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Sono-Tek (SOTK) - 2024 Q2 - Quarterly Report

Part I - Financial Information Item 1 – Condensed Consolidated Financial Statements This section presents Sono-Tek Corporation's unaudited condensed consolidated financial statements, showing increased assets, revenues, and net income Condensed Consolidated Balance Sheets Sono-Tek's total assets grew to $21.65 million by August 31, 2023, driven by marketable securities and inventories, with stockholders' equity also increasing Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | August 31, 2023 (Unaudited, in thousands) | February 28, 2023 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $3,454 | $3,355 | | Marketable securities | $8,862 | $8,090 | | Inventories | $4,008 | $3,243 | | Total current assets | $17,890 | $16,575 | | Total Assets | $21,645 | $20,175 | | Liabilities & Equity | | | | Customer deposits | $3,394 | $2,838 | | Total current liabilities | $6,322 | $5,458 | | Total liabilities | $6,322 | $5,541 | | Total stockholders' equity | $15,323 | $14,634 | | Total Liabilities and Stockholders' Equity | $21,645 | $20,175 | Condensed Consolidated Statements of Income Net sales for the three months ended August 31, 2023, surged 50% to $5.64 million, significantly boosting net income, while six-month sales grew 18% to $9.24 million Income Statement Summary - Three Months Ended August 31 | Metric | 2023 (USD) | 2022 (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $5,639,117 | $3,763,329 | +50% | | Gross Profit | $2,800,568 | $1,895,613 | +48% | | Operating Income | $565,858 | $177,578 | +219% | | Net Income | $541,273 | $162,123 | +234% | | Diluted EPS | $0.03 | $0.01 | +200% | Income Statement Summary - Six Months Ended August 31 | Metric | 2023 (USD) | 2022 (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $9,242,135 | $7,814,864 | +18% | | Gross Profit | $4,577,800 | $4,002,626 | +14% | | Operating Income | $474,242 | $558,103 | -15% | | Net Income | $594,679 | $467,759 | +27% | | Diluted EPS | $0.04 | $0.03 | +33% | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $1.11 million for the six months ended August 31, 2023, despite $1.01 million used in investing activities, resulting in a $99,656 cash increase Cash Flow Summary - Six Months Ended August 31 | Activity | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $1,106,784 | $223,629 | | Net Cash (Used in) Investing Activities | ($1,007,128) | ($755,130) | | Net Increase (Decrease) in Cash | $99,656 | ($531,501) | | Cash and Cash Equivalents, End of Period | $3,454,257 | $4,309,057 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail accounting policies, revenue recognition, inventory, and sales concentrations, highlighting Multi-Axis Coating Systems as the largest revenue driver and 40% foreign sales - Multi-Axis Coating Systems constituted the largest portion of sales, accounting for 51% of total revenue for the six months ended August 31, 202344 - Inventories increased to $4.01 million at August 31, 2023, from $3.24 million at February 28, 2023, primarily due to increases in finished goods and work in process45 - For the first half of fiscal 2024, sales to foreign customers were approximately $3.68 million, representing 40% of total revenues, a decrease from 54% in the same period of fiscal 202353 - One customer accounted for 14% of total sales during the first half of fiscal 2024, and three customers accounted for 39% of outstanding accounts receivable at August 31, 202354 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting a 50% Q2 FY2024 net sales increase, a record $10.7 million backlog, and increased R&D and sales investments to support growth - Net sales for Q2 FY2024 increased by 50% to $5.6 million, driven by strong shipments to alternative/clean energy, medical, and industrial markets66 - Backlog reached a record high of $10.7 million as of August 31, 2023, a 26% increase from February 28, 2023, primarily due to growing orders from the clean energy sector66 - The company has shifted its business from selling components to providing complete machine solutions, with some systems selling for over $1,000,00064 Results of Operations Q2 FY2024 sales grew 50% to $5.64 million, driven by Multi-Axis and Integrated Coating systems, while gross profit margin slightly decreased and operating expenses rose 19% due to R&D and marketing investments Sales by Product Line - Six Months Ended August 31 | Product Line | 2023 Sales (USD) | 2022 Sales (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Multi-Axis Coating Systems | $4,686,000 | $3,470,000 | +35% | | Integrated Coating Systems | $1,162,000 | $594,000 | +96% | | Spare Parts, Services and Other | $2,144,000 | $1,728,000 | +24% | | Fluxing Systems | $440,000 | $707,000 | -38% | | OEM Systems | $810,000 | $1,316,000 | -38% | Sales by Market - Six Months Ended August 31 | Market | 2023 Sales (USD) | 2022 Sales (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Alternative/Clean Energy | $2,652,000 | $1,306,000 | +103% | | Industrial | $1,965,000 | $806,000 | +144% | | Electronics/Microelectronics | $2,351,000 | $3,010,000 | -22% | | Medical | $2,111,000 | $2,473,000 | -15% | - R&D costs for the first half of FY2024 increased by 41% to $1.45 million, and the number of full-time R&D employees increased by approximately 40% over the past twelve months7678 Liquidity and Capital Resources Working capital increased to $11.57 million by August 31, 2023, with total cash and marketable securities at $12.3 million, and operating cash flow significantly improved to $1.11 million Cash and Marketable Securities (in thousands) | Category | August 31, 2023 (in thousands) | February 28, 2023 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $3,454 | $3,355 | | Marketable securities | $8,862 | $8,090 | | Total | $12,316 | $11,445 | - Cash from operating activities was $1,107,000 in the first half of fiscal 2024, compared to $224,000 in the same period of fiscal 202393 - Stockholders' Equity increased by $689,000 to $15,323,000 at August 31, 2023, primarily due to net income of $594,00092 Critical Accounting Policies Critical accounting policies, including Income Taxes and Stock-Based Compensation, require significant judgment and estimates, particularly for deferred tax assets and Black-Scholes model inputs - The company's critical accounting policies involve significant judgment and include Accounting for Income Taxes and Stock-Based Compensation98 - The company uses the Black-Scholes option pricing model to calculate the fair value of stock options, which requires estimates for stock price volatility and option lives100 Item 3 – Quantitative and Qualitative Disclosures about Market Risk The company faces no material foreign currency exchange rate risk due to US dollar transactions and considers interest rate risk on cash and marketable securities immaterial - The company does not believe it is subject to material foreign currency exchange rate risk because all sales transactions are conducted in US dollars102 - Market rate risk from changing interest rates on the company's $3.45 million in cash and $8.86 million in marketable securities is not considered material103 Item 4 – Controls and Procedures The CEO and CFO confirmed the effectiveness of disclosure controls and procedures as of August 31, 2023, with no material changes to internal controls during Q2 FY2024 - Based on an evaluation as of August 31, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective104 - No changes in internal controls over financial reporting occurred during the second fiscal quarter of 2024 that materially affected, or are likely to materially affect, these controls105 Part II - Other Information Item 1. Legal Proceedings The company reported no legal proceedings requiring disclosure for the period - The company had no legal proceedings to report108 Item 1A. Risk Factors There are no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended February 28, 2023 - There are no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended February 28, 2023108