Sono-Tek (SOTK) - 2023 Q2 - Quarterly Report

Part I - Financial Information This section provides an overview of Sono-Tek Corporation's financial performance and position, including condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1 – Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Sono-Tek Corporation for the three and six months ended August 31, 2022, compared with the same periods in 2021, including balance sheets, statements of income, stockholders' equity, and cash flows Condensed Consolidated Balance Sheets As of August 31, 2022, total assets increased to $18.80 million from $17.63 million at February 28, 2022, driven by increases in accounts receivable, inventories, and marketable securities, while total liabilities rose to $4.47 million and stockholders' equity grew to $14.32 million Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | August 31, 2022 ($) | February 28, 2022 ($) | | :--- | :--- | :--- | | Total Current Assets | $15,670,008 | $14,497,599 | | Total Assets | $18,796,356 | $17,625,534 | | Total Current Liabilities | $4,309,254 | $3,715,381 | | Total Liabilities | $4,474,883 | $3,884,221 | | Total Stockholders' Equity | $14,321,473 | $13,741,313 | | Total Liabilities and Stockholders' Equity | $18,796,356 | $17,625,534 | Condensed Consolidated Statements of Income For the six months ended August 31, 2022, net sales slightly increased to $7.81 million, but net income significantly decreased to $467,759 due to a prior-year PPP loan forgiveness, while the three-month period saw a decrease in both net sales and net income Six Months Ended August 31, (Unaudited) | Metric | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net Sales | $7,814,864 | $7,714,935 | | Gross Profit | $4,002,626 | $3,898,164 | | Operating Income | $558,103 | $791,484 | | Net Income | $467,759 | $1,610,576 | | Diluted EPS | $0.03 | $0.10 | Three Months Ended August 31, (Unaudited) | Metric | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net Sales | $3,763,329 | $4,070,467 | | Gross Profit | $1,895,613 | $2,073,999 | | Operating Income | $177,578 | $448,576 | | Net Income | $162,123 | $343,824 | | Diluted EPS | $0.01 | $0.02 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from $13.74 million at February 28, 2022, to $14.32 million at August 31, 2022, primarily driven by net income and stock-based compensation expense for the six-month period - Stockholders' equity grew to $14,321,473 at August 31, 2022, up from $13,741,313 at February 28, 2022[14] - The increase in equity for the six months ended August 31, 2022, was mainly due to net income ($467,759) and stock-based compensation ($112,401)[14][20] Condensed Consolidated Statements of Cash Flows For the six months ended August 31, 2022, net cash provided by operating activities significantly decreased to $223,629, while net cash used in investing activities was $755,130, resulting in a net decrease in cash and cash equivalents of $531,501, ending the period with a balance of $4.31 million Six Months Ended August 31, (Unaudited) | Cash Flow Activity | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $223,629 | $1,196,912 | | Net Cash (Used in) Provided by Investing Activities | ($755,130) | $862,116 | | Net (Decrease) Increase in Cash | ($531,501) | $2,059,028 | | Cash and Cash Equivalents, End of Period | $4,309,057 | $6,143,106 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and financial data, covering business description, revenue recognition, inventory, stock-based compensation, EPS, credit facilities, sales concentrations, and uncertainties related to COVID-19 and supply chain challenges - The company is a world leader in designing and manufacturing ultrasonic coating systems for various markets, including microelectronics, alternative energy, and medical[21] Sales Revenue by Product Line (Six Months Ended Aug 31) | Product Line | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Multi-Axis Coating Systems | $3,470,000 | $3,970,000 | | Other | $1,728,000 | $1,378,000 | | OEM Systems | $1,316,000 | $1,171,000 | | Fluxing Systems | $707,000 | $476,000 | | Integrated Coating Systems | $594,000 | $720,000 | | TOTAL | $7,815,000 | $7,715,000 | - Export sales accounted for approximately 54% of total revenues in the first half of fiscal 2023, down from 64% in the same period of fiscal 2022[64] - The company faces challenges from global supply chain constraints, particularly for electronic components, and inflationary pressures, which may adversely affect business operations[44][45] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the second quarter and first half of fiscal 2023, highlighting the impact of supply chain disruptions, strong sales growth in industrial and medical markets, a significant sales decline in Asia-Pacific, and detailed analysis of sales, gross profit, operating expenses, and net income Overview and Performance Highlights Sono-Tek designs and manufactures ultrasonic coating systems, with a strategic shift towards complete machine solutions, resulting in 1% net sales growth to $7.8 million for H1 FY2023, despite an 8% sales decrease in Q2 due to supply chain delays, with backlog at $5.0 million as of August 31, 2022 - The company's growth strategy focuses on leveraging its technology to provide complete machine solutions and higher-value subsystems, which has increased average unit selling prices[72][74] - Q2 FY2023 net sales decreased 8% to $3.76 million, primarily due to supply chain issues delaying shipments, with these issues expected to continue impacting revenue through Q3[77] - For H1 FY2023, net sales increased 1% to $7.81 million, driven by strong performance in medical and industrial coating machinery[77] - Backlog was $5.05 million on August 31, 2022, a 19% increase from the end of Q1 FY2023 but a 5% decrease from the fiscal year-end 2022[77] Results of Operations For H1 FY2023, total sales grew 1% year-over-year, driven by significant increases in the industrial and medical markets, despite a 46% decline in Asia-Pacific sales due to COVID-19 lockdowns, while gross profit margin improved to 51.2% and operating expenses rose 11% due to R&D and marketing costs, leading to a decrease in operating income Sales by Market (Six Months Ended Aug 31) | Market | 2022 ($) | 2021 ($) | Change % | | :--- | :--- | :--- | :--- | | Electronics/Microelectronics | $3,010,000 | $3,707,000 | (19%) | | Medical | $2,473,000 | $1,814,000 | 36% | | Alternative Energy | $1,306,000 | $1,389,000 | (6%) | | Industrial | $806,000 | $370,000 | 118% | | Emerging R&D and Other | $220,000 | $435,000 | (49%) | Sales by Geography (Six Months Ended Aug 31) | Region | 2022 ($) | 2021 ($) | Change % | | :--- | :--- | :--- | :--- | | U.S. & Canada | $3,591,000 | $2,781,000 | 29% | | Asia Pacific (APAC) | $1,533,000 | $2,853,000 | (46%) | | Europe, Middle East, Asia (EMEA) | $1,826,000 | $1,436,000 | 27% | | Latin America | $865,000 | $645,000 | 34% | - The significant drop in APAC sales was primarily due to decreased shipments to China resulting from COVID-19 related lockdowns and order placement delays[84] - H1 FY2023 gross profit margin improved to 51.2% from 50.5% YoY, attributed to a favorable product mix with increased OEM and medical industry sales[86] - Total operating expenses for H1 FY2023 increased by 11% to $3.45 million, mainly due to a 24% rise in R&D costs for growth initiatives and increased travel/trade show expenses[88] Liquidity and Capital Resources As of August 31, 2022, the company's working capital increased to $11.36 million, with combined cash, cash equivalents, and marketable securities totaling $10.66 million, while operating activities generated $224,000 in cash for H1 FY2023, a significant decrease from the prior year, and the company had no outstanding debt with an available credit line of $1.495 million - Working capital increased by $579,000 to $11.36 million at August 31, 2022, from February 28, 2022[105] Cash and Marketable Securities | Category | August 31, 2022 ($) | February 28, 2022 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $4,309,000 | $4,841,000 | | Marketable securities | $6,348,000 | $5,868,000 | | Total | $10,657,000 | $10,709,000 | - Cash from operating activities decreased by $973,000 in H1 FY2023 compared to H1 FY2022, primarily due to increases in accounts receivable and inventories[108] - Stockholders' equity increased by $580,000 to $14.32 million at August 31, 2022, driven by net income and stock-based compensation[107] Item 3 – Quantitative and Qualitative Disclosures about Market Risk The company does not engage in trading or speculative use of financial instruments or derivatives and is not subject to material foreign currency exchange rate risk as all sales transactions are in U.S. dollars, with market rate risk from interest rate changes also considered not material - The company is not subject to material foreign currency exchange rate risk as all sales transactions are completed in US dollars[117] - Market rate risk from changing interest rates is not considered material, despite holding $4.3 million in cash and $6.3 million in marketable securities[118] Item 4 – Controls and Procedures The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of August 31, 2022, ensuring timely reporting of SEC-required information, with no material changes to internal controls over financial reporting during the second fiscal quarter of 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of August 31, 2022[119] - There were no changes in the company's internal controls over financial reporting during the second fiscal quarter of 2023 that have materially affected, or are reasonably likely to materially affect, these controls[120] Part II - Other Information This section provides disclosures on legal proceedings, risk factors, and other standard items such as sales of equity securities, defaults, and a list of exhibits filed with the report Item 1. Legal Proceedings The company reports that there are no legal proceedings to disclose for the period - None[123] Item 1A. Risk Factors The company states there are no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended February 28, 2022 - There are no material changes from risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended February 28, 2022[123] Other Items (2, 3, 4, 5, 6) This section covers several standard disclosure items, reporting no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures, and listing the exhibits filed with the report, including officer certifications and financial data in Inline XBRL format - Item 2: No unregistered sales of equity securities[124] - Item 3: No defaults upon senior securities[126] - Item 6: Lists exhibits filed, including CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and financial information in Inline XBRL format (101, 104)[124][125]