Item 7. Management’s Discussion and Analysis
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
We discuss expectations regarding our future performance, such as our business outlook,
in our annual and quarterly reports, news releases, and other written and oral statements. These “forward-looking statements”
are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and
investors must recognize that events could turn out to be significantly different from our expectations 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; the duration and scope of the
COVID-19 pandemic; the extent and duration of the pandemic’s adverse effect on economic and social activity, consumer confidence,
discretionary spending and preferences, labor and healthcare costs, and unemployment rates, any of which may reduce demand for some of
our products and impair the ability of those with whom we do business to satisfy their obligations to us; our ability to sell and provide
our services and products, including as a result of continued pandemic related travel restrictions, mandatory business closures, and stay-at
home or similar orders; any temporary reduction in our workforce, closures of our offices and facilities and our ability to adequately
staff and maintain our operations resulting from the pandemic; the ability of our customers and suppliers to continue their operations
as result of the pandemic, which could result in terminations of contracts, losses of revenue; the recovery of the Electronics/ Microelectronics
and Medical markets following COVID-19 related slowdowns; and further adverse effects to our supply chain; maintenance of increased order
backlog, including effects of any COVID-19 related cancellations; 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; maintenance of increased order backlog; 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 forecasted range.
We undertake no obligation to update any forward-looking statement.
6
Overview
Founded in 1975, Sono-Tek Corporation designs and manufactures ultrasonic coating systems
that apply precise, thin film coatings to a multitude of products for the microelectronics/electronics, alternative energy, medical and
industrial markets, including specialized glass applications in construction and automotive. We also sell our products to emerging research
and development and other markets. We have invested significant resources to enhance our market diversity by leveraging our core ultrasonic
coating technology. As a result, we have increased our portfolio of products, the industries we serve and the countries in which we sell
our products.
Our ultrasonic nozzle systems use high frequency, ultrasonic vibrations that atomize liquids
into minute drops that can be applied to surfaces at low velocity providing thin layers of protective materials over a surface such as
glass or metals. Our solutions are environmentally-friendly, efficient and highly reliable. They enable dramatic reductions in overspray,
savings in raw material, water and energy usage and provide improved process repeatability, transfer efficiency, high uniformity and reduced
emissions.
We believe product superiority is imperative and that it is attained through the extensive
experience we have in the coatings industry, our proprietary manufacturing know-how and skills and our unique work force we have built
over the years. Our growth strategy is to leverage our innovative technologies, proprietary know-how, unique talent and experience, and
global reach to further advance the use of ultrasonic coating technologies for the microscopic coating of surfaces in a broader array
of applications that enable better outcomes for our customers’ products and processes.
We are a global business with approximately 65% of our sales generated from outside the
United States and Canada. Our direct sales team and our distributor and sales representative network is located in North America, Latin
America, Europe and Asia. Over the last few years, we have expanded our sales capabilities by increasing the size of our direct sales
force, adding new distributors and sales representatives. In addition, we have established testing labs at our distribution partner sites
in China, Taiwan, Germany, Turkey, Korea and Japan, while also recently expanding our first testing lab that is co-located with our manufacturing
facilities in New York. These labs provide significant value for demonstrating to prospective customers the capabilities of our equipment
and enabling us to develop custom solutions to meet their needs.
Over the last decade, we have shifted our business from primarily selling our ultrasonic
nozzles and components to a more complex business providing complete machine solutions and higher value subsystems to original equipment
manufacturers (“OEMs”). This strategy has resulted in significant growth of our average unit selling price; with our larger
machines often selling for over $300,000 and system prices sometimes reaching over $1,000,000. As a result of this transition, we have
broadened our addressable market and we believe that we can grow sales on a larger scale. We expect that we will experience wide variations
in both order flow and shipments from quarter to quarter.
Highlights
Highlights for fiscal 2021 include:
•
During the unprecedented year of the Covid-19 pandemic, our net sales for fiscal 2021 dipped only slightly to $14,833,000, down 3% compared with $15,355,000 for fiscal 2020. We achieved this despite numerous COVID-19 related delays and cancellations from our customers, that we estimate amounted to 20% or more of lost potential business. We attribute these strong results to the continuing success of our ongoing growth initiatives.
•
Gross profit margin for fiscal 2021 remained strong at 47.2% compared to 47.6% in fiscal 2020; due to the strength in sales and good cost control.
•
Operating margin for fiscal 2021 increased to 9.04% compared to 7.3% in fiscal 2020, due to decreased costs in sales related travel and trade shows during the Covid-19 pandemic.
7
•
Backlog on February 28, 2021
was up 9.5% compared to the backlog on February 29, 2020. We attribute this to our ongoing strategy for product line expansion with
further customization and automation, which delivers increased value to our customer, and a higher average selling price to
Sono-Tek.
•
Operating activities generated an increase of $725,000 in fiscal 2021, as cash, cash equivalents and short-term investments climbed from $7,879,000 on February 29, 2020 to $8,648,000 on February 28, 2021.
•
We repaid our mortgage debt in its entirety during fiscal 2021.
•
We applied for forgiveness of our Payroll Protection Program funding in December 2020. Our forgiveness application was approved in April 2021.
•
We have a strong balance sheet with no debt. We believe that this provides us with the financial flexibility to pursue our business strategy for growth. We believe that our strong, debt free balance sheet will allow us to aggressively pursue organic or other growth opportunities as they arise.
•
The Covid-19 pandemic accelerated sales and broadened our customer base for diagnostic coating machines, which supports the manufacturing of Covid-19 testing kits, with approximately $770,000 of equipment sold in fiscal year 2021.
Market and Geographic Diversity
We have invested significant resources to enhance our market diversity. Leveraging our
core ultrasonic coating technology, we expanded our portfolio of products, the industries we serve, and the countries in which we sell
our products.
Today, we serve five industries: microelectronics/electronics, medical, alternative energy,
emerging research and development and other, as well as the industrial markets.
We are a geographically diverse company with a presence directly and through distributors
and trade representatives, in the United States and Canada, EMEA (Europe, Middle East and Africa), APAC (Asia Pacific) and Latin America
(including Mexico). In fiscal 2021, approximately 65% of sales originated outside of the United States and Canada. We established an infrastructure
to drive our geographic diversity including a newly equipped application process development laboratory in APAC, a strengthened sales
organization of application engineers, expanded talent on our engineering team, the latest, most sophisticated design software tools,
as well as an expanded, highly trained installation and service organization.
We believe that the new products we have introduced, the new markets we have
penetrated, and the expanded regions in which we now sell our products, are a strong foundation for our future sales growth and
enhanced profitability.
Results of Operations
Sales and Gross Profit:
Fiscal Year Ended
February 28,
February 29,
Change
2021
2020
$
%
Net Sales
$ 14,833,000
$ 15,355,000
$ (522,000 )
(3% )
Cost of Goods Sold
7,836,000
8,041,000
(205,000 )
(3% )
Gross Profit
$ 6,997,000
$ 7,314,000
$ (317,000 )
(4% )
Gross Profit %
47.2%
47.6%
8
The Covid-19 pandemic reached the US in full force only two weeks into our fiscal year,
resulting in our application process development labs coming to a grinding halt, and all trade shows and customer visits being canceled.
Fortunately, we had been creating strong digital connections with our customers before the pandemic, enabling Sono-Tek to quickly shift
our customers from in person interactions to virtual experiences in our lab, remote virtual sales meetings, and virtual machine installations.
Many of our customers canceled or delayed orders during the pandemic, but our growth initiatives offset most of these cancelations, and
we only experienced a 3% dip in sales. Gross profit remained stable at 47.2%.
In fiscal 2021, our sales include approximately $4,100,000 for orders that were delivered
to three customers.
Product Sales:
Twelve Months Ended
February 28,
% of
February 29,
% of
Change
2021
total
2020
total
$
%
Fluxing Systems
$ 798,000
5%
$ 906,000
6%
$ (108,000 )
(12% )
Integrated Coating Systems
4,219,000
28%
3,599,000
23%
620,000
17%
Multi-Axis Coating Systems
5,614,000
38%
6,866,000
45%
(1,252,000 )
(18% )
OEM Systems
1,582,000
11%
1,384,000
9%
198,000
14%
Other
2,620,000
18%
2,600,000
17%
20,000
1%
TOTAL
$ 14,833,000
$ 15,355,000
$ (522,000 )
(3% )
Integrated coating systems showed 17% growth due to a significant shipment of
customized machinery to apply nano-coatings in the textile industry. A 12% sales dip occurred in fluxing systems in fiscal 2021 as
many of these customers remained in lockdown for a significant amount of time due to Covid. Multi-Axis coating systems dropped 18%
in fiscal 2021, which was impacted greatly by a $1.6 million multi-axis robot sold in fiscal 2020. Although we did receive an order
for another multi-axis robot of similar value in fiscal 2021, this is not scheduled to ship until fiscal 2022.
Market Sales:
Twelve Months Ended
February 28,
% of
February 29,
% of
Change
2021
total
2020
total
$
%
Electronics/Microelectronics
$ 5,997,000
40%
$ 8,486,000
55%
$ (2,489,000 )
(29% )
Medical
3,369,000
23%
3,476,000
23%
(107,000 )
(3% )
Alternative Energy
2,144,000
15%
1,923,000
12%
221,000
12%
Emerging R&D and Other
1,055,000
7%
1,018,000
7%
37,000
4%
Industrial
2,268,000
15%
452,000
3%
1,816,000
402%
TOTAL
$ 14,833,000
$ 15,355,000
$ (522,000 )
(3% )
The Industrial market showed 402% growth, primarily a result of an order for large multi-nozzle
coating systems sold to an overseas textile manufacturer. Alternative Energy customers had several Covid lockdowns throughout the year
negatively affecting fuel cell system sales, however, an increase in sales to the carbon capture market offset this dip and resulted in
a 12% overall increase for the Alternative energy market. The Electronics / Microelectronics market dipped 29% due to several of our PCB
fluxing customers in this market halting operations during Covid lockdowns, and a large 6-axis robot system that sold in fiscal 2020,
that did not repeat in fiscal 2021.
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Geographic Sales:
Twelve Months Ended
February 28,
February 29,
Change
2021
2020
$
%
U.S. & Canada
$ 5,155,000
$ 4,506,000
$ 649,000
14%
Asia Pacific (APAC)
4,171,000
4,817,000
(646,000 )
(13% )
Europe, Middle East, Asia (EMEA)
4,287,000
4,512,000
(225,000 )
(5% )
Latin America
1,220,000
1,520,000
(300,000 )
(20% )
TOTAL
$ 14,833,000
$ 15,355,000
$ (522,000 )
(3% )
In fiscal 2021, approximately 65% of sales originated outside of the United States and
Canada. This compares with 71% in fiscal 2020. The increased sales to US and Canada are a result of many US companies shifting manufacturing
operations back to the US, due to the operational challenges of manufacturing in foreign countries during the Covid-19 pandemic. Decreased
sales to Latin America of 20% were driven by a drop in PCB fluxer sales during Covid lockdowns in Mexico and Brazil.
Operating Expenses:
Twelve Months Ended
February 28,
February 29,
Change
2021
2020
$
%
Research and product development
$ 1,645,000
$ 1,428,000
$ 217,000
15%
Marketing and selling
2,790,000
3,403,000
(613,000 )
(18% )
General and administrative
1,222,000
1,367,000
(145,000 )
(11% )
Total Operating Expenses
$ 5,657,000
$ 6,198,000
$ (541,000 )
(9% )
Research and Product Development:
Research and product development costs increased $217,000 to $1,645,000 for fiscal 2021
due to increased salaries and related costs. In the prior fiscal year, some of our personnel were assigned to specific customer sales
orders and the associated research and development costs were recorded in inventory, as incurred.
Marketing and Selling:
Marketing and selling costs decreased $613,000 to $2,790,000 for fiscal 2021 due to decreases
in commissions, travel and trade show expenses.
During fiscal 2021, we expended approximately $621,000 for commissions as compared with
$865,000 for the prior fiscal year, a decrease of $244,000. The decrease in commission expense is primarily the result of a decrease in
international sales being generated by our external distributors, which are commissioned at a higher rate than our in-house sales team.
During fiscal 2021, we expended approximately $78,000 for advertising and trade show expense
compared with $297,000 for the prior fiscal year, a decrease of $219,000.
During fiscal 2021, we expended approximately $9,000 for travel expense compared with $153,000
for the prior fiscal year, a decrease of $144,000.
General and Administrative:
General and Administrative costs decreased $145,000 to $1,222,000 for fiscal 2021 due to
decreases in stock based compensation expense, bank fees, bad debt expense and accrued Covid-19 mandated sick time. These decreases were
partially offset by increased health insurance premiums and annual meeting and proxy expenses related to the Covid-19 outbreak.
10
Operating Income:
Our operating income increased $225,000, to $1,340,000 in fiscal 2021 compared with $1,115,000
for the prior fiscal year. Decreased gross profit offset by a larger decrease in operating expenses were key factors in the improvement
of operating income in fiscal 2021. Operating margin for fiscal 2021 increased to 9.0% compared with 7.3% in the prior fiscal year. As
a percentage of net sales, operating expenses were down 200 basis points to 38% in fiscal 2021 compared with 40% in fiscal 2020. As Covid-19
conditions improve, many of these costs are expected to increase when sales and marketing related activities re-open for travel
and trade shows.
Interest Expense:
Interest expense increased to $40,000 for fiscal 2021 as compared with $33,000 for the
prior fiscal year. The current year’s interest expense of $40,000 includes a mortgage prepayment penalty of $14,000. In December
2020, the Company paid the entire outstanding principal balance due on its mortgage.
Interest and Dividend Income:
Interest and dividend income decreased $79,000 to $23,000 for fiscal 2021 as compared with
$102,000 for the prior fiscal year. The decrease in interest and dividend income is due to the reallocation of our investments into US
Treasury securities and certificates of deposit. Our present investment policy is to invest excess cash in highly liquid, low risk US
Treasury securities and certificates of deposit. At February 28, 2021, the majority of our holdings are rated at or above investment grade.
Income Tax Expense:
We recorded income tax expense of $227,000 for fiscal 2021 compared with $106,000 for the
prior fiscal year. The increase in income tax expense in fiscal 2021 is due to a decrease in available research and development credits.
Net Income:
Net income increased by $14,000 to $1,121,000 for fiscal 2021 compared with $1,107,000
for the prior fiscal year.
For fiscal 2021 and 2020, we do not believe that our sales revenue or net income has been
affected by the impact of inflation or changing prices.
Impact of Covid 19
In December 2019, the Covid-19 outbreak occurred in China and has since spread to other
parts of the world. On March 11, 2020, the World Health Organization declared Covid-19 to be a global pandemic and recommended containment
and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak. Along with these
declarations, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental
authorities to contain and combat the outbreak and spread of Covid-19 in regions across the United States and the world. These actions
include quarantines, social distancing and “stay-at-home” orders, travel restrictions, mandatory business closures and other
mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal
operations.
In response to the pandemic and these actions, we began implementing changes in our business
in March 2020 to protect our employees and customers:
11
·
We implemented social distancing and other health and safety protocols.
·
We have flexed the workforce in our manufacturing operations based on business needs, including the addition of a second shift and the implementation of remote, alternative and flexible work arrangements.
·
We have enhanced cleaning and sanitary procedures.
·
We temporarily eliminated domestic and international travel.
·
We restricted access to our facilities to only employees and essential non-employees with strict protocols.
While all of these measures have been necessary and appropriate, they may result in additional
costs and may adversely impact our business and financial performance. As our response to the pandemic evolves, we may incur additional
costs and will potentially experience adverse impacts to our business, each of which may be significant. In addition, an extended period
of remote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks, including,
but not limited to, cybersecurity risks and increased vulnerability to security breaches, cyber-attacks, computer viruses, ransomware,
or other similar events and intrusions. We may experience, decreases in demand and customer orders for our products in all
sales channels, as well as temporary disruptions and closures of our facilities due to decreased demand and government mandates.
Covid-19 has also impacted various aspects of the supply chain as our suppliers experience
similar business disruptions due to operating restrictions from government mandates. We continue to monitor procurement of raw materials
and components used in the manufacturing, distribution and sale of our products, but continued disruptions in the supply chain due
to Covid-19 may cause difficulty in sourcing materials or unexpected shortages or delays in delivery of raw materials and components,
and may result in increased costs in our supply chain.
We have implemented plans to reduce spending in certain areas of our business, including
reductions or delays in capital expenditures, reduced trade show participation costs, reduced travel expenditures and may need to take
additional actions to reduce spending in the future.
We are closely monitoring and assessing the impact of the pandemic on our business. The
extent of the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our ability to execute
near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly
uncertain and cannot be reasonably predicted.
Given the inherent uncertainty surrounding Covid-19, we expect the pandemic may continue
to have an adverse impact on our business in the near term. Should these conditions persist for a prolonged period, the Covid-19 pandemic,
including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, results
of operations, cash flow, liquidity, and financial condition.
Liquidity and Capital Resources
Working Capital – Our working capital increased $1,729,000 to $8,902,000
at February 28, 2021 from $7,173,000 at February 29, 2020. The increase in working capital was primarily the result of the current period’s
net income and non-cash charges partially offset by purchases of equipment and repayment of long-term debt.
12
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 February 28, 2021 and
February 29, 2020, our working capital included:
February 28,
2021
February 29,
2020
Cash
Increase
Cash and cash equivalents
$ 4,084,000
$ 3,660,000
$ 424,000
Marketable securities
4,564,000
4,219,000
345,000
Total
$ 8,648,000
$ 7,879,000
$ 769,000
The following table summarizes the accounts and the major reasons for the $769,000 increase
in “Cash”:
Impact on Cash
Reason
Net income, adjusted for non-cash items
$
1,593,000
To reconcile increase in cash.
Accounts receivable increase
(828,000
)
Timing of cash receipts.
Inventories increase
(306,000
)
Required to support backlog.
Accounts payable and accrued expenses increase
763,000
Timing of disbursements
Customer deposits decrease
(482,000
)
Timing of shipments.
Repayment of long term debt
(708,000
)
Repayment of debt.
Note payable proceeds
1,002,000
Paycheck Protection Program loan proceeds.
Equipment purchases
(344,000
)
Equipment and facilities upgrade.
Capital expenditure grant proceeds
100,000
Receipt of grant proceeds.
Other-net
(21,000)
Timing of disbursements.
Net increase in cash
$
769,000
Stockholders’ Equity - Stockholders' equity increased $1,169,000 from
$9,782,000 at February 28, 2020 to $10,951,000 at February 28, 2021. The increase was a result of the current year’s net income
of $1,121,000 and $48,000 in additional equity related to stock based compensation awards. The details of stock based compensation are
explained in Note 4 in our financial statements.
Operating Activities – We generated $725,000 of cash in our operating
activities in fiscal 2021 compared with generating $3,254,000 in fiscal 2020. The decrease in cash generated by operating activities was
mostly the result of increased accounts receivable, inventories, and decreased customer deposits. These uses of cash were partially offset
by increased accounts payable and accrued expenses.
Investing Activities – In fiscal 2021, cash used in investing activities
was $595,000 compared with their using $2,576,000 of cash in fiscal 2020. Capital spending in fiscal 2021 was $344,000 for the purchase
or manufacture of equipment, furnishings and leasehold improvements and patent costs. This compares with $722,000 for the purchase of
equipment and furnishings in fiscal 2020.
In fiscal 2021 we used $344,000 for the purchase of marketable securities compared with
$1,854,000 for the purchase of marketable securities in fiscal 2020.
In fiscal 2021 we received $100,000 in grant proceeds from the utility which provides our
electricity as a result of our completion of certain energy efficiency related improvements.
Financing Activities – In fiscal years 2021 and 2020, we used $708,000
and $163,000 in cash, respectively, for the principal payments on our mortgage.
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Bank Credit Facilities:
We currently have a revolving credit line of $1,500,000 and a $750,000 equipment purchase
facility, both of which are with a bank. The revolving credit line is collateralized by the Company’s accounts receivable and inventory.
The revolving line of credit is payable on demand and must be retired for a 30-day period, once annually. As of February 28, 2021, there
were no outstanding borrowings under the line of credit.
As of February 28, 2021, $849,000 of the Company’s credit line was being utilized
to collateralize letters of credit issued to customers that have remitted cash deposits to the Company on existing orders. The unused
portion of the credit line was $651,000 as of February 28, 2021. The letters of credit expire at various times in the fiscal year ending
February 28, 2022.
Paycheck Protection Program Loan
During fiscal 2021, we entered into a loan transaction pursuant to which we received proceeds
of $1,001,640 (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of
the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying companies and is administered
by the U.S. Small Business Administration (the “SBA”).
The PPP Loan was evidenced by a promissory note (the “Note”), between the Company
and M&T Bank, (the “Bank”). The Note had a two-year term, accrued interest at the rate of 1.0% per annum, and was prepayable
at any time without payment of any premium. No payments of principal or interest were due during the six-month period beginning on the
date of the Note. Beginning on the seventh month following the date of the Note, we were required to make 18 monthly payments of principal
and interest in the amount of $56,370.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness
for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of
the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, at least 75 percent
of the PPP Loan proceeds must be used for eligible payroll costs. The terms of any forgiveness may also be subject to further requirements
in any regulations and guidelines the SBA may adopt.
The Company applied for forgiveness of the PPP Loan in December 2020. On April 1, 2021,
the Company received notice from the Bank that the Bank had received confirmation from the SBA that the application for forgiveness of
the PPP Loan had been approved. The loan forgiveness request in the amount of $1,001,640 was applied to the Company’s entire outstanding
PPP Loan balance with the Bank.
Off - Balance Sheet Arrangements
We do not have any Off - Balance Sheet Arrangements as of February 28, 2021.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations
are based upon the Company’s 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.
14
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. As of February
28, 2021, management believes that there are no critical accounting policies applicable to the Company that are reflective of significant
judgments and or uncertainties.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this
method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets
and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance
is recognized. The Company uses a recognition threshold and a measurement attribute for financial statement recognition and measurement
of tax positions taken or expected to be taken in a return. For those benefits to be recognized, a tax position must be more likely than
not to be sustained upon examination by taxing authorities. As of February 28, 2021 and February 29, 2020, there were no accruals for
uncertain tax positions.
Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use
of a valuation model. ASC 718 is a complex accounting standard, the application of which requires significant judgment and the use of
estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option lives to value equity-based
compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of stock options. We primarily use historical
data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ
materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise
experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair
value calculation of stock-based awards. ASC 718 requires the recognition of the fair value of stock compensation in net income. Although
every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations
and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting
period.
Revenue Recognition
The Company recognizes revenue in accordance
with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled to receive in exchange for those goods or services.
Impact of New Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “ Income Taxes (Topic 740) - Simplifying
the Accounting for Income Taxes .” The guidance issued in this update simplifies the accounting for income taxes by eliminating
certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating
income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies
aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions
that result in a step-up in the tax basis of goodwill. The ASU will be effective for the Company on March 1, 2021, with early adoption
permitted, and is not expected to have a significant impact on the Company’s financial statements.
15
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement
of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been
released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional
guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company)
and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently in the process of its
analysis of the impact of this guidance on its consolidated financial statements and does not expect the adoption of this guidance to
have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure
Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain
disclosures and adds additional disclosures. The ASU is effective for annual periods, including interim periods within those annual periods,
beginning after December 15, 2019. Early adoption is permitted. The Company adopted the new standard on March 1, 2020, and the adoption
did not have a material impact on its consolidated financial statements.
Other than Accounting Standards Update (“ASU”) 2019-12, ASU 2016-13 and ASU
2018-13 discussed above, all new accounting pronouncements issued but not yet effective have been deemed to be not applicable to the Company.
Hence, the adoption of these new accounting pronouncements, once effective, is not expected to have an impact on the Company.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK – Not Required for Smaller Reporting Companies.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are presented on pages 30 to 49 of this Report.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE – None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.