Sono-Tek (SOTK) - 2023 Q4 - Annual Report

Part I Business Sono-Tek Corporation is a global leader in designing and manufacturing ultrasonic coating systems for various industries, with 55% of fiscal 2023 sales from outside the U.S. and Canada - Sono-Tek designs and manufactures ultrasonic coating systems for applying precise, thin film coatings across several key industries: microelectronics/electronics, alternative energy, medical, industrial, and R&D[10][20] - The company's strategy focuses on advancing ultrasonic coating technologies, growing globally, increasing earnings through lean manufacturing, and developing new solutions to solve customer problems[25][27] - In fiscal 2023, international sales (outside the U.S. and Canada) accounted for 55% of total net sales. The company's two largest customers represented 14% of net sales[24][34] Research and Development Expenses | Fiscal Year | R&D Expense | % of Sales | | :--- | :--- | :--- | | 2023 | $2,149,000 | 14.3% | | 2022 | $1,730,000 | 10.1% | - As of February 28, 2023, the company employed 73 full-time and 11 part-time employees[35] Risk Factors The company faces operational, financial, and market risks, including supply chain disruptions, customer concentration, and limited stock trading volume - The business is exposed to risks from pandemics like COVID-19, which can disrupt operations, supply chains, and customer demand[38][40] - A significant portion of revenue comes from a few major customers. In FY2023, the two largest customers accounted for 14% of net sales, down from 24% in FY2022[42] - The company has experienced challenges in procuring electronic components due to global supply chain shortages, which may continue to cause lengthened lead times[29][71] - All products are manufactured and assembled at a single facility in Milton, New York, making operations vulnerable to disruption at this site[69] - International sales accounted for 55% of total net sales in FY2023, exposing the company to risks such as regulatory changes, tariffs, and geopolitical instability[73] - Inflationary pressures are expected to remain elevated, potentially increasing the company's cost structure for labor, shipping, and materials[78] - The common stock (SOTK) has limited trading volume, which could make it difficult for investors to liquidate their positions[86] Unresolved Staff Comments The company reports no unresolved staff comments - None[108] Properties Sono-Tek owns a 50,000 square foot industrial park in Milton, New York, utilizing 37,000 square feet for its operations - The company owns a 50,000 square foot industrial park in Milton, New York, using 37,000 square feet for its own operations[108] - Approximately 13,000 square feet of the park is leased or available for lease to third parties[109] Legal Proceedings The company reports no legal proceedings - None[110] Mine Safety Disclosures This section is not applicable to the company - Not Applicable[110] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq Capital Market (SOTK), with 97 record holders and approximately 1,519 beneficial shareholders, and no history of cash dividends, retaining earnings for business use - Common stock trades on the Nasdaq Capital Market (SOTK)[112] - As of May 18, 2023, there were 97 record holders and approximately 1,519 beneficial shareholders[112] - The company has no history of paying cash dividends and plans to retain future earnings[112] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 net sales decreased 12% to $15.1 million due to supply chain issues, while gross profit margin improved and backlog increased 60% to $8.5 million, despite a 64% drop in operating income Fiscal 2023 Financial Highlights vs. Fiscal 2022 | Metric | Fiscal 2023 | Fiscal 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $15.1M | $17.1M | ($2.0M) | (12%) | | Gross Profit Margin | 50.8% | 50.3% | +0.5 p.p. | N/A | | Operating Income | $683,000 | $1.9M | ($1.2M) | (64%) | | Backlog (Year-End) | $8.5M | $5.3M | +$3.2M | 60% | | Cash & Marketable Securities | $11.4M | $10.7M | +$0.7M | 7% | Results of Operations Net sales for fiscal 2023 were $15.1 million, a 12% decrease from $17.1 million in fiscal 2022, primarily due to a 32% drop in Multi-Axis Coating Systems sales, leading to a 64% decline in operating income and 75% fall in net income Sales and Gross Profit (Fiscal Year Ended Feb 28) | | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $15,058,000 | $17,133,000 | $(2,075,000) | (12%) | | Gross Profit | $7,652,000 | $8,613,000 | $(961,000) | (11%) | | Gross Profit % | 50.8% | 50.3% | N/A | N/A | Product Sales Breakdown (Fiscal Year Ended Feb 28) | Product Line | 2023 Sales | 2022 Sales | Change (%) | | :--- | :--- | :--- | :--- | | Fluxing Systems | $1,179,000 | $691,000 | 71% | | Integrated Coating Systems | $1,114,000 | $1,182,000 | (6%) | | Multi-Axis Coating Systems | $6,785,000 | $9,912,000 | (32%) | | OEM Systems | $2,144,000 | $2,381,000 | (10%) | | Other | $3,836,000 | $2,967,000 | 29% | Market Sales Breakdown (Fiscal Year Ended Feb 28) | Market | 2023 Sales | 2022 Sales | Change (%) | | :--- | :--- | :--- | :--- | | Electronics/Microelectronics | $5,509,000 | $7,134,000 | (23%) | | Medical | $3,702,000 | $4,338,000 | (15%) | | Alternative Energy | $3,060,000 | $3,688,000 | (17%) | | Industrial | $2,440,000 | $1,055,000 | 131% | | Emerging R&D and Other | $347,000 | $918,000 | (62%) | Geographic Sales Breakdown (Fiscal Year Ended Feb 28) | Region | 2023 Sales | 2022 Sales | Change (%) | | :--- | :--- | :--- | :--- | | U.S. & Canada | $6,804,000 | $5,480,000 | 24% | | Asia Pacific (APAC) | $3,260,000 | $5,301,000 | (39%) | | Europe, Middle East, Asia (EMEA) | $3,448,000 | $5,255,000 | (34%) | | Latin America | $1,546,000 | $1,097,000 | 41% | Liquidity and Capital Resources Working capital increased to $11.1 million and total cash and securities to $11.4 million at fiscal year-end 2023, driven by net income and customer deposits, with $1.3 million cash from operations and an undrawn $1.5 million credit line Working Capital and Cash Position (as of Feb 28) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Working Capital | $11,117,000 | $10,782,000 | | Cash and cash equivalents | $3,355,000 | $4,841,000 | | Marketable securities | $8,090,000 | $5,868,000 | | Total Cash & Securities | $11,445,000 | $10,709,000 | - Stockholders' equity increased by $893,000 to $14.6 million, primarily due to net income of $636,000 and stock-based compensation of $257,000[144] - The company has a $1.5 million revolving credit line and a $750,000 equipment purchase facility. As of February 28, 2023, there were no outstanding borrowings under the line of credit[148] Critical Accounting Policies The company's financial statements adhere to U.S. GAAP, with key policies for income taxes, stock-based compensation, and revenue recognition under ASC 606 - The company uses the asset and liability method for income taxes and recognizes a valuation allowance if a deferred tax asset is not likely to be realized[156] - Stock-based compensation is valued using the Black-Scholes option pricing model, which requires subjective assumptions about stock price volatility and option life[157] - Revenue is recognized under ASC 606, depicting the transfer of goods or services to customers for the expected consideration[158] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of February 28, 2023, with no material changes to internal controls reported - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the fiscal year[162] - Management concluded that the company's internal control over financial reporting was effective as of February 28, 2023[163] Part III Directors, Executive Officers, and Corporate Governance The company's Board of Directors operates with two classes with staggered two-year terms, supported by three independent directors on the Audit and Compensation Committees, and adheres to a Code of Business Conduct and Ethics - The Board of Directors is classified into two classes with staggered two-year terms[168] - The Audit Committee consists of three independent directors: Philip A. Strasburg (Chairman), Carol O'Donnell, and Eric Haskell. Mr. Strasburg is designated as the 'audit committee financial expert'[169] - The company has adopted a Code of Business Conduct and Ethics, which is available on its website[196] Executive Compensation Executive compensation for fiscal 2023 included base salaries, bonuses, and stock option awards, with severance provisions and non-employee directors receiving meeting fees and option awards Summary Compensation Table (Fiscal 2023) | Name and Principal Position | Salary ($) | Bonus ($) | Option Awards ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Christopher L. Coccio (CEO) | 192,200 | 20,200 | 15,000 | 6,373 | 233,773 | | R. Stephen Harshbarger (President) | 249,200 | 23,000 | 15,000 | 8,167 | 295,367 | | Stephen J. Bagley (CFO) | 174,800 | 18,500 | 7,500 | 5,799 | 206,599 | - Executive agreements provide for severance payments equal to two years of base, commission, and bonus compensation in the event of termination following a change of control[207] - Non-employee directors receive $2,500 for each meeting attended. In fiscal 2023, each non-employee director also received option awards valued at $9,900[210][211] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of May 23, 2023, executive officers and directors collectively owned 6.53% of the company's common stock, with Emancipation Management LLC holding 42.11% of the outstanding shares, and a new 2023 Stock Incentive Plan proposed Security Ownership of >5% Beneficial Owners (as of May 23, 2023) | Name of Beneficial Owner | Amount Beneficially Owned | Percent | | :--- | :--- | :--- | | Emancipation Management LLC, Charles Frumberg, Circle N Advisors, LLC | 6,628,393 | 42.11% | | V. Adah Nicklin | 915,599 | 5.82% | | Richard A. Bayles | 840,536 | 5.34% | | All Executive Officers and Directors as a Group | 1,034,122 | 6.53% | Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 250,759 | $4.84 | 1,212,793 | - In May 2023, the Board authorized a new 2023 Stock Incentive Plan to grant up to 2,500,000 options or shares, intended to replace the 2013 Plan. The 2023 Plan is subject to shareholder approval[224] Principal Accountant Fees and Services For fiscal 2023, the company incurred approximately $100,000 in audit fees and approximately $18,000 in tax fees, all pre-approved by the Audit Committee Accountant Fees (Fiscal 2023) | Service | Firm | Fee | | :--- | :--- | :--- | | Audit Fees | Marcum LLP | ~$100,000 | | Audit Fees | Friedman LLP | ~$46,000 | | Tax Fees | RBSM, LLP | ~$18,000 | - The Audit Committee's policy is to pre-approve all audit and non-audit services, and all such services in fiscal 2023 and 2022 were pre-approved[230] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the Form 10-K, including corporate documents, executive agreements, and certifications Financial Statements and Supplementary Data Consolidated Financial Statements Consolidated financial statements for fiscal 2023 show decreased net sales to $15.1 million in FY2023 from $17.1 million in FY2022 and Net income also decreased significantly to $636,000 from $2.5 million, while total assets increased to $20.2 million and stockholders' equity to $14.6 million, with positive operating cash flow of $1.3 million Consolidated Statement of Income Highlights (Fiscal Year Ended Feb 28) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Sales | $15,058,203 | $17,132,710 | | Gross Profit | $7,652,007 | $8,612,554 | | Operating Income | $682,991 | $1,889,336 | | Net Income | $635,905 | $2,542,573 | | Diluted EPS | $0.04 | $0.16 | Consolidated Balance Sheet Highlights (as of Feb 28) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Current Assets | $16,575,422 | $14,497,599 | | Total Assets | $20,174,718 | $17,625,534 | | Total Current Liabilities | $5,457,895 | $3,715,381 | | Total Stockholders' Equity | $14,633,958 | $13,741,313 | Consolidated Statement of Cash Flows Highlights (Fiscal Year Ended Feb 28) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $1,325,039 | $2,319,167 | | Net Cash Used In Investing Activities | ($2,810,996) | ($1,631,462) | | Net (Decrease) Increase in Cash | ($1,485,957) | $756,480 | Notes to Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation showing Multi-Axis Coating Systems as the largest contributor at 45% of sales in FY2023, customer concentrations, and ongoing supply chain risks - Revenue is recognized under ASC 606 when control of equipment is transferred to the customer. The company does not capitalize sales commission costs[292][298] Revenue by Product Line (FY 2023) | Product Line | Revenue | % of Total | | :--- | :--- | :--- | | Multi-Axis Coating Systems | $6,785,000 | 45% | | Other | $3,836,000 | 26% | | OEM Systems | $2,144,000 | 14% | | Fluxing Systems | $1,179,000 | 8% | | Integrated Coating Systems | $1,114,000 | 7% | - In fiscal 2023, two customers accounted for 14% of sales. Export sales to customers outside the U.S. and Canada were $8.3 million, or 55% of sales were to foreign customers[325][326] - The company has a $1.5 million revolving line of credit, of which $1.355 million was unused and available as of February 28, 2023[315][316] - In fiscal 2022, the company recorded a gain of $1,005,372 from the forgiveness of its PPP loan[318]