December 2004,
$450,000 of this loan was classified as current at November 30, 2004.
On December 15, 2004, Norwood Venture Corporation and the Company reached an
agreement whereby the "Put" rights under the Norwood Loan and Warrant Agreement
were terminated for a sum of $188,000 paid by the Company to Norwood. Also,
Norwood exercised all of its warrants to purchase the Company's stock, resulting
in the issuance of 2,022,017 shares of common stock.
On December 21, 2004, the Company and M&T Bank entered into a borrowing
agreement wherein the bank would lend up to $500,000 on a revolving basis with
interest at prime and $150,000 of additional availability for future equipment
purchases. One of the provisions of the new lending agreement is that the
Company must repay all advances under the $500,000 line of credit for a 30 day
period once a year or such outstanding balance on the line of credit would
revert to a term loan payable over 36 months in equal monthly installments. The
Company borrowed $350,000 under this lending arrangement and the proceeds were
used to pay off two higher interest bank loans totaling $316,536 and several
other smaller loans totaling $33,963. These obligations have been classified as
current in the November 30, 2004 financial statements.
10
SONO-TEK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward-Looking Statements
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Federal Securities Laws. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following:
- The Company's ability to respond to competition in its markets;
- General economic conditions in the Company's markets.
The Company undertakes no obligation to update publicly 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.
The Company has a well established position in the electronics industry with its
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. The
Company experienced a significant recovery of this market towards the latter
part of Fiscal Year 2004 and to date into Fiscal Year 2005, resulting in
increased orders for the Company's equipment.
In the past two years, the Company has focused engineering resources on the
medical device market, with emphasis on providing coating solutions for the new
generation of drug coated stents. The Company has sold many specialized
ultrasonic nozzles and AccuMist(TM) and Micromist stent coating systems to large
pharmaceutical and 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. The
11
Company has begun to 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. The Company has developed a unique patented
vacuum-based ultrasonic system capable of uniformly coating batches of stents
with anti-restenosis coatings, and is now offering this technology to selected
manufacturers for licensing.
The Company also committed engineering resources to develop a general industrial
coating product, the WideTrack coating system, which is finding increasing
applications in the glass, food and textile manufacturing industries. The
WideTrack is saving customers money by reducing the use of materials and
lessening the environmental impact by significantly reducing overspray, which is
common with other types of coating systems.
In conclusion, the Company's sales levels have increased as the result of an
improved economy, product development efforts, and related marketing thrusts
which have had the effects of improving net income, reducing debt, and bringing
shareholders' equity from a deficit position to a positive position.
Liquidity and Capital Resources
The Company's working capital increased $329,000 from a working capital of
$786,000 at February 29, 2004 to $1,116,000 at November 30, 2004. The Company's
current ratio is 1.66 to 1 at November 30, 2004, as compared to 1.59 to 1 at
February 29, 2004. The Company's current ratio at November 30, 2004 reflects the
prepayment of $450,000 to Norwood Venture Corporation in late December 2004
which is therefore classified as a current liability. After this repayment and
the additional equity investment made of December 3, 2004, of $515,000 the
current ratio will exceed 2.00 to 1. The Company's debt to equity ratio has
improved from 3.23 to 1 at February 29, 2004 to 1.37 to 1 at November 30, 2004.
Stockholders' equity increased $755,000 from $587,000 at February 29, 2004 to
$1,342,000 at November 30, 2004. The increase in stockholders' equity was the
result of the net profit of $591,000 for the nine months ended November 30,
2004, stock option exercises of $117,000, and stock issuance of $47,000.
Inventory increased $449,000 or 50% from $ 905,000 to $1,296,000 as the result
of the large influx of orders received during the nine months ended November 30,
2004 and the diversification of the Company's product lines.
The Company currently has a $350,000 line of credit with a bank, in the form of
a demand note. The loan is collateralized by accounts receivable, inventory and
all other personal property of the Company and is guaranteed by the former Chief
Executive Officer of the Company. As of August 31, 2004 and February 29, 2004,
the outstanding balance was $312,000. New borrowings are presently precluded
under this note. During December 2004, the Company entered into a new revolving
credit agreement with another bank and repaid all balances under the old line of
credit.
12
The Company and its mezzanine lender, Norwood Venture Corporation ("Norwood"),
reached an agreement during May 2004 whereby principal payments under the
$840,000 loan would be deferred until November 2005. At that time, Norwood would
be repaid over 20 months at $42,000 per month. As a result of this agreement,
$282,000 of current debt was reclassified as long-term. During the six months
ended August 31, 2004, the Company prepaid $220,000 of this loan. Additionally,
$20,000 of this loan was converted to 49,000 shares of the Company's common
stock by Norwood on May 28, 2004. During December 2004 the Company prepaid
another $450,000 of this loan and the current residual outstanding balance is
only $150,000.
Results of Operations
For the nine months ended November 30, 2004, the Company's sales increased
$1,997,000 to $4,392,000 as compared to $2,395,000 for the nine months ended
November 30, 2003. For the three months ended November 30, 2004, the Company's
sales increased $725,000 to $1,670,000 as compared to $946,000 for the three
months ended November 30, 2003. The increases were principally the result of
increased fluxer sales, the sale of a large cleaning system, and sales of new
products, such as Micromist and Accumist stent coaters, spray dryers using
SonoDry nozzles and WideTrack systems for glass coating.
The Company's gross profits increased $1,007,000 to $2,383,000 for the nine
months ended November 30, 2004 from $1,376,000 for the nine months ended
November 30, 2003. The gross profit margin was 54.3% of sales for the nine
months ended November 30, 2004 as compared to 57.5% of sales for the nine months
ended November 30, 2003. The Company's gross profit increased $356,000 to
$884,000 for the three months ended November August 31, 2004 from $528,000 for
the three months ended November 30, 2003. The gross profit margin was 52.9% of
sales for the three months ended November 30, 2004 as compared to 55.8% of sales
for the three months ended November 30, 2003. The changes in gross margin
occurred as the result of the changing mix of products in each period.
Research and product development costs increased $92,000 to $362,000 for the
nine months ended November 30, 2004 from $270,000 for the nine months ended
November 30, 2003 and $47,000 to $134,000 for the three months ended November
30, 2004 from $87,000 for the three months ended November 30, 2003. The
increases were principally due to an increase in engineering personnel and
increased purchases of research and development materials in the current
periods.
Marketing and selling costs increased $277,000 and $60,000 for the respective
nine and three months ended November 30, 2004 as compared to the same periods
ended November 30, 2003. The increases were due principally to increased
commissions, trade show costs and increased labor and fringe benefit costs.
General and administrative costs increased $166,000 and $72,000 for the
respective nine and three months ended November 30, 2004 as compared to the same
periods ended November 30, 2003. The increase was due principally to increased
payroll costs, increased legal, consulting and accounting costs
13
Interest expense decreased $48,000 to $82,000 for the nine months ended November
30, 2004 from $130,000 for the nine months ended November 30, 2003. Interest
expense decreased $14,000 to $24,000 for the three months ended November 30,
2004 from $38,000 for the three months ended November 30, 2003. The decrease is
primarily due to reduced interest and amortization on the Norwood loans and
reduced interest on related party and bank loans partially offset by increased
interest on bank loans resultant from increases in the prime lending rate.
The Company recorded a tax provision of $6,000 for the nine and six months ended
November 30, 2004. Such provision was made for alternative minimum taxes as the
Company can offset 90% of its taxable income with its tax loss carryforwards.
The Company's net income was $591,000 and $249,000 for the nine and three months
ended November 30, 2004 as compared to $85,000 and $68,000 for the nine and
three month periods ended November 30, 2003.
The Company's backlog of firm orders was $728,000 at November 30, 2004. All of
these orders are deliverable before the end of the Company's current fiscal
year, which is February 28, 2005.
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 29, 2004.
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.
During the fourth quarter of the year ended February 29, 2004, 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.
14
Based on its current income level, the Company must provide for Alternative
Minimum Taxes.
Impact of New Accounting Pronouncements
FASB 151 - Inventory Costs
In November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
FASB 152 - Accounting for Real Estate Time-Sharing Transactions
In December 2004, the FASB issued FASB Statement No. 152, which amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.
FASB 153 - Exchanges of Nonmonetary Assets
In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary assets. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
15
FASB 123 (revised 2004) - Share-Based Payments
In December 2004, the FASB issued a revision to FASB Statement No. 123,
Accounting for Stock Based Compensation. This Statement supercedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plans.
A nonpublic entity will measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of those instruments, except in certain circumstances.
A public entity will initially measure the cost of employee services received in
exchange for an award of liability instruments based on its current fair value;
the fair value of that award will be re-measured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period. A
nonpublic entity may elect to measure its liability awards at their intrinsic
value through the date of settlement.
The grant-date fair value of employee share options and similar instruments will
be estimated using the option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for the
same or similar instruments are available).
Excess tax benefits, as defined by this Statement, will be recognized as an
addition to paid-in-capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense unless there are excess tax benefits from previous awards
remaining in paid-in capital to which it can be offset.
16
The notes to the financial statements of both public and nonpublic entities will
disclose information to assist users of financial information to understand the
nature of share-based payment transactions and the effects of those transactions
on the financial statements.
For public entities that file as small business issuers the effective date will
be as of the beginning of the first interim or annual reporting period that
begins after December 15, 2005, Management intends to comply with this Statement
at the scheduled effective date for the relevant financial statements of the
Company.
17
SONO-TEK CORPORATION
CONTROLS AND PROCEDURES
The Company has established and maintains "disclosure controls and procedures"
(as those terms are defined in Rules 13a -14(c) and 15d- 14(c) under the
Securities and Exchange Act of 1934 (the "Exchange Act'). Christopher L. Coccio,
Chief Executive Officer and President (principal executive and accounting
officer) of the Company, has evaluated the Company's disclosure controls and
procedures as of November 30, 2004. Based on his evaluation, Dr. Coccio has
concluded that the Company's disclosure controls and procedures are effective to
ensure that the information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by SEC rules and
forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls after November 30, 2004.
There were no significant deficiencies or material weaknesses, and therefore
there were no corrective actions taken.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On October 28, 2004, the Company issued two warrants for the
purchase of 285,714 shares of common stock exercisable at market
($1.75) to the Empire State Development Corporation for the
purpose of facilitating additional equity investment in the
Company. Such warrants may be exercised until October 28, 2005 and
were issued in reliance of the exemption of Section 4(2) of the
Securities Act of 1933.
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 on Form 8-K
(a) Exhibits
31 - Rule 13a - 14(a)/15d - 14(a) Certification
32 - Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on September 27, 2004
relating to a press release announcing the Company being appointed
exclusive distributor for EVS International products in the United
States and Canada.
The Company filed a report on Form 8-K on October 13, 2004 relating
to a press release on the results of operations for the quarter
ended August 31, 2004.
The Company filed a report of Form 8-K on December 9, 2004 relating
to its completion of a private offering of common shares on December
3, 2004.
19
The Company filed a report on Form 8-K on December 20, 2004 relating
to its agreement with Norwood Venture Corporation for the early
extinguishment of Norwood's Put rights and the exercise of all of
Norwood's common stock purchase warrants.
The Company filed a report on Form 8-K on December 22, 2004 relating
to its new banking agreement with M&T Bank that provides for a
$500,000 line of credit and a $150,000 equipment lending line.
20
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 7, 2005
SONO-TEK CORPORATION
(Registrant)
/s/ Christopher L. Coccio
By: ____________________________________
Christopher L. Coccio
Chief Executive Officer and President
(principal executive and accounting officer)
21