Summary of SONO TEK CORP - Yahoo! Finance

ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results 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. These factors include, among other considerations, general economic and business conditions; political, regulatory, competitive and technological developments affecting the Company's operations or the demand for its products; timely development and market acceptance of new products; adequacy of financing; capacity additions, the ability to enforce patents and the ability to achieve increased sales volume and continued profitability.

We undertake no obligation to update any forward-looking statement.

Overview

Sono-Tek has developed a unique and proprietary series of ultrasonic atomizing 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 and lower energy use.

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 other methods, such as foam fluxing. Less flux equates to less material cost, fewer chemicals in the workplace, and less clean-up. Also, the SonoFlux equipment reduces the number of soldering defects, which reduces the amount of rework.

In recent years we have diversified our product lines and have successfully entered into the medical device market. To accomplish this goal, we have focused engineering resources on the medical device market, with an emphasis on providing coating solutions for the newest generations 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 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. We have also introduced and sold a production oriented stent coater known as Medicoat II in the past year.

Another change that has stimulated an increase in business has been 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 following industries: glass, medical textile (bandages), textiles and recently in the food industry. 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 have also invested time and money in developing equipment solutions for applications in the solar cell and fuel cell clean energy markets. We have seen significant growth in these markets and are serving them with our Exactacoat, Flexicoat and Hypersonic products.

In the electronics, medical device and WideTrack coating markets, it has been incumbent upon us to focus our attention and resources on the development of a much greater international presence. We believe we have accomplished this and plan to continue our marketing efforts. Our international sales have risen from approximately 20% of total revenues in Fiscal Year 2003 to approximately 55% today.

Past history shows the cyclical nature of the electronics business. This cycle, coupled with the increasing trend toward moving electronics production offshore, created a need to diversify. As expected, our US based electronics business has had a significant decline as a result of the trend toward production moving offshore, coupled with a slower economy and the reduced competitiveness of our US based automotive customers. We have been able to offset this reduction in US electronics sales with an increase in our international electronics and medical device sales, as well as with new clean energy applications involving coatings on fuel cells and solar cells.

The creation of technological innovations and the expansion into new geographical markets requires the investment of both time and capital. Although there is no guarantee of success, we expect that over time, these newer markets will be the basis for Sono-Tek's continued growth and will contribute to future profitability.

Liquidity and Capital Resources

Working Capital - Our working capital decreased $24,000 from a working capital of $2,898,000 at February 28, 2009 to $2,874,000 at August 31, 2009. The Company's current ratio is 3.71 to 1 at August 31, 2009 as compared to 3.5 to 1 at February 28, 2009.

Stockholders' Equity - Stockholder's Equity decreased $102,000 from $3,532,000 at February 28, 2009 to $3,430,000 at August 31, 2009. The decrease is a result of the net loss of $129,000, and an adjustment for stock based compensation expense of $27,000.

Operating Activities - Our operating activities provided $167,000 of cash for the six months ended August 31, 2009 as compared to using $943,000 for the six months ended August 31, 2008. During the current period accounts receivable decreased $102,000, prepaid expenses decreased $41,000 and our inventory increased $11,000. The overall decrease in these assets was offset by the net loss of $129,000 for the six months ended August 31, 2009 and a decrease in accounts payable and accrued expenses of $73,000. In addition, we incurred non-cash expenses of $155,000 for depreciation and $27,000 for stock based compensation expense.

Investing Activities - We used $115,000 for the purchase of capital equipment and $8,000 for patent application costs during the six months ended August 31, 2009. We used $84,000 for the purchase of capital equipment and $18,000 for patent application costs during the six months ended August 31, 2008.

Financing Activities - For the six months ended August 31, 2009, we used $12,000 for the repayment of our notes payable. For the six months ended August 31, 2008, we used $8,000 in financing activities resulting from the repayment of our notes payable of $14,000 and $6,000 from the proceeds of stock option exercises.

Results of Operations

For the six months ended August 31, 2009, our sales decreased $77,000 or 2% to $3,149,000 as compared to $3,226,000 for the six months ended August 31, 2008. For the three months ended August 31, 2009, our sales increased $79,000 to $1,684,000 as compared to $1,605,000 for the three months ended August 31, 2008. Our sales for the three month period ended August 31, 2009 were improved over the same period last year due to additional sales of fluxer units, nozzles, stentcoaters, and WideTrack units. Also, our sales for the second quarter increased by 15% over our first quarter sales and we expect to see a similar increase in the third quarter. Although we can provide no assurance, based on our increasing backlog of anticipated sales, we expect to see a profitable third quarter to follow our profitable second quarter.

Our gross profit increased $18,000 to $1,565,000 for the six months ended August 31, 2009 from $1,547,000 for the six months ended August 31, 2008. The gross profit margin was 50% of sales for the six months ended August 31, 2009 and 48% of sales for the six months ended August 31 2008. Our gross profit increased $149,000 to $907,000 for the three months ended August 31, 2009 as compared to $758,000 for the three months ended August 31, 2008. Our gross profit margin was 54% for the three months ended August 31, 2009 and 47% for the three months ended August 31, 2008. The improvement in our gross profit margin for the three months ended August 31, 2009 was due to an increase in a more profitable mix of products being sold when compared to the three months ended August 31, 2008 and our direct and indirect labor costs decreased during the three months ended August 31, 2009.

Research and product development costs decreased $78,000 to $341,000 for the six months ended August 31, 2009 from $419,000 for the six months ended August 31, 2008 and $44,000 to $170,000 for the three months ended August 31, 2009 from $214,000 for the three months ended August 31, 2008. The decreases were principally due to a decrease in salary expense related to a decrease in engineering personnel in the current periods.

Marketing and selling costs increased $22,000 to $866,000 for the six months ended August 31, 2009 from $844,000 for the six months ended August 31, 2008 and $27,000 to $457,000 for the three months ended August 31, 2009 from $430,000 for the three months ended August 31, 2008. During the six months ended August 31, 2009 and the three months ended August 31, 2009, we saw an increase in international commission expense, and depreciation related to sales equipment. The increase in these expenses was offset by decreases in travel and trade show expenses and salary expense.

General and administrative costs decreased $118,000 to $488,000 for the six months ended August 31, 2009 from $606,000 for the six months ended August 31, 2008 and $58,000 to $240,000 for the three months ended August 31, 2009 from $298,000 for the three months ended August 31, 2008. The decreases were principally due to voluntary decrease in officer salary expense and a decrease in stock based compensation expense.

We incurred a net loss of $129,000 for the six months ended August 31, 2009 as compared to a net loss of $308,000 for the six months ended August 31, 2008. During the three months ended August 31, 2009 we had net income of $41,000 as compared to a net loss of $177,000 for the three months ended August 31, 2008. Our results for the three months ended August 31, 2009 were improved over the same period last year due to an improvement in our gross profit margin and reductions in salary expenses due to a decrease in personnel and voluntary salary decreases.

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 those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to the Company's consolidated financial statements included in Form 10-K for the year ended February 28, 2009.

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 for the 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
The computation of the expense associated with stock-based compensation requires the use of a valuation model. SFAS 123(R) is a complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. SFAS 123(R) requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.