UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-16035
SONO-TEK CORPORATION
(Exact name of registrant as specified in its charter)
New York 14-1568099
------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2012 Rt. 9W, Milton, NY 12547
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone no., including area code: (845) 795-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |_| Smaller reporting company |X|
Non Accelerated Filer |_| (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding as of
Class January 6, 2009
----- ---------------
Common Stock, par value $.01 per share 14,392,901
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements: 1 - 3
Consolidated Balance Sheets - November 30, 2008 (Unaudited) and
February 29, 2008 1
Consolidated Statements of Income - Nine Months and Three Months Ended
November 30, 2008 and 2007 (Unaudited) 2
Consolidated Statements of Cash Flows - Nine Months Ended
November 30, 2008 and 2007 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 13
Item 4 - Controls and Procedures 14
Part II - Other Information 15
Signatures and Certifications 16 - 20
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, February 29,
2008 2008
Unaudited
-------------
Current Assets:
Cash and cash equivalents $ 1,256,999 $ 2,339,550
Accounts receivable (less allowance of $18,500
at November 30 and February 29, respectively) 938,296 614,378
Inventories 1,724,880 1,602,511
Prepaid expenses and other current assets 48,886 69,032
Deferred tax asset -- 70,000
------------- -------------
Total current assets 3,969,061 4,965,471
------------- -------------
Equipment, furnishings and leasehold improvements
(less accumulated depreciation of $1,183,537
and $1,046,195 at November 30 and February 29,
respectively) 676,075 536,892
Intangible assets, net 57,096 34,011
Other assets 7,171 7,171
Deferred tax asset -- 615,803
------------- -------------
TOTAL ASSETS $ 4,709,403 $ 5,889,348
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 294,217 $ 412,692
Accrued expenses 383,496 452,911
Line of Credit - Bank 250,000 --
Current maturities of long term debt 23,268 23,909
Deferred tax liability -- 16,239
------------- -------------
Total current liabilities 950,981 905,751
Long term debt, less current maturities 25,373 27,628
Deferred tax liability -- 57,978
------------- -------------
Total liabilities 976,354 991,357
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Commitments and Contingencies -- --
Stockholders' Equity
Common stock, $.01 par value; 25,000,000 shares
authorized, 14,392,901 and 14,361,091 shares
issued and outstanding, respectively at
November 30 and February 29 144,430 143,612
Additional paid-in capital 8,462,158 8,343,880
Accumulated deficit (4,873,539) (3,589,501)
------------- -------------
Total stockholders' equity 3,733,049 4,897,991
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,709,403 $ 5,889,348
============= =============
See notes to consolidated financial statements.
1
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended November 30, Three Months Ended November 30,
------------------------------ -------------------------------
Unaudited Unaudited
2008 2007 2008 2007
---------------------------- ----------------------------
Net Sales $ 4,808,012 $ 4,207,724 $ 1,582,010 $ 1,560,558
Cost of Goods Sold 2,639,190 2,256,956 960,262 869,071
------------ ------------ ------------ ------------
Gross Profit 2,168,822 1,950,768 621,748 691,487
------------ ------------ ------------ ------------
Operating Expenses
Research and product development costs 625,906 555,081 206,448 184,824
Marketing and selling expenses 1,371,575 755,662 527,820 261,576
General and administrative costs 860,277 689,451 253,979 241,570
------------ ------------ ------------ ------------
Total Operating Expenses 2,857,759 2,000,194 988,247 687,970
------------ ------------ ------------ ------------
Operating (Loss) Income (688,937) (49,426) (366,499) 3,517
Interest Expense (3,085) (3,394) (1,605) (1,017)
Interest Income 12,021 66,030 1,519 18,201
Other Income 7,549 8,609 1,887 2,948
------------ ------------ ------------ ------------
(Loss) Income from Operations Before Income Taxes (672,452) 21,819 (364,698) 23,649
Income Tax Expense (Benefit) 611,586 (33,813) 611,586 0
------------ ------------ ------------ ------------
Net (Loss) Income $ (1,284,038) $ 55,632 $ (976,284) $ 23,649
============ ============ ============ ============
Basic (Loss) Earnings Per Share $ (0.09) $ 0.00 $ (0.07) $ 0.00
============ ============ ============ ============
Diluted (Loss) Earnings Per Share $ (0.09) $ 0.00 $ (0.07) $ 0.00
============ ============ ============ ============
Weighted Average Shares - Basic 14,372,056 14,360,541 14,386,864 14,360,541
============ ============ ============ ============
Weighted Average Shares - Diluted 14,372,056 14,412,523 14,386,864 14,409,178
============ ============ ============ ============
See notes to consolidated financial statements.
2
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended November 30,
------------------------------
Unaudited
2008 2007
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (1,284,038) $ 55,632
Adjustments to reconcile net (loss) income to net cash
(used in) operating activities:
Depreciation and amortization 170,995 106,580
Stock based compensation expense 96,956 28,067
Gain on sale of equipment 57,643 --
Decrease (Increase) in:
Accounts receivable (323,918) 1,027
Inventories (122,369) (175,523)
Prepaid expenses and other current assets 20,146 13,993
Deferred tax asset 611,586 (35,000)
(Decrease) Increase in:
Accounts payable and accrued expenses (187,890) (149,694)
------------- -------------
Net Cash (Used In) Operating Activities (960,889) (154,918)
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Patent Application Costs (26,917) --
Purchase of equipment and furnishings (363,988) (140,989)
------------- -------------
Net Cash (Used In) Investing Activities (390,905) (140,989)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 22,140 --
Proceeds from note payable - Bank 17,590 --
Proceeds from Line of Credit - Bank 250,000 --
Repayments of notes payable and loans (20,487) (20,442)
------------- -------------
Net Cash Provided by (Used In) Financing Activities 269,243 (20,442)
------------- -------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,082,551) (316,349)
CASH AND CASH EQUIVALENTS
Beginning of period 2,339,550 2,268,976
------------- -------------
End of period $ 1,256,999 $ 1,952,627
============= =============
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 3,086 $ 3,394
============= =============
Taxes Paid $ 0 $ 0
============= =============
See notes to consolidated financial statements.
3
SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
Nine Months Ended November 30, 2008 and 2007
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying consolidated financial statements of Sono-Tek
Corporation, a New York Corporation (the "Company"), include the accounts of the
Company and its wholly owned subsidiary, Sono-Tek Cleaning Systems, Inc., a New
Jersey Corporation ("SCS") which the Company acquired on August 3, 1999, whose
operations have been discontinued. There have been no operations of this
subsidiary since Fiscal Year Ended February 28, 2002. All significant
intercompany accounts and transactions are eliminated in consolidation.
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. The Company occasionally has cash
or cash equivalents on hand in excess of the $250,000 insurable limits at a
given bank.
Fair Value of Financial Instruments - The carrying amounts reported in the
balance sheet for cash, receivables, accounts payable and accrued expenses
approximate fair value based on the short-term maturity of these instruments.
Interim Reporting - The attached summary 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 29, 2008, and included in
its report on Form 10-KSB. 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.
Intangible Assets - Include cost of patent applications that are deferred and
charged to operations over seventeen years for domestic patents and twelve years
for foreign patents. The accumulated amortization is $62,781 and $58,949 at
November 30, 2008 and February 29, 2008, respectively. Annual amortization
expense of such intangible assets is expected to be $4,600 per year for the next
five years.
4
Reclassifications - Certain reclassifications have been made to the prior period
to conform to the presentations of the current period.
NOTE 2: INVENTORIES
Inventories at November 30, 2008 are comprised of:
Finished goods $ 789,990
Work in process 651,692
Consignment 9,770
Raw materials and subassemblies 579,626
-----------
Total 2,031,078
Less: Allowance (306,198)
-----------
Net inventories $ 1,724,880
===========
NOTE 3: STOCK OPTIONS AND WARRANTS
Stock Options - Under the 2003 Stock Incentive Plan, as amended ("2003 Plan"),
options can be granted to officers, directors, consultants and employees of the
Company and its subsidiaries to purchase up to 1,500,000 of the Company's common
shares. The 2003 Plan supplemented and replaced the 1993 Stock Incentive Plan
(the "1993 Plan"), under which no further options may be granted. Options
granted under the 1993 Plan expire on various dates through 2013. As of November
30, 2008, there were 62,500 options outstanding under the 1993 Plan and
1,105,565 options outstanding under the 2003 plan.
Under both the 1993 and 2003 Stock Incentive Plans, option prices must be at
least 100% of the fair market value of the common stock at time of grant. For
qualified employees, except under certain circumstances specified in the plans
or unless otherwise specified at the discretion of the Board of Directors, no
option may be exercised prior to one year after date of grant, with the balance
becoming exercisable in cumulative installments over a three year period during
the term of the option, and terminating at a stipulated period of time after an
employee's termination of employment.
NOTE 4: STOCK BASED COMPENSATION
On March 1, 2006, the Company adopted SFAS No. 123R, "Share Based Payments."
SFAS No. 123R requires companies to expense the value of employee stock options
and similar awards for periods beginning after December 15, 2005, and applies to
all outstanding and vested stock-based awards at a company's adoption date.
The weighted-average fair value of options has been estimated on the date of
grant using the Black-Scholes options-pricing model. The weighted-average
Black-Scholes assumptions are as follows:
5
2008 2007
-------------------------------
Expected life 4 years 4 years
Risk free interest rate 1.8% - 3.13% 4.35% - 5.07%
Expected volatility 55% - 70% 39% - 78%
Expected dividend yield 0% 0%
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 nine months ended November 30, 2008 and 2007, net income (loss) and
earnings per share reflect the actual deduction for stock-based compensation
expense. The impact of applying SFAS 123R approximated $96,956 and $28,067 in
additional compensation expense during the nine months ended November 30, 2008
and 2007, respectively. Such amount is included in general and administrative
expenses on the statement of operations. The expense for stock-based
compensation is a non-cash expense item.
NOTE 5: EARNINGS PER SHARE
The denominator for the calculation of diluted earnings per share at November
30, 2008 and 2007 are calculated as follows:
November 30, 2008 November 30, 2007
----------------- -----------------
Denominator for basic earnings per share 14,372,056 14,360,541
Dilutive effect of stock options -- 51,982
---------- ----------
Denominator for diluted earnings per share 14,372,056 14,412,523
========== ==========
The effect of stock options for the nine months ended November 30, 2008 is not
used in the calculation of diluted earnings per share. Due to the net loss for
the nine months ended November 30, 2008, the inclusion of stock options in the
calculation would have an anti-dilutive effect.
6
NOTE 6: REVOLVING LINE OF CREDIT
The Company has a $500,000 revolving line of credit at prime which was 4% at
November 30, 2008. The loan is collateralized by all of the assets of the
Company. 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 November 30, 2008, the
Company's outstanding balance was $250,000, and the unused credit line was
$250,000.
NOTE 7: OTHER INCOME
As previously disclosed on Form 8-K, filed on July 5, 2005, the Company
determined that a former employee had misappropriated approximately $250,000 of
the Company's monies, primarily through unauthorized check writing from the
Company's accounts over a period of three calendar years. The Company had
previously expensed substantially all of the misappropriated funds over the
years.
The Company has recovered approximately 75% of these funds to date. The Company
has a note that is being paid down by the former employee. The note has been
fully reserved for as the collectibility is questionable. As previously
discussed, the Company can offer no assurances that it will be successful in its
attempts to collect the balance of the remaining restitution.
7
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
We discuss expectations regarding our future performance, such as our business
outlook, in our annual and quarterly reports, press releases, and other written
and oral statements. These "forward-looking statements" are based on currently
available competitive, financial and economic data and our operating plans. They
are inherently uncertain, and investors must recognize that events could turn
out to be significantly different from our expectations. These factors include,
among other considerations, general economic and business conditions; political,
regulatory, competitive and technological developments affecting the Company's
operations or the demand for its products; timely development and market
acceptance of new products; adequacy of financing; capacity additions, the
ability to enforce patents and the successful implementation of the business
development program.
We undertake no obligation to update any forward-looking statement.
Overview
Sono-Tek has developed a unique and proprietary series of ultrasonic atomizing
nozzles, which are being used in an increasing variety of electronic, medical,
industrial, and nanotechnology applications. These nozzles are electrically
driven and create a fine, uniform, low velocity spray of atomized liquid
particles, in contrast to common pressure nozzles. These characteristics create
a series of commercial applications that benefit from the precise, uniform, thin
coatings that can be achieved. When combined with significant reductions in
liquid waste and less overspray than can be achieved with ordinary pressure
nozzle systems, there is lower environmental impact and lower energy use.
We have a well established position in the electronics industry with our
SonoFlux spray fluxing equipment. It saves customers from 40% to 80% of the
liquid flux required to solder printed circuit boards over other methods, such
as foam fluxing. Less flux equates to less material cost, fewer chemicals in the
workplace, and less clean-up. Also, the SonoFlux equipment reduces the number of
soldering defects, which reduces the amount of rework.
One change that has proven successful is our diversification into the medical
device market. In the past several years, we have focused engineering resources
on the medical device market, with emphasis on providing coating solutions for
the new generation of drug coated stents. We have sold a significant number of
specialized ultrasonic nozzles and MediCoat stent coating systems to large
medical device customers. Sono-Tek's stent coating systems are superior compared
to pressure nozzles in their ability to uniformly coat the very small arterial
stents without creating webs or gaps in the coatings. We sell a bench-top, fully
outfitted stent coating system to a wide range of customers that are
manufacturing stents and/or applying coatings to be used in developmental
trials. We have also introduced and sold several multiple stent coaters known as
Medicoat II, designed for production use.
8
Another change that has stimulated an increase in business has been the
development of the WideTrack coating system, a broad based platform for applying
a variety of coatings to moving webs of glass, textiles, plastic, metal, food
products and packaging materials. The WideTrack is a long-term product and
market development effort. Thus far, we have made successful inroads with
WideTrack systems into the glass, medical textile (bandages), textiles, food and
solar and fuel cell industries. In particular, during the last two quarters we
installed numerous systems in the fuel cell, solar energy and baked goods
industries. We plan to increase our marketing and sales efforts into these
industries, providing our clients with superior technical solutions and cost
savings unmatched by any other existing technology. This will require a
continuation of market and technology development in these areas in the years
ahead. Some of these WideTrack applications involve nano-technology based
materials and biodegradable materials. This places us in an advantageous and
preferable position among clients whose businesses are focused on providing
superior environmental "green" products. We believe there is an excellent fit
between the thin, precise films required in nano-technology coating applications
and our ultrasonic nozzle systems.
The creation of technological innovations and the expansion into new
geographical markets requires the investment of both time and capital. Although
there is no guarantee of success, we expect that over time, these newer markets
will be the basis for Sono-Tek's continued growth and will contribute to future
profitability.
The Company has pursued a business development program for the past four
quarters, designed to take it further into new markets as described above. The
result has been an increase in sales during the past year that has run counter
to the economy and general business trends, caused by the current recession. We
have spent from our cash reserves to finance this program, and have incurred
expected losses, since development expenditures must precede new business. Our
ongoing goal is to improve our sales levels in combination with a decline in the
costs associated with the program.
Liquidity and Capital Resources
Working Capital - Our working capital decreased $1,042,000 from a working
capital of $4,060,000 at February 29, 2008 to $3,018,000 at November 30, 2008.
The Company's current ratio is 4.2 to 1 at November 30, 2008 as compared to 5.5
to 1 at February 29, 2008.
Stockholders' Equity - Stockholder's Equity decreased $1,165,000 from $4,898,000
at February 29, 2008 to $3,733,000 at November 30, 2008. The decrease is a
result of the net loss of $1,284,000, an adjustment for stock based compensation
expense of $97,000 and the exercise of stock options of $22,000.
Operating Activities - We used $961,000 of cash in our operating activities for
the nine months ended November 30, 2008. The use of cash resulted from the
current period net loss of $1,284,000, an increase in accounts receivable of
$324,000, an increase in inventories of $122,000 and a decrease of $20,000 in
prepaid assets. In addition to the above, our accounts payable and accrued
expenses decreased $188,000 and we wrote down our deferred tax asset by $612,000
during the current period
9
Investing Activities - We used $364,000 for the purchase of capital equipment
and $27,000 for patent application costs during the nine months ended November
30, 2008. For the nine months ended November 30, 2007, we used $141,000 for the
purchase of capital equipment.
Financing Activities - For the nine months ended November 30, 2008, the net cash
provided by financing activities was $269,000. We drew down $250,000 of our line
of credit and a note payable for $18,000 for the purchase of equipment. In
addition, we made payments of $20,000 on our notes payable and received $22,000
from the proceeds of stock option exercises.
Results of Operations
During the nine month period ended November 30, 2008, our sales increased
$600,000 or 14% to $4,808,000 as compared to $4,208,000 for the nine months
ended November 30, 2007. For the three months ended November 30, 2008, our sales
increased $21,000 to $1,582,000 as compared to $1,561,000 for the three months
ended November 30, 2007. Our sales for the nine month period ended November 30,
2008 were improved over the same period last year due to additional sales of
fluxer units, stentcoaters, and our programmable XYZ precision coating units.
Our gross profit increased $218,000 to $2,169,000 for the nine months ended
November 30, 2008 from $1,951,000 for the nine months ended November 30, 2007.
The gross profit margin was 45% of sales for the nine months ended November 30,
2008 and 46% for the nine months ended November 30, 2007. Our gross profit
decreased $69,000 to $622,000 for the three months ended November 30, 2008 as
compared to $691,000 for the three months ended November 30, 2007. During the
current quarter, we increased our inventory reserve on our electronics product
lines by $75,000 due to the slowdown in this market. The increase in this
reserve had a negative impact on our gross profit margin and reduced it to 39%
of sales for the three months ended November 30, 2008 as compared to 44% for the
three months ended November 30, 2007.
Research and product development costs increased $71,000 to $626,000 for the
nine months ended November 30, 2008 from $555,000 for the nine months ended
November 30, 2007 and $21,000 to $206,000 for the three months ended November
30, 2008 from $185,000 for the three months ended November 30, 2007. The
increases were principally due to an increase in engineering personnel in the
current periods. The increases are aimed at the development of new products
which are expected to benefit future periods.
Marketing and selling costs increased $616,000 to $1,372,000 for the nine months
ended November 30, 2008 from $756,000 for the nine months ended November 30,
2007 and $266,000 to $528,000 for the three months ended November 30, 2008 from
$262,000 for the three months ended November 30, 2007. During the current
quarter, our international commission expense increased due to an increase in
our international sales. In addition, our trade show expense increased due to
our increased trade show presence.
10
The increase in these expenditures is due to the reorganization of our sales
force into two separate Strategic Business Units. We have added additional sales
personnel, increased the number of trade shows we participate in and have
engaged an outside marketing firm to help increase the awareness of our
products. These increases are part of the business development program which was
initiated last year.
General and administrative costs increased $171,000 to $860,000 for the nine
months ended November 30, 2008 from $689,000 for the nine months ended November
30, 2007 and $12,000 to $254,000 for the three months ended November 30, 2008
from $242,000 for the three months ended November 30, 2007. The increases were
principally due to an increase in salary expense and an increase in stock based
compensation expense.
Income tax expense increased $645,000 to $612,000 for the nine months ended
November 30, 2008 as compared to a tax benefit of $34,000 for the nine months
ended November 30, 2007. During the quarter ended November 30, 2008, we
increased the valuation reserve of our deferred tax asset resulting in the
recognition of current period tax expense of $612,000. The increase in the
valuation reserve is a non cash expense item. The increase in the valuation
reserve is based on our estimate of our ability to utilize the current net
operating loss carryforwards. In the future, we may adjust the valuation reserve
based upon our return to profitable operations.
We incurred a net loss of $1,284,000 for the nine months ended November 30, 2008
as compared to net income of $56,000 for the nine months ended November 30,
2007. During the three months ended November 30, 2008, we incurred a net loss of
$976,000 as compared to net income of $24,000 for the three months ended
November 30, 2007. For the three months ended November 30, 2008 we incurred an
operating loss of $366,000 as compared to operating income of $4,000 for the
three months ended November 30, 2007. Our operating income during the current
quarter was negatively impacted by our decision to increase the inventory
reserve for slow moving electronics parts, an increase in international
commission expense and an increase in trade show expense. In addition to these
operating expenses, we increased the valuation reserve of our deferred tax asset
which resulted in the recognition of a current period tax expense of $612,000.
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-KSB for the year ended February 29, 2008.
11
Accounting for Income Taxes
As part of the process of preparing the Company's consolidated financial
statements, the Company is required to estimate its income taxes. Management
judgment is required in determining the provision for the deferred tax asset.
The Company increased the valuation reserve for the deferred tax asset due to
the operating loss for the current period which reduces the possibility for the
utilization of the net operating loss carryforwards. In the event that actual
results differ from these estimates, the Company may need to again adjust such
valuation reserve.
Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires
the use of a valuation model. SFAS 123(R) is a complex accounting standard, the
application of which requires significant judgment and the use of estimates,
particularly surrounding Black-Scholes assumptions such as stock price
volatility, expected option lives, and expected option forfeiture rates, to
value equity-based compensation. The Company currently uses a Black-Scholes
option pricing model to calculate the fair value of its stock options. The
Company primarily uses historical data to determine the assumptions to be used
in the Black-Scholes model and has no reason to believe that future data is
likely to differ materially from historical data. However, changes in the
assumptions to reflect future stock price volatility and future stock award
exercise experience could result in a change in the assumptions used to value
awards in the future and may result in a material change to the fair value
calculation of stock-based awards. SFAS 123(R) requires the recognition of the
fair value of stock compensation in net income. Although every effort is made to
ensure the accuracy of our estimates and assumptions, significant unanticipated
changes in those estimates, interpretations and assumptions may result in
recording stock option expense that may materially impact our financial
statements for each respective reporting period.
Impact of New Accounting Pronouncements
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 any impact on the Company.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company does not issue or invest in financial instruments or derivatives for
trading or speculative purposes. Substantially all of the operations of the
Company are conducted in the United States, and, as such, are not subject to
material foreign currency exchange rate risk. Although the Company's assets
included $1,257,000 in cash, the market rate risk associated with changing
interest rates in the United States is not material
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ITEM 4 - Controls and Procedures
The Company has established and maintains "disclosure controls and procedures"
(as those terms are defined in Rules 13a -15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934 (the "Exchange Act'). Christopher L. Coccio,
Chief Executive Officer (principal executive officer) and Stephen J. Bagley,
Chief Financial Officer (principal accounting officer) of the Company, have
evaluated the Company's disclosure controls and procedures as of November 30,
2008. Based on this evaluation, they have concluded that the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is (1) recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms, and (2) accumulated and communicated to Management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding timely disclosure.
In addition, there were no changes in the Company's internal controls over
financial reporting during the third fiscal quarter of 2009 that have materially
affected, or are reasonably likely to materially affect, internal controls over
financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
(a) Exhibits
31.1 - 31.2 - Rule 13a - 14(a)/15d - 14(a) Certification
32.1 - 32.2 - Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: January 14, 2009
SONO-TEK CORPORATION
(Registrant)
By: /s/ Christopher L. Coccio
-------------------------
Christopher L. Coccio
Chief Executive Officer
By: /s/ Stephen J. Bagley
-------------------------
Stephen J. Bagley
Chief Financial Officer
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