SONO TEK CORP
For the period ended Aug 31, 2024. Filed Oct 15, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Aug 31, 2024 · Filed Oct 15, 2024
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What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-05-31; filed 2024-07-11.
0001171520-24-000249
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-08-31; filed 2024-10-15.
0001171520-24-000331
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 –20The baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 60 previous paragraphs and 73 current paragraphs.
35 unchanged; 14 reworded; 22 added; 11 removed; 0 previous and 2 current paragraphs rearranged.
Tables are not compared: 8 previous and 10 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (22)
Current report
Total sales for the first half of fiscal year 2025 grew by 10%, and total sales for the second quarter of fiscal year 2025 decreased by 8%. The increase in revenue for the first half of fiscal year 2025 was strongly influenced by shipments to a substantial customer from the Alternative Energy Market that received shipment of three Integrated Coating Systems totaling $2,190,000. Fluxing Systems and OEM Systems dipped for both the second quarter and first half of fiscal 2025, influenced by a softening of activity from the Printed Circuit Board Manufacturing sector and a continued decline of activity from our OEM partners located in China due to the struggling China Economy. Sales of our Multi-Axis Coating Systems decreased in the second quarter of fiscal 2025 primarily due to the timing of orders.
Current report
Sales to the Alternative / Clean Energy market recorded growth of 37% in the second quarter of fiscal 2025 and 80% for the first half of fiscal 2025, and continue to be influenced by a growing number of customers transitioning from our R&D systems to production scale systems that carry much higher ASPs. Electronics market revenue increased by 51% and 30%, respectively, for the second quarter of fiscal 2025 and the first half of fiscal 2025. Growth in the Electronics Market was strongly influenced by two different shipments of a newly developed coating system with wafer shuttling capability for the semiconductor market, with a total value of $808,000. Medical systems sales declined by 77% and 40%, respectively, in the second quarter of fiscal year 2025 and the first half of fiscal 2025. Medical sales decreased primarily as a result of lower demand for our stent and balloon coating systems. However, based on our current backlog and order activity, we project balloon coating system sales to recover in the second half of the year. In contrast, stent coating system sales are likely to remain subdued as several customers in this market have reported slower business activity. Industrial sales declined by 30% and 46%, respectively, for the second quarter of fiscal 2025 and the first half of fiscal 2025. The reduction in industrial sales was strongly impacted by $780,000 of sales to the float glass industry in the first half of fiscal year 2024 that did not repeat in fiscal year 2025. The businesses of our primary American based customers in this market have contracted due to China-based competition entering the market with inexpensive glass.
Current report
In the first half of fiscal 2025, approximately 35% of sales originated outside of the United States and Canada compared with 40% in the first half of fiscal 2024.
Current report
In the second quarter of fiscal 2025, approximately 32% of sales originated outside of the United States and Canada compared with 43% in the second quarter of fiscal 2024.
Current report
We continue to record strong sales from the U.S., growing 9% and 18%, respectively, in the second quarter of fiscal 2025 and the first half of fiscal 2025. U.S. government initiatives such as the CHIPS ACT and the Inflation Reduction Act have influenced these strong sales, as well as the continuing trend of onshoring for high technology products. Asia sales dropped 32% and 21%, respectively, for the second quarter of fiscal 2025 and the first half of fiscal 2025. This dip was influenced by continued decreased sales to China, while other areas of Asia remain more resilient. Latin America experienced decreased sales of 78% and 65%, respectively, for the second quarter of fiscal 2025 and the first half of fiscal 2025. The dip in Latin America sales was primarily attributable to a $465,000 system sold for float glass coating into Mexico in the first half of Fiscal Year 2024 that did not repeat in the current period.
Current report
For the second quarter of fiscal 2025, gross profit decreased by $285,000, or 10%, compared with the prior year period. The gross profit margin was 48.7% compared with 49.7% for the prior year period. The decrease in the gross profit margin was influenced by product mix, inclusive of a decrease in OEM systems sales which typically have high profit margins, a decrease in Multi-Axis Coating Systems and the reallocation and recharacterization of specific labor expenses from the engineering department to cost of goods sold that started in the fourth quarter of fiscal year 2024 as an outcome of completion of several successful R&D endeavors During the quarter, the decrease in gross profit was partially offset by favorable warranty expense reserves.
Current report
For the first half of fiscal 2025, gross profit increased by $393,000, or 9%, to $4,971,000 compared with $4,578,000 in the first half of fiscal 2024. The gross profit margin was 48.8% compared with 49.5% for the prior year period. The decrease in the gross profit margin was influenced by product mix, inclusive of a decrease in OEM systems sales and spare parts sales which typically have high profit margins, and the reallocation and recharacterization of specific labor expenses from the engineering department to cost of goods sold that started in the fourth quarter of fiscal year 2024 as an outcome of completion of several successful R&D endeavors. During the first six months of fiscal 2025, the decrease in gross profit was partially offset by favorable warranty expense reserves and a decrease in outside installation costs.
Current report
Research and product development costs decreased in the second quarter of fiscal 2025 due to a decrease in salary associated with the departure of a senior engineer, a decrease in research & development materials and the reallocation and recharacterization of specific labor expenses from the engineering department to cost of goods sold that started in the fourth quarter of fiscal year 2024 as an outcome of the completion of several successful R&D endeavors.
Current report
Marketing and selling expenses increased in both the second quarter and the first six months of fiscal 2025 due to increased commissions and travel and trade show expenses.
Current report
In the second quarter of fiscal 2025, we expended approximately $211,000 for commissions as compared with $164,000 for the prior year period, an increase of $47,000. In the first six months of fiscal 2025, we expended approximately $407,000 for commissions as compared with $286,000 for the prior year period, an increase of $121,000. The increase in commission expense is primarily the result of an increase in sales being generated by our external distributors, which are commissioned at a higher rate than our in-house sales team.
Current report
In the fourth quarter of fiscal 2024, we were notified by the State of California that we were required to collect sales tax on our shipments to customers in California. For taxable sales, we collected approximately $86,000 of delinquent sales tax from our customers in the first six months of fiscal 2025. As of February 29, 2024, on the basis of a preliminary analysis of our sales to our California customers since April 1, 2019, we recorded an accrual in the amount of $138,000 for the estimated sales tax, penalties and interest that we may have been required to remit to the State of California.
Current report
In the second quarter of fiscal 2025, we filed all necessary sales tax returns with the State of California. Our net expense for sales tax and interest amounted to $72,000. In the second quarter of fiscal 2025, we reversed the remaining accrual of $66,000, this reversal is recorded in general and administrative expenses.
Current report
Operating Income:
Current report
In the second quarter of fiscal 2025, operating income decreased $280,000, or 49%, to $286,000 compared with $566,000 for the second quarter of fiscal 2024. Operating margin for the quarter decreased to 6% compared with 10% in the prior year period. In the second quarter of fiscal 2025, decreases in revenue and gross profit, partially offset by the reversal of the sales tax accrual were key factors in the decrease of operating income.
Current report
In the first half of fiscal 2025, operating income increased by $50,000, to $524,000, compared with $474,000 for the first half of fiscal 2024. Operating margin for the first half of fiscal 2025 and fiscal 2024 was 5%. In the first half of fiscal 2025, an increase in gross profit, partially offset by an increase in operating expenses were key factors in the increase of operating income.
Current report
Interest, Dividend Income and Unrealized Gain:
Current report
Net unrealized gain increased $51,000 to $44,000 in the second quarter of fiscal 2025 as compared to a loss of $7,000 in the second quarter of fiscal 2024. In the first half of fiscal 2025, unrealized gain increased $43,000 to $54,000 as compared with $11,000 in the first half of fiscal 2025.
Current report
Income Tax Expense:
Current report
We recorded income tax expense of $74,000 for the second quarter of fiscal 2025 compared with $142,000 for the second quarter of fiscal 2024. For the first half of fiscal 2025, we recorded income tax expense of $134,000 compared with $121,000 for the first half of fiscal 2024.
Current report
The decrease in income tax expense in the second quarter fiscal 2025 is due to the decrease in income before income taxes partially offset by an increase in permanent timing differences and then the further reduction of taxes due to the application of available research and development tax credits from this quarter’s increase in research and development expenditures. The deferred tax asset increased approximately $173,000, to $1,429,000 at August 31, 2024 from $1,256,000 at February 29, 2024. Additionally, the deferred tax liability increased approximately $82,000, to $312,000 at August 31, 2024 from $230,000 at February 29, 2024. The net increase in the deferred tax asset and liability was approximately $91,000 for the first half of fiscal 2025. This increase is primarily due to an increase in capitalized research and development expenses for tax purposes, partially offset by a decrease in other deferred tax assets and an increase in deferred tax liabilities related to timing differences for depreciation.
Current report
Net income decreased by $200,000 to $341,000 for the second quarter of fiscal 2025 compared with $541,000 for the second quarter of fiscal 2024. The decrease in net income during the second quarter is primarily a result of a decrease in gross profit.
Current report
In the first half of fiscal 2025, we liquidated approximately $4,200,000 of our treasury bill investments. At August 31, 2024, the balance of $4,200,000 is recorded as cash on our balance sheet with approximately $1,800,000 invested in cash equivalents.
Removed paragraphs (11)
Previous report
Integrated Coating System sales increased by 142%, largely due to a $730,000 system delivered to the clean energy sector for an advanced solar application. Sales of Multi-Axis coating systems recorded a 51% increase, influenced by a shipment into the semiconductor market of a newly developed wafer coating system with integrated multi-wafer handling capabilities that sold for $370,000, and the delivery of a new 6-axis robot that sold for $182,000 to the medical device market. OEM System sales increased by 21%. Fluxing systems sales decreased 43%, or $102,000, continuing a downward trend following weak fluxing systems sales in fiscal year 2024. Although we can provide no assurance, we are hopeful that fluxing system sales will rebound in the second half of fiscal year 2025, resulting from significant changes made to our distribution channels for this product line at the beginning of fiscal 2025.
Previous report
Sales to the Alternative Energy market increased by 174%. The Alternative Energy market was influenced by the continued adoption of Sono-Tek platforms used in the manufacturing of critical membranes for carbon capture, green hydrogen generation fuel cells and advanced solar cell applications. Sales to the Medical market increased by 124%, partially due to the shipment of a newly developed six-axis robot system used for a unique implantable medical device application valued at $182,000. The Emerging R&D and Other market decreased by 91% or $115,000, as several emerging applications have shifted into new market baskets as they have become fully developed. The Industrial market decreased by 65% due to the final shipment of a multi-system order delivered in the first quarter of fiscal year 2024 that did not repeat in the first quarter of fiscal year 2025; however, based on existing backlog we anticipate that the industrial market sales will rebound in the second quarter of fiscal year 2025.
Previous report
In the first quarter of fiscal year 2025, approximately 61% of our sales were to customers in the US and Canada compared to 66% in the prior year period of fiscal year 2024. EMEA sales increased 192% due to several large systems shipped to multiple customers in the green energy sector and $86,000 of service-related activities and upgrades on a large system sold to the semiconductor industry several years ago. The increased sales to the US and Canada were positively impacted by several US government initiatives to invest in the green energy sector and advanced research markets. Latin America sales decreased due to a dip in PCB fluxing system sales in Mexico.
Previous report
Our gross profit increased $677,000, or 38%, to $2,454,000 for the first quarter of fiscal year 2025 compared with $1,777,000 in fiscal year 2024. Our gross profit margin decreased 50 basis points to 48.8% in the first quarter of fiscal year 2025 compared to 49.3% in fiscal year 2024. The decrease in gross profit margin during the quarter is primarily due to a realignment of our organizational framework that started in the fourth quarter of fiscal year 2024 as an outcome of completion of several successful R&D endeavors, which shifted some costs from R&D to cost of goods sold.
Previous report
Research and product development costs increased in the first quarter of fiscal year 2025 due to increased salaries resulting from an increase in personnel and related insurance costs, which are directed at the focused growth initiatives we continue to implement. The increase in salaries was partially offset by the reallocation of certain research and development costs to cost of goods sold. This reallocation began in the fourth quarter of fiscal year 2024.
Previous report
Marketing and selling expenses increased in the first quarter of fiscal year 2025 due to increased travel and trade show expenses and commission expense. In the first quarter of fiscal year 2025, our commission expense increased $74,000 to $196,000, compared with $122,000 for the prior year period. The increase in commission expense is a result of the increase in sales in the first quarter of fiscal year 2025.
Previous report
Operating Income/(Loss):
Previous report
In the first quarter of fiscal year 2025, our operating income increased $330,000 to $238,000 compared to an operating loss of $92,000 in the first quarter of fiscal year 2024. The increase is due to the current period’s increase in gross profit partially offset by an increase in operating expenses.
Previous report
Interest and Dividend Income:
Previous report
Income Tax Expense/(Benefit):
Previous report
We recorded an income tax expense of $60,000 for the first quarter of fiscal year 2025 compared with an income tax benefit of $21,000 for the first quarter of fiscal 2024. The increase in income tax expense in fiscal 2025 is due to the increase in income before income taxes offset by the application of available research and development tax credits.
Reworded paragraphs (14)
Previous wording
Our comprehensive suite of thin film coating solutions and application consulting services, provided by our expert applications engineers to guide our customers in developing the complete coating process, ensures unparalleled results for our clients and helps some of the world’s most promising companies achieve technological breakthroughs and bring them the market. In anticipation of customer demands, our significant focus on R&D efforts allows us to keep pace with industry trends while continuously innovating. The company strategically delivers its products through a network of direct sales personnel, carefully chosen independent distributors, and experienced sales representatives located in North America, Latin America, Europe, and Asia, ensuring efficient market reach across diverse sectors around the globe. Approximately 39% of our sales were generated outside the United States and Canada in the first three months of fiscal year 2025.
Current wording
Our comprehensive suite of thin film coating solutions and application consulting services, provided by our expert applications engineers to guide our customers in developing the complete coating process, ensures unparalleled results for our clients and helps some of the world’s most promising companies achieve technological breakthroughs and bring them to market. In anticipation of customer demands, our significant focus on R&D efforts allows us to keep pace with industry trends while continuously innovating. The company strategically delivers its products through a network of direct sales personnel, carefully chosen independent distributors, and experienced sales representatives located in North America, Latin America, Europe, and Asia, ensuring efficient market reach across diverse sectors around the globe. Approximately 35% of our sales were generated outside the United States and Canada in the first six months of fiscal year 2025.
Previous wording
First Quarter Fiscal 2025 Highlights (compared with the first quarter of fiscal 2024 unless otherwise noted) We refer to the three-month periods ended May 31, 2024 and 2023 as the first quarter of fiscal year 2025 and fiscal year 2024, respectively.
Current wording
Second Quarter Fiscal 2025 Highlights (compared with the second quarter of fiscal 2024 unless otherwise noted) We refer to the three-month periods ended August 31, 2024 and 2023 as the second quarter of fiscal 2025 and fiscal 2024, respectively.
Previous wording
These increases were partially offset by a decrease in salary expense due to the reallocation of our new CEO’s salary to the General and Administrative category. Prior to January 1, 2024, Mr. Harshbarger’s salary was classified under marketing and sales expenses. For the first quarter of fiscal year 2025, the total reallocated amount of Mr. Harshbarger’s salary was approximately $77,000.
Current wording
These increases were partially offset by a decrease in salary expense due to the reallocation of our Chief Executive Officer, Steve Harshbarger’s salary to the General and Administrative category as described more fully below under the heading “General and Administrative”.
Previous wording
General and administrative expenses increased in the first quarter of fiscal year 2025 due to increases in salaries, legal and audit fees, corporate investor coverage and other corporate expenses.
Current wording
General and administrative expenses increased in both the second quarter and first six months of fiscal 2025 due to increased salaries, legal and audit fees and other corporate expenses.
Previous wording
Effective January 1, 2024, Steve Harshbarger became our Chief Executive Officer and President, having previously served as Chief Operating Officer and President prior to such date. We reclassified the expenses related to Mr. Harshbarger's compensation in connection with this positional change. Prior to January 1, 2024, we classified Mr. Harshbarger’s salary under sales expenses due to his instrumental involvement in nurturing strategic accounts. In connection with Mr. Harshbarger's assumption of the principal executive officer role, the costs associated with his compensation have been reallocated to the G&A category ensuring a more precise representation of resource allocation in our financial statements. For the first quarter of fiscal year 2025, the total reallocated amount of Mr. Harshbarger’s salary was approximately $77,000.
Current wording
Effective January 1, 2024, Steve Harshbarger became our Chief Executive Officer, having previously served as President prior to such date. We reclassified the expenses related to Mr. Harshbarger's compensation in connection with this positional change. Prior to January 1, 2024, we classified Mr. Harshbarger’s salary under sales expenses because of Mr. Harshbarger’s instrumental role in that area. Upon becoming Chief Executive Officer, we reallocated the costs associated with Mr. Harshbarger’s compensation to the G&A category ensuring a more precise representation of resource allocation in our financial statements. For the first six months of fiscal year 2025, the total reallocated amount of Mr. Harshbarger’s salary was approximately $145,000.
Previous wording
Interest and dividend income increased $29,000 to $153,000 in the first quarter of fiscal year 2025 as compared with $124,000 for the first quarter of fiscal year 2024. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At May 31, 2024, the majority of our holdings are rated at or above investment grade.
Current wording
Interest and dividend income decreased by $39,000 to $85,000 in the second quarter of fiscal 2025 as compared with $124,000 for the second quarter of fiscal 2024 resulting from decreased cash balances. In the first half of fiscal 2025 interest and dividend income decreased by $2,000 to $228,000 as compared with $230,000 for the first half of fiscal 2024. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At August 31, 2024, the majority of our holdings are rated at or above investment grade.
Previous wording
Net income increased by $278,000 to $331,000 in the first quarter of fiscal 2025 compared with $53,000 in the prior year period. The increase in net income is primarily a result of an increase in operating income and interest and dividend income partially offset by an increase in operating expenses.
Current wording
Net income increased by $77,000 to $672,000 for the first half of fiscal 2025 compared with $595,000 for the first half of fiscal 2024. The increase in net income during the first half of fiscal 2025 is primarily a result of an increase in gross profit partially offset by an increase in operating expenses.
Previous wording
Working Capital – Our working capital increased $368,000 to $12,491,000 at May 31, 2024 from $12,123,000 at February 29, 2024. The increase in working capital was primarily the result of the current period's net income and noncash charges partially offset by purchases of equipment.
Current wording
Working Capital – Our working capital increased $823,000 to $12,946,000 at August 31, 2024 from $12,123,000 at February 29, 2024. The increase in working capital was mostly the result of the current period’s net income and noncash charges partially offset by purchases of equipment.
Previous wording
We aggregate cash, cash equivalents and marketable securities in managing our balance sheet and liquidity. For purposes of the following analysis, the total is referred to as “Cash.” At May 31, 2024 and February 29, 2024, our working capital included:
Current wording
We aggregate cash and cash equivalents and marketable securities in managing our balance sheet and liquidity. For purposes of the following analysis, the total is referred to as “Cash.” At August 31, 2024 and February 29, 2024, our working capital included:
Previous wording
The following table summarizes the accounts and the major reasons for the $304,000 increase in “Cash”:
Current wording
The following table summarizes the accounts and the major reasons for the $228,000 decrease in “Cash”:
Previous wording
Stockholders’ Equity – Stockholder’s Equity increased $385,000 from $16,279,000 at February 29, 2024 to $16,664,000 at May 31, 2024. The increase is a result of the current period’s net income of $331,000 and $54,000 in additional equity related to stock-based compensation awards.
Current wording
Stockholders’ Equity – Stockholders’ Equity increased $769,000 from $16,279,000 at February 29, 2024 to $17,048,000 at August 31, 2024. The increase is a result of the current period’s net income of $672,000 and $97,000 in additional equity related to stock-based compensation awards.
Previous wording
Operating Activities – We generated $328,000 of cash in our operating activities in the first quarter of fiscal year 2025 compared to $828,000 of cash in the first quarter of fiscal year 2024, a decrease of $500,000. The decrease was mostly the result of decreases in cash received for accounts receivable and customer deposits when compared to the prior year partially offset by an increase in inventories.
Current wording
Operating Activities – We used $90,000 of cash in our operating activities in the first half of fiscal 2025 compared to our operating activities providing $1,107,000 of cash in the first half of fiscal 2024, a decrease of $1,197,000. The decrease was mostly the result of decreases in accounts payable, accrued expenses, customer deposits, income taxes payable and an increase accounts receivable. These uses of cash were partially offset by a decrease in inventories.
Previous wording
Investing Activities – For the first quarter of fiscal year 2025, our investing activities used $61,000 of cash compared with providing $112,000 for the first quarter of fiscal year 2024. For the first quarters of fiscal years 2025 and 2024, we used $33,000 and $149,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first quarters of fiscal years 2025 and 2024, our marketable securities used $28,000 and provided $261,000, respectively, of cash.
Current wording
Investing Activities– Our investing activities provided $3,808,000 of cash in the first half of fiscal 2025 compared with using $1,007,000 in the first half of fiscal 2024. For the first halves of fiscal years 2025 and 2024, we used $191,000 and $246,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements.
Previous wording
Net Increase in Cash and Cash Equivalents – In the first quarter of fiscal year 2025, our cash balance increased by $267,000 as compared to an increase of $940,000 in the first quarter of fiscal year 2024. In the first quarter of fiscal year 2025, our operating activities generated $328,000 of cash and our marketable securities used $28,000 of cash. In addition, we used $33,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.
Current wording
Net Changes in Cash and Cash Equivalents – In the first half of fiscal 2025, our cash balance increased by $3,718,000 as compared to an increase of $100,000 in the first half of 2024. In the first half of fiscal 2025, our operating activities used $90,000 of cash, our marketable securities provided $3,999,000 of cash and we used $191,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.
Rearranged current paragraphs (2)
Current report — wording carried from elsewhere
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Current report — wording carried from elsewhere
First Half Fiscal 2025 Highlights (compared with the first half of fiscal 2024 unless otherwise noted) We refer to the six-month periods ended August 31, 2024 and 2023 as the first half of fiscal 2025 and fiscal 2024, respectively.