Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended November 30, 2012. Sono-Tek develops ultrasonic spray-coating systems serving electronics, advanced energy, medical devices, glass, textiles, and food markets, and also operates rental real estate.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Three months ended Nov. 30, 2011 | Nine months ended Nov. 30, 2012 | Nine months ended Nov. 30, 2011 |
|---|---|---|---|---|
| Net sales | $2.202 million | $2.945 million | $7.433 million | $9.084 million |
| Gross profit / margin | $1.082 million / 49% | $1.506 million / 51% | $3.597 million / 48% | $4.618 million / 51% |
| Operating income | $47,361 | $224,405 | $137,903 | $956,925 |
| Net income | $25,265 | $195,803 | $96,101 | $871,923 |
- For the nine months, diluted and basic EPS were $0.01 versus $0.06 in the prior-year period; for the quarter, both were reported as $0.00 versus $0.01.
- Operating cash flow was $167,414 for the nine months, down from $515,664. Investing used $896,730, including $721,679 for marketable securities; financing used $65,070. Cash decreased by $794,386 to $1.737 million.
- At November 30, cash and cash equivalents were $1.737 million and marketable securities were $975,666. Working capital was approximately $4.824 million, and the current ratio was 4.64:1.
- Total debt was $2.144 million, including $123,573 due within one year. The $750,000 revolving credit facility had no outstanding balance.
- Total assets were $9.322 million and stockholders’ equity was $5.978 million.
Changes and management commentary
- Nine-month sales declined 18% year over year; quarterly sales declined 25%. Management attributed weaker results to lower sales across several product categories and reduced gross margins. Servo and quarterly stent-coating sales increased; quarterly fluxer sales were flat.
- Management cited a slowdown in solar projects amid industry overcapacity and reduced government incentives, as well as slower purchasing by other customers and segments. Sales associated with direct or indirect government funding were approximately $1.4 million for the nine months, compared with approximately $2.8 million for the full year ended February 29, 2012.
- Nine-month operating expenses decreased overall, principally as research and development and sales and marketing costs declined. General and administrative costs rose, partly due to consulting on strategic and growth opportunities and higher stock-based compensation.
- Management describes market diversification and new products as a foundation for future growth, but provides no quantified revenue, earnings, or other financial guidance.
Liquidity, risks, and notable items
- Accounts receivable increased by $312,190 during the nine months; management said this was partly due to increased November sales. Customer deposits decreased by $193,415.
- The company’s $110,000 of cash on deposit at a foreign bank collateralized guarantees for international customers’ order deposits. The guarantees expire at various dates in 2013 and may be exercised subject to performance requirements.
- On November 8, 2012, the board granted officers 810,718 options at a $0.61 exercise price in exchange for cancellation of existing options with an average $0.96 strike price. The new options vest in three installments and expire after ten years.
- Management identified risks including economic and business conditions, competition and technology, product development and market acceptance, financing, patent enforcement, and the ability to increase sales and sustain profitability. It noted that interim results are not necessarily indicative of full-year results.
- No legal proceedings or defaults were reported. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Whether sales and margins stabilize, particularly in solar/advanced energy and products affected by lower orders.
- How much future demand depends on government-funded projects and whether the stated funding-related sales figure is comparable with prior periods.
- Receivables collection, customer-deposit trends, and operating cash generation as sales fluctuate.
- Debt repayment obligations, availability and terms of the demand line of credit, and the status of customer guarantees.
- The cost and dilution implications of the officer option exchange and the strategic-growth consulting activity.