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; inflationary and
supply chain pressures; the recovery of the Electronics/Microelectronics and Medical markets; 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.
We undertake no obligation to update any forward-looking statement.
Sono-Tek Corporation Fiscal Year 2025 Highlights (compared
with fiscal 2024 unless otherwise noted)
We refer to the twelve-month periods ended February 28, 2025 and February 29, 2024 as fiscal 2025 and fiscal 2024, respectively.
· Net Sales: Record $20.5 million, up 4%
from $19.7 million in fiscal 2024, driven by strong shipments to the Alternative/Clean Energy Market. This marks the highest annual revenue
in company history.
· Gross Profit: $9.74 million, down 1%
or $106K from the prior year. Gross margin decreased to 47.5% from 50%, mainly due to product mix and the reclassification of labor costs
from engineering to cost of goods sold.
· Operating Income: Decreased $172,000
to $1.01 million compared to $1.20 million in fiscal 2024, due to the decrease in gross profit combined with higher operating expenses.
· Net Income: Approximately $1.3 million,
down from $1.4 million in fiscal 2024, reflecting a combination of lower gross profit and higher operating expenses.
· Backlog: Equipment and service-related
backlog of $8.67 million at fiscal year-end, down 6.6% from the prior year-end record high of $9.28 million.
· Geography: US/Canada sales increased
15% (+$1.6 million), driven by a record shipment of five high Average Selling Price “ASP” systems totaling $3.85 million—the
largest number of high ASP systems shipped in a year.
· Product Categories: Integrated Coating
Systems increased 28% (+$814K), and Multi-Axis Systems grew 6% (+$603K), both supported by significant orders from the solar and clean
energy sectors.
· End Markets: Alternative/Clean Energy
rose 64% (+$3.84 million) driven by production-scale system shipments to the solar market and electrolysis markets, including four high
ASP system deliveries totaling $3.38 million. The Industrial market declined 47% (-$1.68 million) as our customers saw reduced demand
for float glass coating systems due to rising competition from China-based float glass producers.
· Balance Sheet: No outstanding debt as
of February 28, 2025, with cash, cash equivalents, and marketable securities totaling $11.9 million, compared to $11.8 million at the
prior year-end.
· Other Income: Interest income, dividend
income, and unrealized gains on marketable securities totaled $524K, down $38K due to a slight reduction in interest rates.
24
Market and Geographic Diversity
We have invested significant resources to enhance our market diversity.
By leveraging our core ultrasonic coating technology, we have 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/clean energy, industrial markets, and emerging research and development and other.
We are a geographically diverse company with a presence either directly
or 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 2025, approximately 39% of sales originated outside of the United States and Canada.
We have an established infrastructure of application process development
laboratories located at our distributor sites in Japan, China, Germany, Taiwan, Korea and our home office in New York. These laboratories
are equipped with Sono-Tek systems and technical personnel to conduct customer demonstrations and process development for new coating
applications that our customers bring to us. Our engineering, service and sales teams all continue to grow as we expand our addressable
markets and enhance our product line to include larger more sophisticated machinery and systems with increased capabilities.
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
2025
2024
$
%
Net Sales
$
20,504,000
$
19,700,000
$
804,000
4%
Cost of Goods Sold
10,765,000
9,855,000
910,000
9%
Gross Profit
$
9,739,000
$
9,845,000
$
(106,000
)
(1%
)
Gross Profit %
47.5%
50.0%
Gross profit decreased $106,000, or 1% to $9,739,000 for fiscal 2025
compared with $9,845,000 in fiscal 2024. The gross profit percentage decreased to 47.5% for fiscal 2025, compared to 50.0% for fiscal
2024.
In fiscal 2025 the decrease in the gross profit percentage was a result
of 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 the completion of several successful R&D endeavors.
Product Sales:
Twelve
Months Ended
February
28,
%
of
February
29,
%
of
Change
2025
Total
2024
total
$
%
Fluxing Systems
$
467,000
2%
$
724,000
4%
$
(257,000
)
(35%
)
Integrated Coating Systems
3,703,000
18%
2,889,000
14%
814,000
28%
Multi-Axis Coating Systems
10,678,000
52%
10,075,000
51%
603,000
6%
OEM Systems
1,484,000
7%
1,533,000
8%
(49,000
)
(3%
)
Other
4,172,000
21%
4,479,000
23%
(307,000
)
(7%
)
TOTAL
$
20,504,000
$
19,700,000
$
804,000
4%
25
Total sales for fiscal year 2025 grew by 4%, driven by increased demand
for our Integrated Coating and Multi-Axis Coating systems which are commonly used in the clean energy sector. Integrated Coating System
sales increased by 28%, or $814,000, to $3,703,000 due to continued success with a key strategic partner within the solar energy market.
Printed Circuit Board “PCB” Fluxing System sales declined
35%, or $257,000, largely due to weaker demand in Latin America. The decrease was driven by a general slowdown in PCB equipment sales
in Mexico and the closure of one of our key distributors in the region. To address this, we onboarded and trained a New Mexico-based distribution
partner, which we believe will contribute to improved spray fluxing sales in fiscal 2026.
Market Sales:
Twelve Months Ended
February 28,
% of
February 29,
% of
Change
2025
Total
2024
Total
$
%
Electronics/Microelectronics
$ 5,426,000
27%
$ 5,602,000
29%
$ (176,000 )
(3%)
Medical
3,250,000
16%
4,180,000
21%
(930,000 )
(22%)
Alternative Energy
9,838,000
48%
5,997,000
30%
3,841,000
64%
Emerging R&D and Other
67,000
0%
315,000
2%
(248,000 )
(79%)
Industrial
1,923,000
9%
3,606,000
18%
(1,683,000 )
(47%)
TOTAL
$ 20,504,000
$ 19,700,000
$ 804,000
4%
Sales to the Alternative/Clean Energy market increased 64% in fiscal
2025, driven by a growing number of customers transitioning from our R&D systems to production scale systems, which carry significantly
higher ASPs. This growth was partially offset by declines in the Medical and Industrial markets. Medical sales decreased $930,000, or
22%, to $3.25 million compared to $4.18 million in the prior year, and Industrial sales declined $1.68 million, or 47%, to $1.92 million
compared to $3.61 million in the prior year.
Geographic Sales:
Twelve Months Ended
February 28,
February 29,
Change
2025
2024
$
%
U.S. & Canada
$
12,506,000
$
10,878,000
$
1,628,000
15%
Asia Pacific (APAC)
2,758,000
3,268,000
(510,000
)
(16%
)
Europe, Middle East, Asia (EMEA)
4,431,000
4,333,000
98,000
2%
Latin America
809,000
1,221,000
(412,000
)
(34%
)
TOTAL
$
20,504,000
$
19,700,000
$
804,000
4%
In fiscal 2025, approximately 61% of our sales were to US and Canadian
customers. This is compared to 55% in fiscal 2024.
Sales in the US & Canada increased 15% or $1.63 million, driven
by the delivery of five high ASP systems totaling $3.85 million, reinforcing our strategy to provide highly complex, high-volume systems
with premium pricing. This represents the largest number of high ASP systems sold in a single year. Growth in the US/Canada region was
partially offset by declines in other regions. Latin America sales decreased 34% or $412,000, due to a $465,000 float glass coating system
sale into Mexico that occurred in the prior year that did not repeat in fiscal 2025. Asia sales declined 16% or $510,000, influenced by
continued weak demand from China, where sales fell to $522,000 in fiscal 2025 from $775,000 in fiscal 2024. China now represents approximately
2.5% of total sales, down significantly from its historical peak. EMEA sales increased 2% or $98,000, supported by multiple system shipments
to customers in the green energy sector.
26
Operating Expenses:
Twelve
Months Ended
February 28,
February 29,
Change
2025
2024
$
%
Research and
product development
$
2,724,000
$
2,886,000
$
(162,000
)
(6%
)
Marketing and selling
3,678,000
3,696,000
(18,000
)
0%
General
and administrative
2,327,000
2,080,000
247,000
12%
Total
Operating Expenses
$
8,729,000
$
8,662,000
$
67,000
1%
Research and Product Development:
Research and product development costs decreased $162,000 to $2,724,000
for 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.
Marketing and Selling:
Marketing and selling expenses decreased slightly in fiscal 2025 to
$3,678,000 due to a decrease in salary expense which was partially offset by an increase in commissions and travel and trade show expenses.
During fiscal 2025, we expended approximately $595,000 for travel
and trade show expenses compared with $505,000 for the prior fiscal year, an increase of $90,000.
In fiscal 2025, we expended approximately $767,000 for commissions
as compared with $674,000 for the prior fiscal year, an increase of $93,000. 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.
The decrease in salary expense is primarily due to the reallocation
of the salary of our Chief Executive Officer, Steve Harshbarger, to the General and Administrative category as described more fully below
under the heading “General and Administrative”.
General and Administrative:
General and Administrative (G&A) costs increased $247,000 to $2,327,000
for fiscal 2025 due to an increase in salaries, professional fees, corporate expenses and stock-based compensation. These increases were
partially offset by the reversal of the sales tax accrual described more fully below.
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 fiscal year 2025, the total reallocated amount of Mr.
Harshbarger’s salary was approximately $325,000.
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 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.
In the second quarter of fiscal 2025, we filed all necessary sales
tax returns with the State of California. Our net expense for sales tax and interest amounted to $72,000. In the second quarter of fiscal
2025, we reversed the remaining accrual of $66,000. This reversal is recorded in general and administrative expenses.
27
Operating Income:
Our operating income decreased $172,000 or 15%, to $1,010,000 in fiscal
2025 compared with $1,182,000 for the prior fiscal year. In fiscal 2025, the decrease in operating income is a result of a decrease in
gross profit combined with an increase in operating expenses. Operating margin for fiscal 2025 decreased to 5% compared with 6% in fiscal
2024. As a percentage of net sales, operating expenses decreased 100 basis points to 43% in fiscal 2025 compared with 44% in fiscal 2024.
Interest and Dividend Income:
Interest and dividend income decreased $41,000 to $489,000 for fiscal
2025 as compared with $530,000 for the prior fiscal year, reflecting a minor reduction in interest rates earned on our cash balances in
fiscal 2025. Our present investment policy is to invest excess cash in highly liquid, low risk US Treasury securities and certificates
of deposit. At February 28, 2025, the majority of our holdings are rated at or above investment grade.
Income Tax Expense:
We recorded income tax expense of $261,000 for fiscal 2025 compared
with $303,000 for the prior fiscal year. The decrease in income tax expense in fiscal 2025 is due to the current period’s decrease in income
before income taxes offset by the application of available research and development tax credits.
Net Income:
Net income decreased $168,000 or 12%, to $1,273,000 for fiscal 2025
compared with $1,441,000 for the prior fiscal year. The decrease in net income in fiscal 2025 is a result of a decrease in gross profit
combined with an increase in operating expenses partially offset by a decrease in income tax expense.
Liquidity and Capital Resources
Working Capital – Our working capital increased
$1,378,000 to $13,501,000 at February 28, 2025 from $12,123,000 at February 29, 2024. The increase in working capital was primarily the
result of the current year’s net income and non-cash charges partially offset by purchases of equipment.
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, 2025 and February 29, 2024, our working capital included:
February 28,
2025
February 29,
2024
Cash
Increase
Cash and cash equivalents
$ 5,202,000
$ 2,135,000
$ 3,067,000
Marketable securities
6,728,000
9,712,000
(2,984,000 )
Total
$ 11,930,000
$ 11,847,000
$ 83,000
The following table summarizes the accounts and the major reasons
for the $83,000 increase in “Cash”:
Impact
on Cash
Reason
Net income, adjusted for non-cash items
$
1,937,000
To reconcile increase in cash.
Accounts receivable increase
(877,000
)
Decrease due to timing of receipts.
Inventories decrease
666,000
Decrease in finished goods for customer orders.
Customer deposits decrease
(1,007,000
)
Received for new orders.
Accounts payable
(190,000
)
Timing of disbursements.
Accrued expenses
(21,000
)
Timing of disbursements.
Prepaid and Other Assets increase
(29,000
)
Decreased prepaid expenses.
Income taxes payable decrease
81,000
Timing of disbursements.
Equipment purchases
(469,000
)
Equipment and facilities upgrade.
Treasury stock purchase
(8,000
)
Purchase of treasury stock.
Net increase in cash
$
83,000
28
Stockholders’ Equity – Stockholders’
equity increased $1,513,000 from $16,279,000 at February 29, 2024 to $17,792,000 at February 28, 2025. The increase was a result of the
current year’s net income of $1,273,000 and $248,000 in additional equity related to stock-based compensation awards. These increases
were partially offset by treasury stock purchases of $8,000. The details of stock-based compensation are explained in Note 4 in our financial
statements.
Operating Activities – We generated $525,000
of cash in our operating activities in fiscal 2025 compared with generating $1,164,000 in fiscal 2024, a decrease of $639,000. The decrease
in cash generated by operating activities was the result of an increase in accounts receivable combined with a decrease in customer deposit
balances. These uses of cash were partially offset by a decrease in inventories and an increase in income taxes payable.
In fiscal 2025, our accounts receivable increased $877,000 when compared
to the prior year. The increase in accounts receivable is primarily due to a large number of sales occurring in the fourth quarter of
fiscal 2025.
In fiscal 2025, customer deposit balances decreased $1,007,000 when
compared to the prior year. The decrease in customer deposits is primarily due to a large number of shipments occurring in the fourth
quarter of fiscal 2025.
Investing Activities – In fiscal 2025,
our investing activities provided $2,550,000 of cash compared with using $2,384,000 of cash in fiscal 2024. Capital spending in fiscal
2025 was $469,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements. This compares with $795,000 for
the prior year period.
In fiscal 2025, net sales of marketable securities generated $3,019,000
of cash compared with using $1,589,000 for the purchase of marketable securities in fiscal 2024.
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, 2025, there were no outstanding borrowings under the line of credit.
As of February 28, 2025, $106,000 of our credit line was being utilized
to collateralize letters of credit issued to customers that have remitted cash deposits to us on existing orders. The unused portion of
the credit line was $1,394,000 as of February 28, 2025. The letters of credit expire in fiscal year 2025.
Backlog
At the end of fiscal year 2025, our total backlog
amounted to $8,677,000, comprised of $8,618,000 in equipment backlog and $59,000 in services-related backlog.
Off - Balance Sheet Arrangements
We do not have any Off - Balance Sheet Arrangements as of February
28, 2025.
29
Critical Accounting Estimates
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.
Management’s estimates and judgements are continually evaluated and are based on
historical experience and expectations regarding future events that are believed to be reasonable under the specific circumstances.
Critical accounting estimates 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.
Accounting for 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. Based on management’s estimate, 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. Management evaluates the valuation allowance based on current
estimates and historical experience. We use a recognition threshold and a measurement attribute for financial statement recognition and
measurement 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, 2025 and February 29, 2024, there were no uncertain
tax provisions.
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.
Judgement is required when determining at what point in time control
of the Company’s manufactured equipment is transferred to its customers. Management’s judgement is based on each customer
contract and the transfer of control of the equipment to the customer. The sales revenue to be recorded is based on each contract.
Impact of New Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Improvements to
Income Tax Disclosures. This ASU requires greater disaggregation of information about a reporting entity’s effective tax rate
reconciliation as well as information on income taxes paid. This ASU applies to all entities subject to income taxes and is intended to
help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and assess income tax
information that affects cash flow forecasts and capital allocation decisions. This ASU is effective for annual periods beginning after
December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact the adoption of this ASU will have on
its consolidated financial statements and related disclosures.
In November 2024, the FASB issued issued ASU 2024-03 – Income
Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income
Statement Expenses, which is intended to provide more detailed information about specified about specified categories of expenses (purchases
of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the consolidated
statement of operations. The guidance in this ASU is effective for fiscal years beginning after December 15, 2026, and interim periods
within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact the
adoption of this ASU will have on its consolidated financial statements and related disclosures.
30
Other than ASU 2023-09 discussed above, accounting pronouncements
issued but not yet effective have been deemed to be not applicable or the adoption of such accounting pronouncements is not expected to
have a material impact on the financial statements of 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 43 to 60 of this Report.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE – None.
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