SONO-TEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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May 31,
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|
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2018
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|
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February 28,
|
|
|
|
(Unaudited)
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2018
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|
ASSETS
|
|
|
|
|
|
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|
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Current Assets:
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
1,541,752
|
|
|
$
|
2,016,464
|
|
Marketable securities
|
|
|
4,316,746
|
|
|
|
4,405,900
|
|
Accounts receivable (less allowance of $46,000)
|
|
|
973,282
|
|
|
|
774,778
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|
Inventories, net
|
|
|
1,425,455
|
|
|
|
1,354,083
|
|
Prepaid expenses and other current assets
|
|
|
134,633
|
|
|
|
139,406
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|
Total current assets
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|
|
8,391,868
|
|
|
|
8,690,631
|
|
|
|
|
|
|
|
|
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Land
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250,000
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|
|
|
250,000
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|
Buildings, net
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|
|
1,788,921
|
|
|
|
1,807,339
|
|
Equipment, furnishings and building improvements, net
|
|
|
543,345
|
|
|
|
498,401
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|
Intangible assets, net
|
|
|
130,791
|
|
|
|
136,576
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|
Deferred tax asset
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|
|
396,387
|
|
|
|
396,387
|
|
|
|
|
|
|
|
|
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TOTAL ASSETS
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$
|
11,501,312
|
|
|
$
|
11,779,334
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|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities:
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Accounts payable
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$
|
582,982
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|
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$
|
652,863
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|
Accrued expenses
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|
672,940
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|
|
|
893,192
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|
Customer deposits
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|
346,993
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|
|
|
344,098
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|
Current portion of long term debt
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|
|
157,726
|
|
|
|
156,119
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|
Income taxes payable
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|
|
102,185
|
|
|
|
84,621
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|
Total current liabilities
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|
|
1,862,826
|
|
|
|
2,130,893
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|
|
|
|
|
|
|
|
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Deferred tax liability
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385,384
|
|
|
|
385,384
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|
Long term debt, less current maturities
|
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|
830,247
|
|
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870,532
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Total liabilities
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|
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3,078,457
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|
|
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3,386,809
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Stockholders’ Equity
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Common stock, $.01 par value; 25,000,000 shares authorized, 14,989,003 and 14,986,367 shares issued and outstanding, respectively
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149,890
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|
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149,864
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Additional paid-in capital
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|
|
8,910,045
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|
|
|
8,901,171
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|
Accumulated deficit
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|
(637,080
|
)
|
|
|
(760,115
|
)
|
Accumulated other comprehensive income
|
|
|
—
|
|
|
|
101,605
|
|
Total stockholders’ equity
|
|
|
8,422,855
|
|
|
|
8,392,525
|
|
|
|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
$
|
11,501,312
|
|
|
$
|
11,779,334
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|
See notes to condensed consolidated financial statements.
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
(Unaudited)
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Three Months Ended May 31,
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2018
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2017
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|
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Net Sales
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$
|
2,700,860
|
|
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$
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2,500,734
|
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Cost of Goods Sold
|
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1,429,663
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|
|
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1,320,217
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Gross Profit
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1,271,197
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1,180,517
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Operating Expenses
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Research and product development costs
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333,866
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309,251
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Marketing and selling expenses
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629,788
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|
587,798
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|
General and administrative costs
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275,392
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|
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|
262,389
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Total Operating Expenses
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|
1,239,046
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|
|
|
1,159,438
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|
|
|
|
|
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Operating Income
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|
|
32,151
|
|
|
|
21,079
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(10,614
|
)
|
|
|
(12,213
|
)
|
Interest and Dividend Income
|
|
|
34,606
|
|
|
|
17,143
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|
Realized gain on sale of marketable securities
|
|
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29,392
|
|
|
|
—
|
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Net unrealized loss on marketable securities
|
|
|
(49,061
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)
|
|
|
—
|
|
Other (expense) income
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|
|
2,520
|
|
|
|
(1,658
|
)
|
|
|
|
|
|
|
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|
Income Before Income Taxes
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|
|
38,994
|
|
|
|
24,351
|
|
|
|
|
|
|
|
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Income Tax Expense
|
|
|
17,564
|
|
|
|
8,482
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|
|
|
|
|
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Net Income
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|
$
|
21,430
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|
|
$
|
15,869
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|
|
|
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Other Comprehensive income
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|
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Net unrealized gain on marketable securities
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|
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—
|
|
|
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27,035
|
|
|
|
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Comprehensive Income
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—
|
|
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$
|
42,904
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Basic Earnings Per Share
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$
|
0.00
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|
|
$
|
0.00
|
|
|
|
|
|
|
|
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Diluted Earnings Per Share
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$
|
0.00
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|
|
$
|
0.00
|
|
|
|
|
|
|
|
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Weighted Average Shares - Basic
|
|
|
14,987,613
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|
|
|
14,961,076
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|
|
|
|
|
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|
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Weighted Average Shares - Diluted
|
|
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15,088,512
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|
|
|
15,057,495
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|
See notes to condensed consolidated financial statements.
SONO-TEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended May 31,
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2018
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|
2017
|
|
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CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
21,430
|
|
|
$
|
15,869
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
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|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
80,893
|
|
|
|
101,808
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|
Stock based compensation expense
|
|
|
8,900
|
|
|
|
10,469
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|
Inventory reserve
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|
|
18,000
|
|
|
|
27,000
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|
Unrealized loss on marketable securities
|
|
|
49,061
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|
|
|
—
|
|
Decrease (Increase) in:
|
|
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|
|
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|
|
Accounts receivable
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|
|
(198,504
|
)
|
|
|
(136,070
|
)
|
Inventories
|
|
|
(89,372
|
)
|
|
|
63
|
|
Prepaid expenses and other current assets
|
|
|
4,773
|
|
|
|
36,720
|
|
(Decrease) Increase in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(290,133
|
)
|
|
|
21,486
|
|
Customer Deposits
|
|
|
2,895
|
|
|
|
268,176
|
|
Income taxes payable
|
|
|
17,564
|
|
|
|
12,563
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|
Net Cash (Used In) Provided by Operating Activities
|
|
|
(374,493
|
)
|
|
|
358,084
|
|
|
|
|
|
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|
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CASH FLOWS FROM INVESTING ACTIVITIES:
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|
|
|
|
|
|
|
|
Purchase of equipment and furnishings
|
|
|
(101,634
|
)
|
|
|
(39,704
|
)
|
Sale (Purchase) of marketable securities
|
|
|
40,093
|
|
|
|
(537,265
|
)
|
Net Cash (Used In) Investing Activities
|
|
|
(61,541
|
)
|
|
|
(576,969
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments of notes payable and loans
|
|
|
(38,678
|
)
|
|
|
(37,135
|
)
|
Net Cash (Used In) Financing Activities
|
|
|
(38,678
|
)
|
|
|
(37,135
|
)
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(474,712
|
)
|
|
|
(256,020
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
2,016,464
|
|
|
|
2,557,223
|
|
End of period
|
|
$
|
1,541,752
|
|
|
$
|
2,301,203
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
10,614
|
|
|
$
|
12,213
|
|
Taxes Paid
|
|
$
|
—
|
|
|
$
|
—
|
|
See notes to condensed consolidated financial statements.
SONO-TEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2018 and 2017
(Unaudited)
NOTE 1: BUSINESS DESCRIPTION
Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We”
or “Our”) is the world leader in the design and manufacture of ultrasonic
coating systems for applying precise, thin film coatings to protect, strengthen or smooth surfaces on parts and components for
the microelectronics/electronics, alternative energy, medical, industrial and emerging research & development/other markets.
We design and manufacture custom-engineered ultrasonic coating systems and also provide patented nozzles and generators for manufacturers’
equipment.
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information.
Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation
(consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative
of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction
with the audited Consolidated Financial Statements as of and for the fiscal year ended February 28, 2018 (“fiscal year 2018”)
contained in the Company’s 2018 Annual Report on Form 10-K filed with the SEC. The Company’s current fiscal year ends
on February 28, 2019 (“fiscal 2019”).
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities -
The Company
adopted ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial
Liabilities.” ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting,
or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form
of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company
has evaluated the potential impact this standard may have on the condensed consolidated financial statements and the fair value
from of the securities from the prior year has been reclassified to Retained Earnings from Other Accumulated Comprehensive Income.
The unrealized loss on the marketable securities during the three months ended May 31, 2018 has been recorded in Other Income on
the Income Statement.
Cash and Cash Equivalents
-
Cash and cash equivalents consist
of money market mutual funds, short term commercial paper and short-term certificates of deposit with original maturities of 90
days or less.
Consolidation
- The accompanying condensed consolidated financial
statements of the Company, include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC (“SIP”).
SIP operates as a real estate holding company for the Company’s real estate operations.
Earnings Per Share
-
Basic earnings per share (“EPS”)
is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock.
Equipment, Furnishings and Leasehold Improvements
– Equipment,
furnishings and leasehold improvements are stated at cost. Depreciation of equipment and furnishings is computed by use of the
straight-line method based on the estimated useful lives of the assets, which range from three to five years.
Fair Value of Financial Instruments -
The
Company follows the guidance in the “Fair Value Measurements and Disclosure Topic” of the Accounting Standards Codification
for assets and liabilities measured at fair value on a recurring basis. This guidance establishes a common definition for fair
value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes
a framework for measuring fair value and expands disclosure about such fair value measurements. The guidance defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Additionally, the guidance requires the use of valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: Quoted prices in active markets.
Level 2: Observable market-based
inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs for which
there is little or no market data, which require the use of the reporting entity’s own assumptions.
The fair values of financial assets
of the Company were determined using the following categories at May 31, 2018 and February 28, 2018, respectively:
|
|
Quoted Prices in Active Markets
|
|
|
|
(Level 1)
|
|
|
|
May 31,
2018
|
|
|
February 28,
2018
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
$
|
4,316,746
|
|
|
$
|
4,405,900
|
|
Marketable Securities include mutual
funds of $4,316,746 and $4,405,900 that are considered to be highly liquid and easily tradeable as of May 31, 2018, and February
28, 2018, respectively. These securities are valued using inputs observable in active markets for identical securities and are
therefore classified as Level 1 within the Company’s fair value hierarchy. The Company’s marketable securities
are considered to be available-for-sale investments as defined under ASC 320 “Investments – Debt and Equity Securities.”
Income Taxes
- The Company accounts for income taxes under the asset
and liability method. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. If it is more likely than not that some portion or all of a deferred tax
asset will not be realized, a valuation allowance is recognized.
Intangible Assets
-
Include costs of patent applications which
are deferred and charged to operations over seventeen years for domestic patents and twelve years for foreign patents. The accumulated
amortization of patents is $152,304 and $149,654 at May 31, 2018 and February 28, 2018, respectively. Annual amortization expense
of such intangible assets is expected to be approximately $11,000 per year for the next five years.
Interim Reporting
- The attached summary condensed consolidated financial
information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity
with accounting principles generally accepted in the United States of America. Such disclosures were included with the financial
statements of the Company at February 28, 2018, and included in its report on Form 10-K. Such statements should be read in conjunction
with the data herein.
The financial information reflects all adjustments, normal and recurring, which,
in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. The results for such interim periods are not necessarily indicative of the results to be expected for the
year.
Inventories
-
Inventories are stated at the lower of cost or
market. Cost is determined using the first-in, first-out (FIFO) method for raw materials, subassemblies and work-in-progress and
the specific identification method for finished goods.
Land and Buildings –
Land and buildings are stated at cost.
Buildings are being depreciated by use of the straight-line method based on an estimated useful life of forty years.
Long-Lived Assets
-
The Company periodically evaluates the
carrying value of long-lived assets, including intangible assets, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds
the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
Management Estimates
-
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
New Accounting Pronouncements-
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “
Revenue from
Contracts with Customers” (Topic 606)
, to clarify the principles of recognizing revenue and create common revenue recognition
guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer
obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received
in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. The ASU is effective for fiscal years beginning after December
15, 2017.
The new revenue standard is principle based and interpretation of those principles
may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and
guidance may evolve as companies and the accounting profession work to implement this new standard. The implementation of the standard
did not have a material impact on the financial statements.
In January 2016, The FASB issued
ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.”
ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result
in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public
business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes,
requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset,
and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate
the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective
for all entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company
has evaluated the potential impact this standard may have on the condensed consolidated financial statements, the
fair value of the securities from the prior year has been reclassified to Retained Earnings from Other Accumulated Comprehensive
Income. The unrealized loss on the marketable securities during the three months ended May 31, 2018 has been recorded in Other
Income on the Income Statement.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive
Income (Topic 220), “
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
”. ASU
2018-02 was issued to allow the reclassification from accumulated other comprehensive income to retained earnings for the stranded
tax effect resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. The Tax Cuts and Jobs Act, among other things,
reduced the corporate tax rate from 35% to 21%, which required the re-evaluation of any deferred tax assets and liabilities at
the lowered tax rate which potentially could leave a disproportionate tax effect in accumulated other comprehensive income. ASU
2018-02 allows for the election to reclassify these stranded tax effects to retained earnings. ASU 2018-02 is effective for all
entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in any interim period for public business entities for reporting periods for which financials statements have
not yet been issued. The Company is currently evaluating the impact of adopting ASU 2018-02.
Other than, Accounting Standards Update (“ASU”) No. 2014-09,
ASU 2016-01 and ASU 2018-02 discussed above, all new accounting pronouncements issued but not yet effective have been deemed
to be not applicable to the Company. Hence, the adoption of these new accounting pronouncements, once effective, is not
expected to have an impact on the Company.
Reclassifications –
Where appropriate, certain reclassifications
have been made to the prior period to conform to the presentations of the current period.
NOTE 3: INVENTORIES
Inventories consist of the following:
|
|
May 31,
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2018
|
|
Raw materials and subassemblies
|
|
$
|
666,320
|
|
|
$
|
673,969
|
|
Finished goods
|
|
|
428,944
|
|
|
|
395,410
|
|
Work in process
|
|
|
552,569
|
|
|
|
489,082
|
|
Total
|
|
|
1,647,833
|
|
|
|
1,558,461
|
|
Less: Allowance
|
|
|
(222,378
|
)
|
|
|
(204,378
|
)
|
Net inventories
|
|
$
|
1,425,455
|
|
|
$
|
1,354,083
|
|
NOTE 4: STOCK OPTIONS AND WARRANTS
Stock Options
– Under the 2013 Stock Incentive Plan
("2013 Plan"), options can be granted to officers, directors, consultants and employees of the Company and its subsidiaries
to purchase up to 2,500,000 shares of the Company's common stock. Under the 2013 Plan options expire ten years after the date of
grant. As of May 31, 2018, there were 744,100 options outstanding under the 2013 Plan.
Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"),
until May 2013, options were available to be granted to officers, directors, consultants and employees of the Company and its subsidiaries
to purchase up to 1,500,000 shares of the Company's common stock. As of May 31, 2018, there were 160,500 options outstanding under
the 2003 Plan, under which no additional options may be granted.
NOTE 5: STOCK BASED COMPENSATION
The Company adopted ASC 718, “Share Based Payments.” which requires
companies to expense the value of employee stock options and similar awards.
The weighted-average fair value of options are estimated on the date of grant using
the Black-Scholes options-pricing model. For the three months ended May 31, 2018 no options were issued.
In computing the impact, the fair value of each option is estimated on
the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate;
volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment
awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation
expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate
and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed
its historical forfeiture rate, the remaining lives of unvested options, and the number of vested options as a percentage of total
options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company
reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what
the Company has recorded in the current period.
For the three months ended May 31, 2018 and 2017, net income and earnings
per share reflect the actual deduction for stock-based compensation expense. The impact of applying ASC 718 approximated $9,000
and $10,000 in additional compensation expense during the three months ended May 31, 2018 and 2017, respectively. Such amounts
are included in general and administrative expenses on the statement of operations. The expense for stock-based compensation is
a non-cash expense item.
NOTE 6: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three Months Ended May 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
|
|
$
|
21,430
|
|
|
$
|
15,869
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average
|
|
|
14,987,613
|
|
|
|
14,961,076
|
|
|
|
|
|
|
|
|
|
|
Effects of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options for employees, directors and outside consultants
|
|
|
100,899
|
|
|
|
96,419
|
|
Denominator for diluted earnings per share
|
|
|
15,088,512
|
|
|
|
15,057,495
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
NOTE 7: LONG TERM DEBT
Long-term debt consists of the following:
|
|
May 31,
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Note payable, bank, collateralized by land and buildings, payable in monthly installments of principal and interest of $16,358 through January 2024. Interest rate 4.15%. 10-year term.
|
|
|
987,973
|
|
|
|
1,026,651
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
|
987,973
|
|
|
|
1,026,651
|
|
Due within one year
|
|
|
157,726
|
|
|
|
156,119
|
|
Due after one year
|
|
$
|
830,247
|
|
|
$
|
870,532
|
|
NOTE 8: REVOLVING LINE OF CREDIT
The Company has a $750,000 revolving line of credit at prime which was 4.75% at
May 31, 2018. The loan 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. If the Company fails to perform the 30-day annual pay
down or if the bank elects to terminate the credit line, the bank may at its option convert the outstanding balance to a 36-month
term note with payments including interest in 36 equal installments. As of May 31, 2018, and February 28, 2018, the Company’s
outstanding balance was $0, and the unused credit line was $750,000.
NOTE 9: SUBSEQUENT EVENTS
The Company has evaluated subsequent events for disclosure purposes.
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, news 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
Founded in 1975, Sono-Tek Corporation designs and manufactures ultrasonic
coating systems that apply precise, thin film coatings to a multitude of products for the microelectronics/electronics, alternative
energy, medical and industrial markets, including specialized glass applications in construction and automotive. We also sell our
products to emerging research and development and other markets. We have invested significant resources to enhance our market diversity.
Founded on our core ultrasonic coating technology, we have increased our portfolio of products, the industries we serve, and the
countries in which we sell our products.
Our ultrasonic nozzle systems use high frequency ultrasonic vibrations that atomize
liquids into minute drops that can be applied to surfaces at low velocity providing microscopic layers of protective materials
over a surface such as glass. Our solutions are environmentally-friendly, efficient and highly reliable. They enable dramatic reductions
in overspray, savings in raw material, water and energy usage and provide improved process repeatability, transfer efficiency,
high uniformity and reduced emissions.
We believe product superiority is imperative in all that we produce and
that it is developed through the extensive experience we have in the coatings industry, our proprietary manufacturing know-how
and skills and our unique work force we have built over the years. Our growth strategy is focused on leveraging our innovative
technologies, proprietary know-how, unique talent and experience, and global reach to further develop microscopic coating technologies
that enable better outcomes for our customers’ products and processes.
We are a global business with approximately 63% of our sales generated from outside
the United States in the first quarter of fiscal 2019. Our direct sales team and our distributor and sales representative network
is located in North America, Latin America, Europe and Asia. Over the last few years, we have expanded our sales capabilities by
increasing the size of our direct sales force, adding new distributors and sales representatives (“reps”). Of note,
we have developed demonstration labs in Asia and at our facility in New York that are used to train our distributors and reps.
These labs are also very valuable for demonstrating to prospective customers the capabilities of our equipment and enable us to
develop custom solutions to meet their needs.
First Quarter Fiscal 2019 Highlights
(compared with the first quarter
of fiscal 2018 unless otherwise noted) We refer to the three-month periods ended May 31, 2018 and 2017 as the first quarter of
fiscal 2019 and fiscal 2018, respectively.
|
·
|
Net sales were $2,701,000, up 8% or $200,000, driven primarily by demand from the
Electronics/Microelectronics and Medical industries.
|
|
·
|
Gross profit margin was relatively consistent at 47.1%.
|
|
·
|
Operating income grew $11,000, or 53%, to $32,000.
Operating
margin increased 40 basis points to 1.2%
. Strong revenue growth and cost management drove the improvement in operating income and margin.
|
|
·
|
Higher interest and dividend income and realized gains on marketable securities aided net income growth
to $21,000, up from $16,000.
|
|
·
|
Backlog on May 31, 2018 grew 17% to $1,448,000, compared with backlog of $1,238,000 on February
28, 2018.
|
|
·
|
Cash and cash equivalents and short-term investments at May 31, 2018 were $5,859,000, down from $6,422,000
at February 28, 2018. The decline was the result of the timing of working capital requirements primarily due to an increase
in accounts receivables combined with a decrease in accounts payable and accrued expenses.
|
|
·
|
Total debt decreased $39,000 to $988,000 at May 31, 2018.
|
Results of Operations
Sales:
|
|
Three Months Ended May 31,
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
Net Sales
|
|
$
|
2,701,000
|
|
|
$
|
2,501,000
|
|
|
$
|
200,000
|
|
|
8%
|
Cost of Goods Sold
|
|
|
1,430,000
|
|
|
|
1,320,000
|
|
|
|
110,000
|
|
|
8%
|
Gross Profit
|
|
$
|
1,271,000
|
|
|
$
|
1,181,000
|
|
|
$
|
90,000
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit %
|
|
|
47.1%
|
|
|
|
47.2%
|
|
|
|
|
|
|
|
Product Sales:
|
|
Three Months Ended May 31,
|
|
|
Change
|
|
|
|
2018
|
|
|
% of total
|
|
2017
|
|
|
% of total
|
|
$
|
|
|
%
|
Fluxing Systems
|
|
$
|
734,000
|
|
|
27%
|
|
$
|
600,000
|
|
|
24%
|
|
|
134,000
|
|
|
22%
|
Integrated Coating Systems
|
|
|
337,000
|
|
|
12%
|
|
|
583,000
|
|
|
23%
|
|
|
(246,000
|
)
|
|
(42%)
|
Multi-Axis Coating Systems
|
|
|
857,000
|
|
|
32%
|
|
|
755,000
|
|
|
30%
|
|
|
102,000
|
|
|
14%
|
OEM Systems
|
|
|
607,000
|
|
|
22%
|
|
|
432,000
|
|
|
17%
|
|
|
175,000
|
|
|
40%
|
Other
|
|
|
166,000
|
|
|
6%
|
|
|
131,000
|
|
|
5%
|
|
|
35,000
|
|
|
27%
|
TOTAL
|
|
$
|
2,701,000
|
|
|
|
|
$
|
2,501,000
|
|
|
|
|
$
|
200,000
|
|
|
8%
|
Our ability to provide subsystems and components including our custom-designed
Align system, which OEMs include in their equipment, drove higher sales of this product category.
Increased demand in the Microelectronic/Electronics and medical market drove higher
sales of Multi-Axis Coating Systems.
Improved sales of Fluxing Systems reflect the success of the introduction of a newly
developed camera recognition system, InSight, which automatically identifies different PCBs and changes the process recipes.
These increases more than offset the decline in sales of Integrated Coating Systems
which reflected the fluctuation of demand in Alternative Energy, primarily in fuel cells.
Market Sales:
|
|
Three Months Ended May 31,
|
|
|
Change
|
|
|
|
2018
|
|
|
% of total
|
|
2017
|
|
|
% of total
|
|
$
|
|
|
%
|
Electronics/Microelectronics
|
|
$
|
1,328,000
|
|
|
49%
|
|
$
|
884,000
|
|
|
35%
|
|
|
444,000
|
|
|
50%
|
Medical
|
|
|
889,000
|
|
|
33%
|
|
|
608,000
|
|
|
24%
|
|
|
281,000
|
|
|
46%
|
Alternative Energy
|
|
|
173,000
|
|
|
6%
|
|
|
507,000
|
|
|
20%
|
|
|
(334,000
|
)
|
|
(66%)
|
Emerging R&D and Other
|
|
|
192,000
|
|
|
7%
|
|
|
180,000
|
|
|
7%
|
|
|
12,000
|
|
|
7%
|
Industrial
|
|
|
119,000
|
|
|
4%
|
|
|
322,000
|
|
|
13%
|
|
|
(203,000
|
)
|
|
(63%)
|
TOTAL
|
|
$
|
2,701,000
|
|
|
|
|
$
|
2,501,000
|
|
|
|
|
$
|
200,000
|
|
|
8%
|
Our strategy of providing paid coating services, in addition to Sono-Tek coating
equipment, is showing success. These service based customers are guided by our applications engineering team, to develop
successful coating processes for unique needs. Upon achieving coating results that meet the applications requirement, a sale
of the needed equipment is than the next step. This process has been well received by our customers, and resulted in
several shipments during the first quarter to our Medical and Electronic markets, contributing to our increased revenue.
In the first quarter of fiscal 2019, sales in the alternative energy market decreased
due to customer delivery schedules, however, based upon our current backlog and forecast, we believe this market will show a significant
increase for the remainder of the fiscal year.
Geographic Sales:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
U.S. & Canada
|
|
$
|
1,003,000
|
|
|
$
|
837,000
|
|
|
$
|
166,000
|
|
|
20%
|
Asia Pacific (APAC)
|
|
|
800,000
|
|
|
|
847,000
|
|
|
|
(47,000
|
)
|
|
(6%)
|
Europe, Middle East, Asia (EMEA)
|
|
|
628,000
|
|
|
|
558,000
|
|
|
|
70,000
|
|
|
13%
|
Latin America
|
|
|
270,000
|
|
|
|
259,000
|
|
|
|
11,000
|
|
|
4%
|
TOTAL
|
|
$
|
2,701,000
|
|
|
$
|
2,501,000
|
|
|
$
|
200,000
|
|
|
8%
|
In the first quarter of fiscal 2019, approximately 63% of sales originated outside
of the United States and Canada compared with 67% in the prior year period.
Gross Profit:
Our gross profit increased $90,000, or 8%, to $1,271,000 for the first quarter of
fiscal 2019 compared with $1,181,000 in the prior year period. Gross profit margin of 47.1% was relatively consistent with
the prior year period. The change in product mix and higher direct labor and service department costs partially offset
the benefit of higher volume.
Operating Expenses:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
Research and product development
|
|
$
|
334,000
|
|
|
$
|
309,000
|
|
|
$
|
25,000
|
|
|
8%
|
Marketing and selling
|
|
$
|
630,000
|
|
|
$
|
588,000
|
|
|
$
|
42,000
|
|
|
7%
|
General and administrative
|
|
$
|
275,000
|
|
|
$
|
262,000
|
|
|
$
|
13,000
|
|
|
5%
|
Research and Product Development:
Higher research and product development expense in the first quarter of fiscal 2019
was primarily due to the increase in salaries to ensure employee retention in a competitive labor market and measurable increases
in health insurance costs. Higher costs for engineering materials and supplies as well as travel expense also contributed
to the increase.
Marketing and Selling:
The increase reflects increases in sales salaries and higher health insurance costs.
These increases were partially offset by decreased travel and trade show expenses.
General and Administrative:
In the first quarter of fiscal 2019, we experienced increases in health insurance,
professional fees and corporate and other miscellaneous expenses.
Operating Income:
Our operating income increased $11,000, or 53%, to $32,000
in the first quarter of fiscal 2019 compared with $21,000 for the prior year period. Higher gross profit more than offset the
7% increase in operating expenses. Operating margin for the quarter increased to 1.2% compared with 0.8% in the prior year period.
We continue to invest in our research and product development as well as marketing and selling activities in order to expand our
future market opportunities. We expect with continued growth, we will begin to demonstrate operating leverage and improved margins.
Interest Expense:
Interest expense $11,000 in the first fiscal quarter of 2019 compared with $12,000
for the prior year period.
Interest and Dividend Income:
Interest and dividend income increased to $35,000 in the first quarter of fiscal
2019 as compared with $17,000 for the first quarter of fiscal 2018. Our present investment policy is to invest excess cash in highly
liquid, lower risk fixed income mutual funds. At May 31, 2018, the majority of our holdings are rated at or above investment grade.
Net unrealized loss on marketable securities:
The Company adopted ASU 2016-01, “Financial Instruments – Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities” in the first quarter of fiscal 2019. ASU 2016-01
requires the Company to measure its equity investments at fair value and changes in fair value are to be recognized in net income.
Further information is available in NOTE 2: SIGNIFICANT ACCOUNTING POLICIES in our financial statements.
In the first quarter of fiscal 2019, net income and earnings per share reflect
the actual deduction of $49,000 for the unrealized loss on our marketable securities.
In the first quarter of fiscal 2018, changes in the fair value of our marketable
securities were not recognized in net income, they were recorded as a component of Other Comprehensive Income. In the first quarter
of fiscal 2018, the company reported $27,000 as an unrealized gain on marketable securities in Other Comprehensive Income.
Other Income:
Included in other income is the net revenue related to the rental of the Company’s
real estate. For the first quarter of fiscal 2019, the Company’s rental revenue was $18,000, expenses were $16,000 and the
net revenue was $2,000.
In the first quarter of fiscal 2018, the Company’s rental revenue was $11,000,
expenses were $13,000 and the net revenue was ($2,000).
Income Tax Expense:
We recorded income tax expense of $18,000 for the first quarter of fiscal 2019 compared
with $8,000 for the first quarter of fiscal 2018.
Net Income:
Net income increased by $5,000 to $21,000 for the first quarter of fiscal
2019 compared with $16,000 for the prior year period. Driving the improvement in net income was the $11,000 in higher
operating profit, the $19,000 net increase in interest income and dividends and interest expense, and the $4,000 increase in
other income. Offsetting these improvements were the $20,000 net loss on marketable securities ($29,000 realized gain offset
by $49,000 unrealized loss) and higher income tax expense of $9,000.
Liquidity and Capital Resources
Working Capital –
Our working capital decreased
$31,000 from $6,560,000 at February 28, 2018 to $6,529,000 at May 31, 2018. The decline in working capital was mostly as a
result of the reduction in cash used for investments in equipment and a $40,000 repayment of long term debt. The
Company’s current ratio is 4.5 to 1 at May 31, 2018 as compared with 4.08 to 1 at February 28, 2018.
At May 31, 2018, working capital included $1,542,000 of cash and $4,317,000 of marketable
securities, for a total of $5,859,000. At February 28, 2018, working capital included $2,016,000 of cash and $4,406,000 of marketable
securities, for a total of $6,422,000. The aggregate balance of cash and marketable securities decreased $563,000 during the three-month
period ended May 31, 2018.
Stockholders’ Equity –
Stockholder’s Equity
increased $30,000 from $8,393,000 at February 28, 2018 to $8,423,000 at May 31, 2018. The increase is a result of
the current period’s net income of $21,000 and stock based compensation expense of $9,000.
Operating Activities –
We used $374,000 in our operating
activities in the first quarter of fiscal 2019 as compared to our operating activities providing $358,000 in the first quarter
of fiscal 2018. During the first quarter of fiscal 2019, we had net income of $21,000, accounts receivable increased $199,000,
inventories increased $89,000, prepaid expenses decreased $5,000, accounts payable and accrued expenses decreased $290,000,
customer deposits increased $3,000 and income taxes payable increased $18,000. In addition, in the current period we incurred non-cash
expenses of $81,000 for depreciation and amortization, $9,000 for stock based compensation expense, $18,000 for our inventory
reserve and $49,000 as an unrealized loss on our marketable securities.
Investing Activities –
For the first quarter of fiscal
2019, we used $62,000 in our investing activities as compared with $577,000 for the first quarter of fiscal 2018. For the first
quarters of fiscal years 2019 and 2018, we used $102,000 and $40,000, respectively, for the purchase or manufacture of equipment,
furnishings and leasehold improvements. For the first quarter of 2019 our marketable securities provided $40,000 and we used $537,000
in the first quarter of 2018.
Financing Activities –
In the first quarter of fiscal
years 2019 and 2018, we used $39,000 and $37,000, respectively, for the repayment of our notes payable.
Net (Decrease) Increase in Cash –
In the first quarter of fiscal
2019 our cash balance decreased by $475,000 as compared to a decrease of $256,000 in the first quarter of 2018. In the first quarter
of fiscal 2019, we used $374,000 in our operations. In addition, we used $102,000 for the purchase or manufacture of equipment,
furnishings and leasehold improvements, received $40,000 from the sale of marketable securities and $39,000 for the repayment of
our notes payable.
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, 2018.
Accounting for Income Taxes
As part of the process of preparing the Company’s condensed 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.
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. 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. 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
Accounting pronouncements issued but not yet effective have been deemed to be not
applicable or the adoption of such accounting pronouncements are not expected to have a material impact on the financial statements
of the Company.