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SOTK > SEC Filings for SOTK > Form 10-K on 28-May-2014All Recent SEC Filings

Show all filings for SONO TEK CORP

Form 10-K for SONO TEK CORP


28-May-2014

Annual Report


ITEM 7 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 our operations or the demand for our 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

We have developed a unique and proprietary series of ultrasonic atomizing nozzles, which are being used in an increasing variety of electronics, advanced energy (solar and fuel cells), medical device, glass, textiles and food 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.

Market Diversity

During the past four years we have invested significant time, monies and efforts to enhance our market diversity. Based on our core ultrasonic coating technology, we increased our portfolio of products, the industries we serve and the countries in which we operate.

Today we serve six major industries: electronics, advanced energy (solar and fuel cells), medical device, glass, textiles and food.

A majority of our sales now originate outside the United States, and we are geographically present directly and through distributors and trade representatives in North and Latin America, Europe and Asia. The infrastructure upon which this diversified market approach is based, includes a newly equipped process development laboratory, a strengthened sales organization with application engineers, an engineering team with additional talent and the latest, most sophisticated design software tools, as well as an expanded, highly trained installation and service organization.

The new products which were introduced, the new markets that were penetrated, and the regions in which we now operate, are a strong foundation for our future sales growth and enhanced profitability.

Liquidity and Capital Resources

Working Capital - Our working capital increased $73,000 from a working capital of $4,680,000 at February 28, 2013 to $4,753,000 at February 28, 2014. The increase in working capital is due to: net income of $484,000 and cash proceeds of $1,600,000 from a note payable, offset by cash outflows of $57,000 for patent and other asset costs, $224,000 for the purchase of equipment and furnishings and $2,043,000 for the repayment of notes payable and $65,000 for an increase in the current maturities of our long term debt. In addition, we incurred non-cash expenses for depreciation and amortization expense of $344,000, stock based compensation expense of $18,000 and $15,000 from the write-off of impaired acquisition costs. The Company's current ratio was 3.6 to 1 at February 28, 2014 as compared to 5.3 to 1 at February 28, 2013.

Our customer deposits on hand increased $294,000 from $69,000 at February 28, 2013 to $363,000 at February 28, 2014.

Stockholders' Equity - Stockholders' equity increased $503,000 from $5,992,000 at February 28, 2013 to $6,495,000 at February 28, 2014. The increase in stockholders' equity is the result of the current year's net income of $484,000 and stock based compensation of $18,000.

Operating Activities - Our operating activities provided $1,668,000 of cash for the year ended February 28, 2014 as compared to providing $611,000 for the year ended February 28, 2013. During the year ended February 28, 2014, we had net income of $484,000, accounts receivable decreased $69,000, inventories decreased $159,000, prepaid expenses and other assets increased $81,000, accounts payable and accrued expenses increased $236,000, customer deposits increased $294,000 and income taxes payable increased $123,000. In addition, we incurred non-cash expenses of $344,000 for depreciation and amortization, $18,000 for stock based compensation expense, $(5,000) for inventory reserve, $12,000 for allowance for accounts receivable and $15,000 for the write-off of impaired assets costs.

Investing Activities - For the year ended February 28, 2014, our investing activities provided $65,000 as compared to using $1,106,000 for the year ended February 28, 2013. In 2014 and 2013, we used $224,000 and $352,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. In 2014 and 2013, we used $56,000 and $32,000, respectively, for patent application and other asset costs. In 2014, we had proceeds of $345,000 from the sale of marketable securities as compared to the use of $722,000 for the purchase of marketable securities in 2013

Financing Activities - For the year ended February 28, 2014, we used $443,000 in our financing activities as compared to using $96,000 of cash for the year ended February 28, 2013. We had proceeds of $210 and $25,000 for stock option exercises in 2014 and 2013, respectively. In addition, we made repayments of notes payable of $2,043,000 and $121,000 in 2014 and 2013, respectively. During the year ended February 28, 2014, we had proceeds of a note payable for $1,600,000 for the refinancing of the industrial park in which our operations are located.

Net Increase in Cash - For the year ended February 28, 2014, our cash balance increased by $1,291,000 as compared to a decrease of $591,000 for the year ended February 28, 2013. During the year ended February 28, 2014, our operations provided $1,668,000 of cash, our investing activities provided $65,000 and we used $443,000 in our financing activities.

Net Decrease in Marketable Securities - For the year ended February 28, 2014, our marketable securities decreased to $631,000 from $976,000 at February 28, 2013. The decrease is due to the sale of our marketable securities during the year ended February 28, 2014.

We currently have a revolving credit line of $750,000 and a $250,000 equipment purchase facility, both of which are with a bank. The revolving credit line is collateralized by all of the assets of the Company, except for the land and buildings. The line of credit is payable on demand and must be retired for a 30 day period once annually. As of February 28, 2014, we had no outstanding borrowings under the line of credit.

We had outstanding borrowings of $81,000 under the equipment facility at February 28, 2014. The borrowing has a repayment term of 48 months and bears interest at 2.12% per annum.

We had outstanding borrowings under a note payable of $1,589,000 at February 28, 2014. The note is payable over ten years and accrues interest at 4.15%. The note payable is secured by a mortgage on our land and buildings.

Results of Operations

Ultrasonic Spraying - Sales and Gross Profit:

For the year ended February 28, 2014, our sales increased by $712,000 to $10,202,000 as compared to $9,491,000 for the year ended February 28, 2013, an increase of 7.5%. During the year ended February 28, 2014, we experienced an increase in sales of our nozzles and generators, widetrack units, XYZ units, servo units, lead solder recovery systems and spray dryer units. We did, however, see a decrease in sales of our stent coating units and a slight decrease in fluxers and fluxer related equipment.

For the year ended February 28, 2013, we were affected by the slowdown of solar energy projects due to an overcapacity in that industry, combined with a decrease in government incentives. This market remained slow in the year ended February 2014.

For the year ended February 28, 2014, sales to customers located in European countries increased by $597,000 or 47%, sales to customers located in Asian countries decreased by $74,000 or 2% and sales to other non-based US customers increased $270,000 or 54%. Sales to U.S. based customers decreased by $78,000 or 2%.

Our gross profit increased $201,000, to $4,733,000 for the year ended February 28, 2014 from $4,532,000 for the year ended February 28, 2013. Our gross profit margin percentage was 46% for the year ended February 28, 2014 compared to 48% for the year ended February 28, 2013. The decrease in the current year's gross profit margin is primarily due to a decrease in sales of our stent coating units.

Research and Product Development:

Research and product development costs decreased $9,000 to $885,000 for the year ended February 28, 2014 as compared to $894,000 for the year ended February 28, 2013. For the year ended February 28, 2014 we experienced decreases in engineering salaries, insurance and engineering materials.

During the year ended February 28, 2014, we expended approximately $552,000 for engineering personnel as compared to $572,000 for the year ended February 28, 2013. During the year ended February 28, 2014, we expended approximately $118,000 for additional research, materials and product development as compared to $128,000 for the year ended February 28, 2013. During the year ended February 28, 2014 we expended approximately $39,000 for insurance as compared to $47,000 for the year ended February 28, 2013. The decrease in the above costs was offset by an increase in depreciation expense. During the year ended February 28, 2014, depreciation expense was $89,000 as compared to $64,000 for the year ended February 28, 2013.

Marketing and Selling:

Marketing and selling costs decreased $257,000 to $1,958,000 for the year ended February 28, 2014 as compared to $2,215,000 for the year ended February 28, 2013. For the year ended February 28, 2014, we experienced decreases in international commission expense, travel and entertainment expense, advertising and trade show expenses and depreciation expense.

During the year ended February 28, 2014, we expended approximately $384,000 for commissions as compared to $652,000 for the year ended February 28, 2013, a decrease of $268,000. During the current year, our sales include four large orders that were shipped to Asia. Our international commission expense decreased because these Asian sales originated in house by our internal sales staff and, as such, no external commissions were incurred.

During the year ended February 28, 2014, we expended approximately $121,000 for travel and entertainment as compared to $139,000 for the year ended February 28, 2013, a decrease of $18,000. During the year ended February 28, 2014, we expended approximately $175,000 for advertising and trade show expenses as compared to $219,000 for the year ended February 28, 2013, a decrease of $44,000. During February 28, 2014, depreciation expense was $105,000 as compared to $126,000 for the year ended February 28, 2013. The decrease in the above costs was offset by an increase in salary expenses. During February 28, 2014, salary expenses were $1,044,000 as compared to $960,000 for the year ended February 28, 2013, an increase of $84,000.

General and Administrative:

General and administrative costs decreased $137,000 to $1,017,000 for the year ended February 28, 2014 as compared to $1,154,000, for the year ended February 28, 2013. For the year ended February 28, 2014, we experienced decreases in salary expense, stock based compensation expense, corporate expenses and outside consulting fees related to the consideration of strategic and enhanced growth opportunities.

During the year ended February 28, 2014, we expended approximately $608,000 for salaries as compared to $675,000 for the year ended February 28, 2013, a decrease of $67,000. During the year ended February 28, 2014, we expended $124,000 for corporate and consulting expenses as compared to $179,000 for the year ended February 28, 2013, a decrease of $55,000. Stock based compensation expense was $18,000 for the year ended February 28, 2014 as compared to $27,000 for the year ended February 28, 2013, a decrease of $9,000.

Rental Real Estate Operations:

Real estate operations expense are expenses for the operations of the Sono-Tek Industrial Park. All inter-company revenue is eliminated in consolidation. For the fiscal years ended 2014 and 2013, the results of our rental real estate operations are as follows:

                                     Fiscal Year Ended
                              February 28,      February 28,
                                  2014              2013
Rental Income                $      76,665     $      51,790

Depreciation                        60,118            59,241
Insurance                            9,000             9,000
Utilities and Landscaping           12,305             6,012
Property taxes                      44,115            40,979
Repairs & Maintenance                5,062                -
Snow Removal                         6,163             3,089
Miscellaneous                        3,009               238
Impaired Acquisition Costs          15,020                -
Total Rental Expense         $     154,792     $     118,559

Loss before Interest               (78,127 )         (66,769 )

Interest expense                   107,740           110,385

Net Loss                     $    (185,867 )   $    (177,154 )

Rental income for the industrial park increased $25,000 from $52,000 for the year ended February 28, 2013 to $77,000 for the year ended February 28, 2014. The increase in rental income is a result of leasing 10,000 square feet of the park to a new tenant. The lease is for a five year period and began in April 2013. In May 2014, we signed a two year lease with a new tenant for 4,000 square feet.

Rental expenses for the industrial park increased $36,000 from $119,000 for the year ended February 28, 2013 to $155,000 for the year ended February 28, 2014. During the year ended February 28, 2014, utilities and landscaping increased $6,000 and snow removal increased $3,000. These increases are due to the harsh winter we experienced in the north east and utility rate increases. Property taxes increased $3,000, repairs and maintenance increased $5,000 and miscellaneous expenses increased $3,000.

In addition to the increase in operating expenses, we had a $15,000 expense due to the write-off of impaired asset costs which were related to the original financing we obtained when we purchased the industrial park. The costs were considered to be impaired as a result of the refinancing of the industrial park that took place in December 2013.

For the years ended February 28, 2014 and 2013, net cash outflows related to the industrial park were $208,000 and $181,000, respectively. These cash outflows are net of rental income and depreciation expense and include the principal payments on the industrial park's mortgage and additional capitalized costs related to the refinancing of the parks mortgage. Prior to purchasing the industrial park in December 2010, we had rental expense of approximately $142,000. If we are able to lease additional vacant space, it will provide a positive cash flow for the park when compared to our prior rental payments.

Interest Income, Interest Expense and Income Taxes:

Interest income increased to $7,000 for the year ended February 28, 2014 when compared to $5,000 for the year ended February 28, 2013. Our present investment policy is to invest excess cash in highly liquid mutual funds. Our holdings are rated at or above investment grade.

Interest expense decreased to $110,000 for the year ended February 28, 2014 as compared to $114,000 for the year ended February 28, 2013.

We recorded income tax expense of $130,000 for the year ended February 28, 2014 as compared to a benefit of $74,000 for the year ended February 28, 2013. As of February 28, 2014, we have no net operating loss deductions available to carryforward. The details of the current year's tax benefit are explained in Note 12 in our financial statements.

For the year ended February 28, 2014, we had net income of $484,000 as compared to $132,000 for the year ended February 28, 2013. The increase in our net income is due to an increase in our sales volume combined with a decrease in our operating expenses.

For the years ended February 28, 2014 and 2013, we do not believe that our sales revenue or net income has been adversely affected by the impact of inflation or changing prices.

Off - Balance Sheet Arrangements

We do not have any Off - Balance Sheet Arrangements as of February 28, 2014.

Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's 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. As of February 28, 2014, management believes there are no critical accounting policies applicable to the Company that are reflective of significant judgments and or uncertainties.

Stock-Based Compensation

The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 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. We currently use a Black-Scholes option pricing model to calculate the fair value of stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have 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. ASC 718 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.

Impact of New Accounting Pronouncements

All accounting pronouncements issued but not yet effective have been deemed to be not applicable or the adoption of such accounting pronouncement is not expected to have a material impact on the financials.

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