SONO TEK CORP

Previous wording

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 and could cause actual results to differ materially. These factors include, among other considerations, general economic and business conditions; political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our products; inflationary and supply chain pressures; the recovery of the Electronics/Microelectronics and Medical markets; rebound of sales to the industrial market in the second quarter of fiscal year 2025; maintenance of increased order backlog; the imposition of tariffs; timely development and market acceptance of new products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the ability to enforce patents; maintenance of operating leverage; consummation of order proposals; completion of large orders on schedule and on budget; continued sales growth in the medical and alternative energy markets; successful transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems; and realization of quarterly and annual revenues within the forecasted range of sales guidance.

Current wording

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 and could cause actual results to differ materially. These factors include, among other considerations, general economic and business conditions; political, regulatory, tax, competitive and technological developments affecting our operations or the demand for our products; inflationary and supply chain pressures; the recovery of the Electronics/Microelectronics and Medical markets; rebound of sales to the industrial market in the fourth quarter of fiscal year 2025; continued depletion of excess inventory created by our OEM Partners; continued positive impact of recent distributor changes on the Printed Circuit Board revenues; maintenance of increased order backlog; the imposition of tariffs; timely development and market acceptance of new products and continued customer validation of our coating technologies; adequacy of financing; capacity additions, the ability to enforce patents; maintenance of operating leverage; consummation of order proposals; completion of large orders on schedule and on budget; continued sales growth in the medical and alternative energy markets; successful transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete machine solutions and higher value subsystems which are sold at higher average selling prices; and realization of quarterly and annual revenues within the forecasted range of sales guidance.

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 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.

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 39% of our sales were generated outside the United States and Canada in the first nine months of fiscal year 2025.

Previous 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.

Current wording

Third Quarter Fiscal 2025 Highlights (compared with the third quarter of fiscal 2024 unless otherwise noted) We refer to the three-month periods ended November 30, 2024 and 2023 as the third quarter of fiscal 2025 and fiscal 2024, respectively.

Previous wording

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.

Current wording

Nine Month Fiscal 2025 Highlights (compared with the first nine months of fiscal 2024 unless otherwise noted) We refer to the nine-month periods ended November 30, 2024 and 2023 as the first nine-months of fiscal 2025 and fiscal 2024, respectively.

Previous wording

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 wording

Sales to the Alternative/Clean Energy market recorded growth of 42% in the third quarter of fiscal 2025, and 63% for the first nine months of fiscal 2025, which were positively impacted by a growing number of our customers transitioning from our R&D systems to production scale systems that carry much higher average selling prices.

Previous wording

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 wording

In the first nine months of fiscal 2025, approximately 39% of sales originated outside of the United States and Canada compared with 40% in the first nine months of fiscal 2024.

Previous wording

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 wording

In the third quarter of fiscal 2025, approximately 46% of sales originated outside of the United States and Canada compared with 40% in the third quarter of fiscal 2024.

Previous wording

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 wording

We continue to record strong sales from the U.S. and Canada compared to past years, with the first nine-month revenue up 5% or $421,000. 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

Previous wording

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 wording

For the third quarter of fiscal 2025, gross profit decreased $583,000, or 20%, compared with the third quarter of fiscal 2024. For the third quarter of fiscal 2025, the gross profit margin was 45% compared with 51% for the prior year period. The decrease in the gross profit margin was influenced by product mix, increased International Sales that most commonly have distributor discounts, 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.

Previous wording

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 wording

Gross profit decreased $190,000, or 3%, to $7,314,000 for the first nine months of fiscal 2025 compared with $7,504,000 in the first nine months of fiscal 2024. The gross profit margin was 48% compared with 50% for the prior year period. The decrease in the gross profit margin was influenced by product mix 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.

Previous wording

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 wording

Research and product development costs decreased in the third quarter and the first nine months of fiscal 2025 due to a decrease in salary associated with the departure of a senior engineer, a decrease in research and 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. The reallocation of the labor expenses is an outcome of the completion of several successful R&D endeavors.

Previous wording

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 wording

Marketing and selling expenses increased in the first nine months of fiscal 2025 due to increased commissions and increased travel and trade show expenses. In the third quarter of fiscal 2025, we expended approximately $222,000 for commissions as compared with $178,000 for the prior year period, an increase of $44,000. In the first nine months of fiscal 2025, we expended approximately $628,000 for commissions as compared with $464,000 for the prior year period, an increase of $164,000. 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.

Previous 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”.

Current wording

The decrease in salary expense is 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 both the second quarter and first six months of fiscal 2025 due to increased salaries, legal and audit fees and other corporate expenses.

Current wording

General and administrative expenses increased in both the third quarter and first nine months of fiscal 2025 due to increased salaries, legal and audit fees, corporate expenses and stock based compensation. These increases were partially offset by the reversal of the sales tax accrual described more fully below.

Previous 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.

Current wording

Effective January 1, 2024, Steve Harshbarger became our Chief Executive Officer, having previously served as President prior to such date. On becoming Chief Executive Officer, 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. For the first nine months of fiscal year 2025, the total reallocated amount of Mr. Harshbarger’s salary was approximately $194,000.

Previous wording

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 wording

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 nine 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.

Previous wording

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 wording

In the third quarter of fiscal 2025, operating income decreased $523,000, or 73%, to $198,000 compared with $721,000 for the third quarter of fiscal 2024. Operating margin for the third quarter of fiscal 2025 was 4% compared with 13% in the prior year period. The current period’s decrease in operating income is a result of a decrease in revenue and gross profit partially offset by a decrease in operating expenses.

Previous wording

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 wording

In the first nine months of fiscal 2025, operating income decreased $473,000, or 40%, to $722,000 compared with $1,195,000 for the first nine months of fiscal 2024. Operating margin for the first nine months of fiscal 2025 was 5% compared with 8% in the prior year period. In the first nine months of fiscal 2025, the decrease in operating income is a result of a decrease in gross profit combined with an increase in operating expenses.

Previous wording

Interest, Dividend Income and Unrealized Gain:

Current wording

Interest, Dividend Income and Unrealized Gain/(Loss):

Previous 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.

Current wording

Interest and dividend income decreased by $18,000 to $132,000 in the third quarter of fiscal 2025 as compared with $150,000 for the third quarter of fiscal 2024, reflecting a minor reduction in interest rates earned on our cash balances in the third quarter of fiscal 2025. In the first nine months of fiscal 2025, interest and dividend income decreased by $21,000 to $359,000 as compared with $380,000 for the first nine months of fiscal 2024. Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities. At November 30, 2024, the majority of our holdings are rated at or above investment grade.

Previous wording

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 wording

We recorded income tax expense of $40,000 for the third quarter of fiscal 2025 compared with $200,000 for the third quarter of fiscal 2024. For the first nine months of fiscal 2025 we recorded income tax expense of $174,000 compared with $321,000 for the first nine months of fiscal 2024.

Previous wording

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 wording

The decrease in income tax expense in the third 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 the current quarter’s increase in research and development expenditures. The deferred tax asset increased approximately $255,000, to $1,511,000 at November 30, 2024 from $1,256,000 at February 29, 2024. Additionally, the deferred tax liability increased approximately $87,000, to $317,000 at November 30, 2024 from $230,000 at February 29, 2024. The net increase in the deferred tax asset and liability was approximately $168,000 for the first nine months 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.

Previous wording

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 wording

Net income decreased by $416,000 or 60% to $274,000 for the third quarter of fiscal 2025 compared with $690,000 for the third quarter of fiscal 2024. The decrease in net income during the third quarter is primarily the result of a decrease in revenue and gross profit combined with decreases in operating expenses and income tax expense.

Previous 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.

Current wording

Working Capital – Our working capital increased $1,079,000 to $13,202,000 at November 30, 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

The following table summarizes the accounts and the major reasons for the $228,000 decrease in “Cash”:

Current wording

The following table summarizes the accounts and the major reasons for the $834,000 increase in “Cash”:

Previous 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.

Current wording

Stockholders’ Equity – Stockholders’ Equity increased $1,122,000 from $16,279,000 at February 29, 2024 to $17,401,000 at November 30, 2024. The increase is a result of the current period’s net income of $946,000 and $176,000 in additional equity related to stock-based compensation awards.

Previous 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.

Current wording

Operating Activities – We generated $1,199,000 of cash in our operating activities in the first nine months of fiscal 2025 compared with $1,442,000 of cash in the first nine months of fiscal 2024, a decrease of $243,000. The decrease was mostly the result of increases in accounts receivable, a decrease in income taxes payable offset by decreases in inventories and customer deposits. The increase in accounts receivable is due to a number of large sales occurring in the last month of the quarter.

Previous 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.

Current wording

Investing Activities– Our investing activities provided $4,765,000 of cash in the first nine months of fiscal 2025 compared with using $1,815,000 in the first nine months of 2024. For the first nine months of fiscal years 2025 and 2024, we used $403,000 and $327,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements.

Previous wording

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.

Current wording

In the first nine months of fiscal 2025, we liquidated approximately $5,318,000 of our treasury bill investments. At November 30, 2024, approximately $3,583,000 of the liquidated balance is recorded as cash on our balance sheet and is invested in cash equivalents.

Previous 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.

Current wording

Net Changes in Cash and Cash Equivalents – In the first nine months of fiscal 2025, our cash balance increased by $5,964,000 as compared to a decrease of $373,000 in the first nine months of 2024. In the first nine months of fiscal 2025, our operating activities generated $1,199,000 of cash, our marketable securities provided $5,168,000 of cash and we used $403,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.