SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 2001
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)
Registrant'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 _____
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 9, 2002
Common Stock, par value $.01 per share 9,105,422
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements: 1 - 3
Consolidated Balance Sheets - November 30, 2001 (Unaudited) and
February 28, 2001 1
Consolidated Statements of Operations - Nine Months and Three Months Ended
November 30, 2001 and 2000 (Unaudited) 2
Consolidated Statements of Cash Flows - Nine Months and Three Months Ended
November 30, 2001 and 2000 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 16
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 16
Part II - Other Information 16 - 17
Signatures 18
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, February 28,
2001 2001
Current Assets Unaudited __Audited_
Cash and cash equivalents $ 358,409 $ 3,232
Accounts receivable
(less allowance of $37,234 and $116,581
at November 30 and February 28, respectively) 521,574 593,605
Inventories (Note 4) 658,745 796,696
Prepaid expenses and other current assets 52,231 97,093
--------- ---------
Total current assets 1,590,959 1,490,626
--------- ---------
Equipment, furnishings and leasehold improvements
(less accumulated depreciation
of $559,016 and $508,928 at November 30
and February 28, respectively) 156,824 209,675
Intangible assets, net:
Patents and patents pending (Note 1) 21,550 25,640
Deferred financing fees 20,131 25,459
-------- ---------
Total intangible assets 41,681 51,099
Net assets of discontinued operations (Note 3) - 452,462
Net investment in affiliate - 8,068
Other assets 6,667 100
-------- --------
TOTAL ASSETS $1,796,131 $2,212,030
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $275,811 $841,267
Accrued expenses 362,711 369,386
Revolving Line of Credit 344,000 350,000
Short term loans-related parties (Notes 6) 286,084 459,605
Current maturities of long term debt 22,999 21,777
Current maturities of subordinated
convertible loans 60,000 -
Current maturities of subordinated
mezzanine debt (Note 7) 47,224 76,390
--------- ----------
Total current liabilities 1,398,829 2,118,425
Subordinated mezzanine debt 694,628 411,547
Long term debt, less current maturities 25,768 43,311
Subordinated convertible loans 90,000 150,000
Other long-term liabilities 69,076 -
Estimated future costs of discontinued
operations (Note 3) 244,255 -
---------- ---------
Total liabilities 2,522,556 2,723,283
--------- ---------
Commitments and Contingencies - -
Put Warrants (Note 7) 188,223 94,111
Stockholders' Equity
Common stock, $.01 par value; 25,000,000
shares authorized, 9,105,422 and
9,092,354 shares issued and outstanding at
November 30 and February 28, respectively 91,055 90,924
Additional paid-in capital 6,011,578 6,007,037
Accumulated deficit (7,017,281) (6,703,325)
----------- -----------
Total stockholders' deficiency (914,648 (605,364)
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,796,131 $2,212,030
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Three Months Ended
November 30, November 30,
Unaudited Unaudited
2001 2000 2001 2000
----------------------- ----------------------
Net Sales $2,700,783 $3,361,438 $1,026,452 $1,190,617
Cost of Goods Sold 987,538 1,428,872 314,959 440,253
---------- --------- ---------- ---------
Gross Profit 1,713,245 1,932,566 711,493 750,364
--------- --------- ------- ---------
Operating Expenses
Research and product
development costs 280,920 230,564 95,468 55,189
Marketing and selling expenses 484,286 646,759 155,461 240,546
General and administrative costs 448,032 406,498 155,660 145,778
--------- ---------- ------- --------
Total Operating Expenses 1,213,238 1,283,821 406,589 441,513
--------- --------- ------- ---------
Operating Income 500,007 567,475 304,904 227,581
Interest Expense (178,182) (197,248) (63,161) (41,913)
Loss from Affiliate (9,858) (70,585) - (18,558)
Interest and Other Income 5,693 8,419 2,716 3,810
--------- ---------- --------- ----------
Income from Continuing Operations
Before Income Taxes 317,660 389,331 244,459 252,190
Income Tax Expense 0 0 0 0
-------- --------- -------- --------
Income from Continuing Operations 317,660 389,331 244,459 252,190
(Loss) Income from
Discontinued Operations (631,616) (504,146) 237,614 (188,168)
--------- -------- ------- ---------
Net (Loss) Income $(313,956) $(114,815) $482,073 $64,022
========= ========== ======== =======
Basic (Loss) Earnings Per Share
Earnings from continuing operations $ 0.03 $ 0.04 $0.03 $0.03
(Loss) Earnings from discontinued
operations (0.06) (0.05) 0.02 (0.02)
------ ------- ---- ------
Net (Loss) Earnings $(0.03) $(0.01) $0.05 $0.01
======= ======= ===== =====
Diluted (Loss) Earnings Per Share
Earnings from continuing operations $ 0.03 $ 0.04 $0.03 $0.03
(Loss) Earnings from discontinued
operations (0.06) (0.05) 0.02 (0.02)
------- ------- ------ ------
Net (Loss) Earnings $(0.03) $(0.01) $0.05 $0.01
======= ======= ===== =====
Weighted Average Shares - Basic 9,093,494 8,984,787 9,095,801 9,047,025
========= ========= ========= =========
Weighted Average Shares - Diluted 9,950,087 10,739,539 9,207,228 10,573,508
========= ========== ========= ==========
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended November 30,
Unaudited
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(313,956) $(114,815)
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Non-cash charge for issuance of warrants 1,797 75,831
Imputed interest expense on subordinated
mezzanine debt 48,027 16,308
Loss on equity investment 0 2,624
Depreciation and amortization 59,505 53,548
Provision for doubtful accounts (79,347) (11,000)
Decrease (Increase) in:
Accounts receivable 151,378 (15,474)
Inventories 137,951 (118,976)
Prepaid expenses and other current assets 44,862 (11,743)
Other assets 1,501 102
(Decrease) Increase in:
Accounts payable and accrued expenses (503,054) 302,292
--------- ---------
Net Cash (Used In) Provided by Continuing Operations (451,336) 178,697
Net Cash Provided By (Used In) Discontinued Operations 927,876 (140,515)
------- -----------
Net Cash Provided By Operating Activities 476,540 38,182
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Sale (Purchase) of equipment and furnishings 2,763 (121,575)
------- ---------
Net Cash Provided By (Used In) Investing Activities 2,763 (121,575)
------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 0 15,693
Proceeds from bank loan for production equipment 0 40,823
Proceeds from short term loans - related parties 0 204,000
Proceeds from subordinated mezzanine debt 300,000 0
Issuance of shares 2,875 137,500
Proceeds from exercise of warrants 0 55,692
Proceeds from stock options 0 1,601
Repayments of short term loans - related parties (173,521) (241,000)
Repayments of note payable and equipment loans (22,321) (8,105)
--------- ----------
Net Cash Provided By Continuing Operations 107,033 206,205
Net Cash (Used In) Discontinued Operations (231,159) (87,145)
---------- ---------
Net Cash (Used In) Provided By Financing Activities (124,126) 119,059
---------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 355,177 35,666
CASH AND CASH EQUIVALENTS
Beginning of period 3,232 6,131
---------- ------------
End of period $358,409 $ 41,797
======== ==========
SUPPLEMENTAL DISCLOSURE:
Interest paid $88,973 $ 34,859
======= ==========
See notes to consolidated financial statements.
SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
Nine Months and Three Months Ended November 30, 2001 and 2000
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 (the
"Acquisition"). On April 23, 2001, the Company adopted a plan to discontinue the
operations of the cleaning and drying systems segment, which includes SCS and
the Serec product line. These operations were discontinued and were classified
as discontinued operations. All significant intercompany accounts and
transactions are eliminated in consolidation.
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 28, 2001, and included in
its report on Form 10-K. Such statements should be read in conjunction with the
data herein.
The financial information reflects all adjustments, which in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. The results for such interim periods are not necessarily
indicative of the results to be expected for the year.
Patent and Patent Pending Costs - Cost of patent applications are deferred and
charged to operations over seventeen years for domestic patents and twelve years
for foreign patents. However, if it appears that such costs are related to
products, which are not expected to be developed for commercial application
within the reasonably foreseeable future, or are applicable to geographic areas
where the Company no longer requires patent protection, they are written off to
operations. The accumulated amortization is $90,146 and $86,056 at November 30,
2001 and February 28, 2001, respectively.
Reclassifications - Certain February 28, 2001 balances have been reclassified to
conform to the current period presentation.
NOTE 2: FINANCIAL CONSIDERATIONS AND MANAGEMENT'S PLANS
The Company incurred losses on a consolidated basis in Fiscal Year 2000 and
2001. These losses were principally due to its wholly owned subsidiary, SCS.
These losses led to an increase in the Company's debt and negative cash flow.
During Fiscal Year 2001, the Company increased it's borrowing from a bank, an
investment banker, and officers and directors of the Company. At February 28,
2001, the Company was late on its payments to various vendors and in default on
its subordinated mezzanine debt with Norwood Venture Corp. ("Norwood") for
failure to make interest payments when due. The Company subsequently paid the
interest and the default was cured. In addition, during the first two quarters
of Fiscal Year 2001, SCS was in default on a bank note for failure to make
interest and principal payments when due. This default was cured in July 2001
when SCS brought all its payments up to date.
During Fiscal Year 2001, the Company received additional cash from the sale of
common stock and the exercise of warrants. These influxes of cash were not able
to provide the Company with adequate amounts to pay its debts. The Company
continued to have difficulty paying vendors and purchasing necessary raw
materials.
During the nine months ended November 30, 2001, the Company took actions to
limit its losses and reduce negative cash flow. The spraying systems segment was
downsized to reflect the decline in market demand, and the sales force was
refocused to increase nozzle sales instead of fluxer sales. The cleaning and
drying segment, composed of SCS and Serec, terminated production of their
products. By decreasing operating costs and terminating thirty-two employees,
the Company achieved positive cash flow beginning in the second quarter of
Fiscal Year 2002. Although there can be no assurances, it is anticipated that
continued cash flow improvements will be sufficient to cover current operating
costs, and will permit partial payments to vendors and payment of the required
principal payments on all debt. During the first quarter of Fiscal Year 2002,
the Company received additional financing from Norwood, directors, an officer
and an affiliate of the Company. During the third quarter of Fiscal Year 2002,
the Company restructured the payment terms of its debt with Norwood by deferring
principal payments for a period of one year.
The Company's wholly owned subsidiary has been negotiating with its vendors and
other creditors to repay its past due obligations. During the quarter ended
November 30, 2001, settlement agreements were reached with 22 creditors of the
discontinued operation, which reduced a gross amount of $362,043 of obligations
due to $110,885. Such amounts were paid and the obligations were satisfied.
In order to decrease its losses, the Company adopted a plan to discontinue
operations of cleaning and drying systems segment during the first quarter of
Fiscal 2002 (see Note 3). The Company is refocusing on the sales of ultrasonic
nozzles and attempting to increase sales through diversifying the product line
while decreasing the reliance on the electronics industry.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing and
refinancing as may be required, and to timely dispose or sell off assets related
to its discontinued operating segment.
NOTE 3: DISCONTINUED OPERATIONS
In order to decrease its losses, on April 23, 2001, the Company adopted a plan
to discontinue the operations of cleaning and drying systems segment. We
anticipate that the orderly liquidation of the disposed assets and liabilities
will be completed within the fiscal year ending February 28, 2002.
The accompanying statements of operations have been reclassified so that the
results for the cleaning and drying systems segment are classified as
discontinued operations for all periods presented. The assets and liabilities of
the discontinued operations have been reclassified in the November 30, 2001 and
February 28, 2001 balance sheets as "net assets of discontinued operations" and
"estimated future costs of discontinued operations". The statements of cash
flows and related notes to the consolidated financial statements have also been
reclassified to conform to the discontinued operations presentation.
Summary operating results of the discontinued operations for each of the periods
presented are as follows:
Nine Months Nine Months Three Months Three Months
Nov. 30, 2001 Nov. 30, 2000 Nov. 30, 2001 Nov. 30, 2000
Revenues $1,229,665 $2,913,466 $188,246 $ 790,303
Expenses 1,864,281 3,417,612 (49,368) 978,471
--------- --------- -------- -------
(Loss) Income from
discontinued operations $(631,616) $ (504,146) $237,614 $(188,168)
=========== =========== ======== ==========
The Company wrote off goodwill in the amount of $477,377 during the nine month
period ended November 30, 2001. This goodwill is related to the acquisition of
its discontinued operations and was deemed to be impaired as the Company
estimated that it would not likely realize positive future cash flows from the
residual assets and uncompleted orders of this business. Additionally, the
Company wrote off impaired accounts receivable of $30,000, impaired inventory of
$81,057, impaired fixed assets of $70,511 and provided reserves for future rent
and utility costs of $27,430. Expenses are negative ($49,368) for the three
months ended November 30, 2001 due to settlements with creditors in the amount
of $251,158 which offset expenses of $201,791. The Company does not expect that
there will be any additional estimated future costs of discontinuance for the
orderly liquidation of the disposed assets and liabilities.
A summary of the net assets of the discontinued operations is as follows:
November 30, February 28,
2001 2001
Assets
Cash $19,829 $ 183
Accounts Receivable, net 30,068 551,028
Inventory, net 0 631,970
Prepaid Expenses 655 783
------------ ---------------
Total current assets 49,897 1,183,964
Goodwill 0 487,377
Equipment and furnishings, net 4,006 87,935
----------- -------------
Total assets $54,558 $1,759,276
------- ----------
Liabilities
Current Liabilities
Notes payable - bank $ 50,369 $238,917
Accounts payable 110,924 603,146
Accrued expenses 134,700 239,200
Customer deposits 2,820 182,940
--------- -----------
Total current liabilities 298,813 1,264,203
Long term debt 0 42,611
-------- -----------
Total liabilities 298,813 1,306,814
------- ---------
Net (liabilities) assets $(244,255) $452,462
========== ========
NOTE 4: INVENTORIES
Inventories at November 30, 2001 are comprised of:
Finished goods $260,350
Work in process 43,143
Consignment 9,251
Raw materials and subassemblies 550,901
---------
Total 863,645
Less: Allowance (204,900)
--------
Net inventories $658,745
========
NOTE 5: LONG-TERM EQUITY INVESTMENT - NET
The Company had a 49% ownership interest in PNR America, LLC, a Delaware limited
liability company. During the six month period ended August 31, 2001, PNR
America incurred a loss of $20,119 and the Company recorded its share of this
loss in the amount of $9,858. The Company sold its equity in PNR America during
the three months ended August 31, 2001 for the book value of such interest.
NOTE 6: RELATED PARTY TRANSACTIONS
Short term loans - related parties - From time to time the Company has required
short term loans to meet its cash requirements. All of these loans have been
provided by officers and directors of the Company, at the fixed rate of prime
plus 2% at the date of the loans (9.75% to 11.50% at November 30, 2001). Accrued
interest on these short term loans was $55,093 and $37,075 at November 30, 2001
and February 28, 2001, respectively. Interest expense for the six and three
months ended August 31, 2001 was $13,090 and $6,915, respectively.
On April 30, 2001, in order to induce the advance of the additional $300,000 by
Norwood, certain of the Company's directors, an officer and an affiliate of the
Company participated in the amount of $216,750 in the additional subordinated
mezzanine financing (see Note 7).
On September 14, 2001 the Company sold the intellectual property of Serec
Corporation, consisting of patents, trademarks and drawings, for $35,000 to an
officer of the Company and another individual. The intellectual property had
been purchased during fiscal year 2001 for $100,000 plus closing costs. At
February 28, 2001 these assets were written down to $10,000 due to impairment.
The gain realized on disposition will be included in discontinued operations.
NOTE 7: SUBORDINATED MEZZANINE DEBT
On April 30, 2001, Norwood amended the Norwood Note and Warrant Purchase
Agreement to increase the Note to $850,000 and the Warrant shares to 2,077,777.
The monthly principal payments to commence in October 2001 are increased to
$23,612 per month accordingly, and the balance sheet reflects this monthly rate
in reporting the related current maturities. The additional 733,333 Warrant
shares are valued at $80,667 which is accounted for as a discount and is being
imputed as additional interest expense over the term of the loan.
On October 24, 2001, the Company and Norwood amended their agreement by changing
the repayment commencement date to October 31, 2002 with final payment on
September 30, 2005. Additionally, the exercise price of certain of the Warrants
was reduced from $.30 to $.15 per share. This resulted in an increase in the
value of the Warrants of $13,445, which is accounted as a discount and is being
imputed as additional interest expense over the term of the loan.
Certain of the Company's directors, an officer and an affiliate are participants
with Norwood in its subordinated mezzanine financing (see Note 6).
NOTE 8: EARNINGS PER SHARE
Basic earnings per share ("EPS") and loss per share ("LPS") are computed by
dividing net income (loss) by the weighted-average number of common shares
outstanding for the period. Diluted EPS and LPS reflect the potential dilution
that could occur if securities or other obligations to issue common stock were
exercised or converted into common stock. Stock options granted but not yet
exercised under the Company's stock option plans are included for Diluted EPS
and LPS calculations under the treasury stock method.
The computation of basic and diluted earnings (loss) per share are set forth on
the following table:
Nine Months Ended Three Months Ended
November, 30 November 30,
2001 2000 2001 2000
---- ---- ---- ----
Numerator-
Numerator for basic and diluted
Earnings (loss) per share $(313,956) $(178,837) $482,073 $64,022
========== ========== ======== =======
Denominator:
Denominator for basic earnings
(loss)per share - weighted
average shares 9,093,494 8,984,787 9,095,801 9,047,025
Effects of dilutive securities:
Stock warrant 856,593 1,754,752 111,427 1,526,483
Stock options for employees,
directors, and outside
consultants 0* 0* 0** 0**
--------- ----------- ---------- --------
Denominator for diluted earnings
(loss) per share 9,950,087 10,739,539 9,207,228 10,573,508
========= ========== ========= ==========
*Stock options and warrants for employees, directors and outside
consultants are antidilutive as a result of the net loss and therefore
are not considered in the Diluted LPS calculation.
**Stock options and warrants are antidilutive based on the exercise
price as compared to the ending market price of the Company's stock and
therefore are not considered in the Diluted earnings per share
calculation.
Under the assumption that stock options and warrants were not antidilutive as
described in * and **, the denominator for Diluted LPS/EPS would be 11,582,824
and 11,234,771 weighted average shares for the nine months ended November 30,
2001 and 2000, and 10,839,965 and 10,987,648 weighted average shares for the
three months ended November 30, 2001 and 2000 respectively.
NOTE 9: NEW ACCOUNTING DEVELOPMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combination", SFAS No.
142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for
Asset Retirement Obligations", SFAS No. 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. It also
requires that the Company recognize acquired intangible assets apart from
goodwill. SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. SFAS No. 143
establishes accounting standards for recognition and measurement of a liability
for an asset retirement obligation and the associated asset retirement cost,
which will be effective for financial statements issued for fiscal years
beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets" which further clarifies SFAS No. 121 and methods
of quantifying potential impairments or disposal of assets as well as the
related reporting of such impairments or disposals.
The adoption of SFAS No. 141, SFAS No. 142, SFAS No. 143 and SFAS No. 144
is not expected to have a material effect on theCompany's financial
position, results of operations and cash flows.
SONO-TEK CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
RESULTS OF OPERATIONS
Overview
The Company has experienced a turn-around during the six-month period ended
November 30, 2001. The six-month period was preceded with top management
changes. Sales of the Company's original products, ultrasonic nozzles and
systems, and products for the coating of medical devices and for the national
defense led the return to profitability. Orders for the Company' mainstay, the
Sono-fluxer, which is used for coating printed circuit boards for the
electronics industry were affected by the slowdown of orders. Nevertheless the
diversification of products has allowed the Company to weather the downturn in
the consumer electronics markets.
For the first time in several years Sono-Tek has brought new products to the
marketplace; the Microflux XL selective fluxing system, which is a computer
controlled fluxing machine for "flip-chip" applications was completed during the
third quarter and is now being "Beta-site" tested at one of the Company's
customer locations. The Microflux XL and the new Sonoflux XL, 24inch wide
circuit board fluxer will be shown at the APEX Show in California this month.
Also introduced, was the "Thin-Sonic" chemical vapor deposition machine for the
plating of very thin MOCVD polymer coatings on either substrates or medical
devices.
Forward-Looking Statements
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Federal Securities Laws. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following:
- - The Company's access to adequate funds to meet the Company's operating and
financial needs and to repay its past due debt, and the Company's ability to
continue as a going concern if it is unable to access adequate financing;
- - The Company's ability to restructure its debt;
- - The Company's ability to respond to competition in its markets;
- - General economic conditions in the Company's markets;
- - The risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and
- - Various other factors discussed in the Annual Report on Form 10-K.
The Company undertakes no obligation to update publicly any forward-looking
statement.
Liquidity and Capital Resources
The Company's working capital deficiency improved $819,929 from a working
capital deficiency of $627,799 at February 28, 2001 to working capital of
$192,130 at November 30, 2001. The increase in working capital was principally
the result of an increase in cash of $355,000, reductions in accounts payable
and accrued expenses of $572,000, decrease in related party loans of $174,000
and the current maturities of subordinated mezzanine debt of $29,000 offset by
decreases in net accounts receivable of $72,000, decrease in inventory of
$138,000, decrease in prepaid expenses of $45,000, and an increase in the
current maturities of convertible loans of $60,000. The stockholders' deficiency
increased $309,284 from $605,364 at February 28, 2001 to $914,648 at November
30, 2001. The decrease in stockholders' equity was the result of the loss of
$314,000 for the nine months ended November 30, 2001.
Accounts receivable at November 30, 2001 decreased $72,031 or 21% from February
28, 2001 due to better collection efforts in the nine months ended November 30,
2001. The allowance for doubtful accounts was reduced $79,347 from February 28,
2001 due to collection of one foreign customer whose payment was remitted during
the second quarter of this fiscal year.
Inventory decreased $137,951 or 17% as the result of reduced purchasing in the
nine months ended November 30, 2001. This reduction was based upon the order
level for the Company's principal product, solder flux application products
("fluxers") during the nine months ended November 30, 2001. This reduction in
the sale of fluxers was due to the slowdown in the manufacture of printed
circuit boards.
Accounts payable decreased $565,000 as compared to February 28, 2001 due to the
reduced purchasing activity noted above and payments made to vendors during the
nine months ended November 30, 2001.
On April 30, 2001, the Company amended its agreement with Norwood pursuant to
which the Company increased its five year loan in the principal amount of
$300,000 of which $216,750 was loaned by certain of the Company's directors, an
officer and an affiliate of the Company. The terms of the loan require interest
payments only through September 2001 followed by monthly payments of $23,612
plus interest through September 30, 2004. The Company was also required to grant
a warrant to purchase 733,333 shares of the Company's common stock at an
exercise price of $0.10 per share, which can be put to the Company. Such
warrants were valued at $80,667, which is accounted for as a discount and will
be imputed as additional interest expense over the term of the loan. On October
24, 2001, the Company and Norwood amended their agreement by changing the
repayment commencement date to October 31, 2002 with final payment on September
30, 2005. Additionally, the exercise price of certain of the Warrants was
reduced from $.30 to $.15 per share. This resulted in an increase in the value
of the Warrants of $13,445, which is accounted as a discount and is being
imputed as additional interest expense over the term of the loan.
The Company currently has a $350,000 line of credit with a bank. The loan is
collateralized by accounts receivable, inventory and all other personal property
of the Company and is guaranteed by James Kehoe, former Chief Executive Officer
of the Company and is subject to certain priority liens on SCS assets. As of
November 30, 2001 the outstanding balance was $344,000.
Due to the consolidated Company losses incurred during Fiscal Years 2001, 2000
and 1999, the Company was required to borrow on a short term basis from officers
and directors of the Company. During the three month period ended May 31, 2001
$173,521 plus interest was repaid. As of November 30, 2001, the balance owed the
officers and directors was $286,084 plus accrued interest of $55,093.
During the third quarter of Fiscal Year 2002, SCS repaid the balance of its
$57,327 loan agreement with Sovereign Bank.
During the first quarter of Fiscal Year 2002, the Company discontinued the
production of capital equipment in the cleaning and drying systems segment and
began to focus on its original product lines, specifically the sales of
ultrasonic nozzles. Although there can be no assurances, management believes
that by taking these steps the Company will be able to remain profitable in the
remaining quarter of Fiscal Year 2002.
Results of Continuing Operations
The continuing operations of Sono-Tek reflect improved operating margins and the
Company has reduced its payroll and operating expenses during the quarter ended
May 31, 2001 in order to provide positive cash flow from continuing operations.
This was accomplished by downsizing the spraying systems business through
layoffs, salary reductions, and cutbacks in employee benefits. The Company
reduced additional costs by changing outside professionals and other service
providers.
For the nine months ended November 30, 2001, the Company's sales decreased
$760,655 to $2,770,783 as compared to $3,461,438 for the nine months ended
November 30, 2000. The decrease was a result of a decrease in fluxer sales of
$1,074,000 offset by an increase in nozzle sales of $270,000 and MCS nozzle
spraying systems and other sales of $144,000. The sales decrease was caused by
the slowdown in the consumer electronics markets that uses the company's solder
flux-spraying systems. The sales increase of nozzle and other sales was
attributable to orders placed by customers in the medical device field and for
national defense contracts.
For the three months ended November 30, 2001, the Company's sales decreased
$164,165 to $1,026,452 as compared to $1,190,617 for the three months ended
November 30, 2000. The decrease was a result of a decrease in fluxer sales of
$233,000 offset by an increase in nozzle sales of $14,000 and MCS and other
sales of $55,000. The sales decrease was caused by the slowdown in the consumer
electronics markets that uses the company's solder flux-spraying systems.
The Company's gross profit decreased $219,321 to $1,713,245 for the nine months
ended November 30, 2001 from $1,932,566 for the nine months ended November 30,
2000. The decrease was primarily a result of decreased sales of the Company's
products that were offset by the related material costs and labor. The change in
the mix of the company's products sold improved the gross margin percentage from
57% for the nine months ended November 30, 2000 to 63% for the nine months ended
November 30, 2001.
The Company's gross profit decreased $38,871 to $711,493 for the three months
ended November 30, 2001 from $750,364 for the three months ended November 30,
2000. The decrease was primarily a result of decreased sales of the Company's
products that were offset by the related material costs and labor. The change in
the mix of the company's products sold improved the gross margin percentage from
63% for the three months ended November 30, 2000 to 69% for the three months
ended November 30, 2001.
Research and product development costs increased $50,386 to $280,920 for the
nine months ended November 30, 2001 from $230,564 for the nine months ended
November 30, 2000. The increase was a result of product development costs on the
Microfluxer (which is a new product) and continued work on the CVD (chemical
vapor deposition) product line.
Research and product development costs increased $40,279 to $95,468 for the
three months ended November 30, 2001 from $55,189 for the three months ended
November 30, 2000. The increase was a result of product development costs on the
Microfluxer (which is a new product) and continued work on the CVD (chemical
vapor deposition) product line.
Marketing and selling costs decreased $162,475 to $484,284 for the nine months
ended November 30, 2001 from $646,759 for the nine months ended November 30,
2000. The decrease was a result of decreases in marketing and advertising
expense of $99,000, sales commissions of $92,000, professional fees of $13,000
and travel expense of $18,000, that were offset by increased personnel costs of
$49,000 and facilities costs of $12,000.
Marketing and selling costs decreased $85,085 to $155,461 for the three months
ended November 30, 2001 from $240,546 for the three months ended November 30,
2000. The decrease was a result of decreased marketing expenses of $40,000,
sales commissions of $59,000, and travel expenses of $14,000, that were offset
by increased sales personnel costs of $23,000 and facilities costs of $6,000.
General and administrative costs increased $41,535 to $448,033 for the nine
months ended November 30, 2001 from $406,498 for the nine months ended November
30, 2000. The increase was primarily attributable to increased personnel and
travel costs of $104,000, increased banks fees of $10,000, increased facility &
utility costs of $10,000 and increased bad debt provision of $20,000, increased
royalty expense of $6,000, offset by reduced consulting expense of $43,000,
reduced professional fees of $48,000, reduced goodwill amortization of $4,000
and reduced corporate expenses of $12,000.
General and administrative costs increased $9,882 to $155,660 for the three
months ended November 30, 2001 from $145,778 for the three months ended November
30, 2000. The increase was primarily attributable to increased personnel and
travel costs of $62,000, increased bad debt provision of $20,000, increased
royalty expense of $9,000, increased other costs of $2,000, offset by reduced
consulting expense of $12,000, reduced professional fees of $53,000, reduced
goodwill amortization of $4,000, reduced insurance expense of $6,000 and reduced
corporate expenses of $8,000.
Interest expense decreased $19,066 to $178,182 for the nine months ended
November 30, 2001 from $197,248 for the nine months ended November 30, 2000. The
decrease is primarily due to a non-recurring, non-cash charge of $76,000
reflecting the value of warrants issued in the nine months ended November 30,
2000 and reduced bank interest of $26,000, offset by $62,000 of additional
interest of the Norwood financing and $21,000 of interest on shareholder loans
in the nine months ended November 30, 2001.
Interest expense increased $21,248 to $63,161 for the three months ended
November 30, 2001 from $41,913 for the three months ended November 30, 2000. The
increase is primarily due to the Norwood financing of $24,000 and shareholder
loan interest of $8,000, offset by lower bank interest of $9,000.
The Company's loss from affiliate was eliminated in the three months ended
August 31, 2001 with the sale of the Company's interest in this affiliate.
During the nine and three month periods ended November 30, 2000, the Company's
share of the loss of this affiliate was $70,585 and $18,023, respectively.
The Company's income from continuing operations decreased $71,671 from $389,331
or $0.04 per share for the nine months ended November 30, 2000 to $317,660 or
$.03 per share for the nine months ended November 30, 2001.
The Company's income from continuing operations decreased $7,731 from $252,190
or $0.03 per share for the three months ended November 30, 2000 to $244,459 or
$.03 per share for the three months ended November 30, 2001.
Results of Discontinued Operations
The Company's loss from discontinued operations increased by $127,470 from a
loss of $504,146 for the nine months ended November 30, 2000 to a loss of
$631,616 for the nine months ended November 30, 2001. At February 28, 2001 the
discontinued operation had residual goodwill of $477,377. This goodwill was
based on the residual profits of open contracts at February 28, 2001, the
assumed value of the residual spares business, and the value that was assumed
could be realized from the sale of the business. During the quarter ended May
31, 2001, one major customer canceled the balance of his order. It was
determined that the business could not be sold and the value of the spares
business was deemed to be overstated. Accordingly, the goodwill was considered
impaired and was written off. The increase in the loss was due to the impairment
of goodwill of $477,377, an increase in the raw material inventory reserve
$39,246, a reserve of $89,812 for work in process inventory, increase in
allowance for bad debts of $30,000 impairment of fixed assets of $70,511 and
provision of reserves for future rent and utility costs of $27,430, plus the
lack of sales to support the necessary amount of overhead.
The Company's wholly owned subsidiary has been negotiating with its vendors and
other creditors to repay its past due obligations. During the quarter ended
November 30, 2001, settlement agreements were reached with 22 creditors of the
discontinued operation, which reduced a gross amount of $362,043 of obligations
due to $110,885. Such amounts were paid and the obligations were satisfied.
SONO-TEK CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
interest rate on the Company's debt is based on fluctuations in the prime rates.
If the prime rate increased by 1 percentage point from the levels at February
29, 2000, the negative effect on the Company's results of operations would
approximate $3,000 and $1,000 for the nine and three months ended November 30,
2001.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in 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 on Form 8-K
(a) Exhibits
(1) Amended Note and Warrant Purchase Agreement dated October 24, 2001
between the Company and Norwood Venture Corp.
(b) Reports on Form 8K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 10, 2002
SONO-TEK CORPORATION
(Registrant)
/s/ Christopher L. Coccio
By: ____________________________________
Christopher L. Coccio
Chief Executive Officer and President
/s/ Duncan Urquhart
By: ____________________________________
Duncan Urquhart
Treasurer
Exhibit 1
October 24, 2001
Sono-Tek Corporation
2012 Route 9W, Building 3
Milton, NY 12547
Attention: Mr. Christopher L. Coccio, President and Chief Executive Officer
Subject: Note and Warrant Purchase Agreement dated September 29, 1999 ("the
Agreement") the 12% Note dated September 30, 1999 (the "Note"), the First
Amendment dated December 22, 2000 and the Second Amendment dated April 30, 2001.
Gentlemen:
The Agreement and the Note are hereby amended (the "Third Amendment"), as
follows (capitalized terms have the same meaning as in the Agreement).
a. Section 1.1 of the Agreement is modified such that prepayment of the
Note shall commence on October 31, 2002, and the scheduled maturity
shall be September 30, 2005.
b. Section 1.1 is amended further such that the exercise prices of the
1,100,00 share Warrant dated September 30, 1000 and the 244,444 share
Warrant dated July 30, 2001, shall be reduced to $.15 per share. The
Company will issue replacement Warrants as soon as possible, but thus
amendment is effective on the date hereof.
c. All other terms and conditions of the Agreement, Note and other
Closing Documents remain in full force and effect.
If this letter correctly states our agreement in all respects, please sign
below, fax back a copy, and return one original.
Very truly yours,
/s/ Mark R. Littell,
- ---------------
President
Norwood Venture Corp.