SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1999
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, Bldg. 3, Milton, NY 12547
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone no., including area code: (914) 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 July 12, 1999
Common Stock, par value $.01 per share 6,281,667
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1 - Financial Statements: 1 - 3
Balance Sheets - May 31, 1999 (Unaudited) and February 28, 1999 1
Statements of Operations - Three Months Ended May 31, 1999
and 1998 (Unaudited) 2
Statements of Cash Flows - Three Months Ended May 31, 1999
and 1998 (Unaudited) 3
Notes to Financial Statements 4 - 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 6 - 8
Part II - Other Information 8 - 9
Signatures 10
SONO-TEK CORPORATION
BALANCE SHEETS
ASSETS
May 31, February 28,
1999 1999
Unaudited
------------------------------
Current Assets
Cash and cash equivalents $ 6,707 $ 70,051
Accounts receivable (less allowance of $6,000
at May 31 and February 28) 443,071 264,217
Loan receivable (Note C) 25,426 0
Inventories (Note D) 852,252 787,200
Prepaid expenses and other current assets (Note C) 112,635 42,039
---------- ----------
Total current assets 1,440,091 1,163,507
Equipment and furnishings (less accumulated depreciation
of $416,347 and $407,486 at May 31 and February 28,
respectively) 119,669 127,892
Patents, patents pending and copyrights (less accumulated
amortization of $80,371 and $78,697 at May 31 and
February 28, respectively) 36,659 38,333
Other assets 5,917 5,917
---------- ----------
TOTAL ASSETS $1,602,336 $1,335,649
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long term debt $ 10,762 $10,503
Short term loans-related parties (Note E) 165,000 88,000
Revolving Line of Credit 250,948 199,948
Accounts payable 494,295 324,192
Accrued expenses 227,295 267,948
---------- ----------
Total current liabilities 1,148,300 890,591
Long term debt, less current maturities 34,490 37,293
Noncurrent rent payable 9,332 9,083
---------- ----------
Total liabilities 1,192,122 936,967
---------- ----------
Stockholders' Equity
Common stock, $.01 par value; 12,000,000 shares
authorized, 6,281,667 shares issued and
outstanding at May 31 and February 28 62,817 62,817
Additional paid-in capital 4,838,601 4,735,975
Accumulated deficit (4,491,204) (4,400,110)
---------- ----------
Total stockholders' equity 410,214 398,682
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,602,336 $1,335,649
========== ==========
See notes to financial statements.
SONO-TEK CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended May 31,
Unaudited
1999 1998
----------------------------
Net Sales $805,329 $746,042
Cost of Goods Sold 345,571 416,491
-------- --------
Gross Profit 459,758 329,551
-------- --------
Operating Expenses
Research and product development costs 111,249 134,198
Marketing and selling expenses 217,105 166,262
General and administrative costs 116,199 115,303
-------- --------
Total Operating Expenses 444,553 415,763
-------- --------
Operating Income (Loss) 15,205 (86,212)
Interest Expense (Note E) (112,768) (13,601)
Interest and Other Income 6,469 1,109
-------- --------
Loss Before Income Taxes (91,094) (98,704)
Income Tax Expense (Note F) 0 0
-------- --------
Net Loss $(91,094) $(98,704)
======== ========
Basic Loss Per Share $(0.01) $(0.02)
======= =======
Diluted Loss Per Share $(0.01) $(0.02)
======= =======
Weighted Average Shares - Basic 6,281,667 4,374,387
========= =========
Weighted Average Shares - Diluted 6,281,667 4,374,387
========= =========
See notes to financial statements.
SONO-TEK CORPORATION
STATEMENTS OF CASH FLOWS
Three Months Ended May 31,
Unaudited
1999 1998
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(91,094) $(98,704)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash charge for issuance of warrants 102,626 0
Depreciation and amortization 10,536 10,571
Provision for doubtful accounts 0 3,000
(Increase) decrease in:
Accounts receivable (179,280) 349,693
Inventories (65,051) (172,822)
Prepaid expenses and other current assets (70,596) (26,701)
Increase (decrease) in:
Accounts payable and accrued expenses 129,450 (133,791)
Non-current rent payable 249 248
-------- --------
Net Cash Used In Operating Activities (163,160) (68,506)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment and furnishings (638) 0
Loan receivable (25,000) 0
------- --------
Net Cash Used In Investing Activities (25,638) 0
------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 51,000 0
Proceeds from short term loans-related parties 77,000 0
Repayments of equipment loan (2,546) 0 0
Repayments of note payable, bank 0 (23,700)
------- --------
Net Cash Provided by (Used In) Financing Activities 125,454 (23,700)
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (63,344) (92,206)
CASH AND CASH EQUIVALENTS
Beginning of period 70,051 113,759
------- --------
End of period $ 6,707 $ 21,553
======= ========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 6,392 $ 3,802
======= ========
See notes to financial statements.
SONO-TEK CORPORATION
Notes to Financial Statements
May 31, 1999 and 1998
NOTE A: The attached summary financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
February 28, 1999 included in its report on Form 10-K. Such statements should be
read in conjunction with the data herein.
NOTE B: 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.
NOTE C: On March 3, 1999 the Company signed a non-binding letter of intent to
acquire a manufacturer of specialty equipment. As of May 31, 1999, the Company
has loaned this manufacturer $25,000, to be repaid at the time of closing or
termination of the acquisition. The interest on the loan has been accrued at an
annual interest rate of 9.75%. As of May 31, 1999, the Company has incurred and
recognized as prepaid expense and other current assets approximately $65,000 in
costs related to the acquisition. These costs will be included as part of the
purchase price at the time of the closing, or expensed if the acquisition does
not occur.
NOTE D: Inventories at May 31, 1999 are comprised of:
Finished goods $166,260
Work in process 84,884
Consignment 10,868
Raw materials and subassemblies 590,238
---------
Net inventories $852,252
========
NOTE E: From time to time the Company has required short term loans to meet its
cash requirements. All of these loans, which are payable on demand, have been
provided by two Board members of the Company, one of whom is an officer, at an
interest rate of prime plus 2% (9.75% at May 31, 1999). As of May 31, 1999 the
amount of these loans outstanding was $165,000. Interest expense for the three
month period ended May 31, 1999 was $3,750 on these short term loans. Accrued
interest on these short term loans was $5,114 and $1,354 at May 31, 1999 and
February 28, 1999, respectively. On May 13, 1999, the Board of Directors granted
to the Board members who provided the short term loans 600,000 warrants
exercisable at $0.30 per share that expire May 13, 2004. The Company recognized
a non-cash interest charge of $102,626 for the immediate amortization of the
discounted short term loans that had been discounted based on the fair market
value of the warrants granted. The Company estimated the fair market value of
the warrants using the minimum value method under the assumption that the
estimated life of the warrants were 5 years, the discount rate was 5.25% and
expected volatility of the Company's common stock was 94%.
NOTE F: The Company has a net operating loss carryforward, therefore no income
tax expense is recorded for the three months ended May 31, 1999 and 1998. At
February 28, 1999, the Company had available operating loss carryforwards of
approximately $3,632,000 for income tax purposes.
NOTE G: Basic loss per share ("LPS") is computed by dividing net loss by the
weighted-average number of common shares outstanding for the period. Diluted LPS
reflects 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 LPS calculations under the treasury stock method.
The computation of basic and diluted loss per share are set forth on the
following table:
Three Months Ended May 31,
1999 1998
--------------------------
Numerator-
Numerator for basic and diluted loss
per share $(91,094) $(98,704)
======== ========
Denominator:
Denominator for basic loss per
share - weighted average shares 6,281,667 4,374,387
Effects of dilutive securities:
Stock warrants for directors 0* -
Stock options for employees
and outside consultants 0* 0*
--------- ---------
Denominator for diluted loss per share 6,281,667** 4,374,387**
========= =========
*Stock options and warrants for employees and outside consultants are
antidilutive as a result of the net loss and therefore are not
considered in the Diluted LPS calculation.
**The effect of considering the detachable warrants related to the
convertible secured subordinated promissory notes which were converted
on February 26, 1999, are antidilutive and therefore not considered for
the Diluted LPS calculations.
Under the assumption that stock options and warrants were not antidilutive as
described in * and **, the denominator for diluted loss per share would be
8,280,501 and 5,617,903 shares at May 31, 1999 and 1998, respectively.
NOTE H: SUBSEQUENT EVENTS
On June 8, 1999, the Board of Directors of the Company granted options to
acquire 42,500 shares of Common Stock to qualified employees of the Company,
exercisable at current fair market value, under the 1993 Stock Incentive Plan.
SONO-TEK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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: general economic and business conditions; political, regulatory,
competitive and technological developments affecting the Company's operations or
the demand for its products; timely development and market acceptance of new
products; adequacy of financing; capacity additions; and ability to enforce
patents. The Company undertakes no obligation to update publicly any
forward-looking statement.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital increased $18,875 to $291,791 at May 31, 1999 from
$272,916 at February 28, 1999. The stockholders' equity increased $11,532 to
$410,214 on May 31, 1999 from $398,682 on February 28, 1999. The increase in
working capital and stockholders' equity was the result an increase in paid in
capital of $102,626 from the issuance of 600,000 warrants that was offset by a
loss of $(91,094) for the three months ended May 31, 1999.
The Company currently has a $300,000 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 the CEO of the Company. As of May 31, 1999
the outstanding balance was $250,948, with an available amount of $49,052 under
the terms of the line of credit. Due to losses incurred during Fiscal 1999, the
Company was required to borrow on a short term basis from two officers of the
Company. As of May 31, 1999 the balance owed the officers was $165,000.
On March 3, 1999, as part of the Company's plan to grow and diversify, the
Company signed a non-binding letter of intent to acquire a manufacturer of
specialty equipment that produces cleaning, degreasing and vapor drying systems
for the semiconductor, disk drive, and other high technology industries. The
Company believes this acquisition will complement the Company's core business
including industry focus and manufacturing similarities. The Company also
believes that significant efficiencies can be realized by integrating the
operation of the two companies. The Company anticipates reporting this
transaction on Form 8-K upon the execution of a definitive acquisition
agreement.
On May 5, 1999 the Company released a Private Placement Memorandum which offers
1,666,667 shares of the Company's common stock at $0.30 per share. The money
raised from this offering will be used for the planned acquisition, as discussed
in the preceding paragraph, and as working capital.
Although there can be no assurances, management believes that the continued
success of the MCS Accu Mist, MCS Infinity and Liquid Delivery Systems, along
with the improvement in the market for the SonoFlux Systems will lead to broader
markets and increases in sales and profits, which will in turn allow the Company
to meet its current obligations as they become due.
Results of Operations
- ---------------------
For the three months ended May 31, 1999, the Company's sales increased $59,287
to $805,329 as compared to $746,042 for the three months ended May 31, 1998. The
increase was a result of an increase in the sales of the MCS Infinity and Accu
Mist Systems of $69,000, plus sales of special orders of $53,000 that were
offset by a decrease in sales of the Company's Nozzle Systems of $10,000 and
Fluxer Systems of $51,000. During the past year there was a slowdown in certain
segments of the electronics industry that effected the sales of the Sono-Flux
System. The Company believes that the electronics industry has begun to improve,
resulting in an increase in fluxer sales between the last quarter of fiscal year
1999 and the first quarter of fiscal year 2000.
The Company's gross profit increased $130,207 to $459,758 for the three months
ended May 31, 1999 from $329,551 for the three months ended May 31, 1998. The
increase was primarily a result of increased sales of the Company's products,
combined with decreases in direct labor costs of $25,000, service related travel
of $28,000 and warranty costs of $11,000. The gross profit margin was 57% and
44% of sales for the three months ended May 31, 1999 and 1998, respectively. The
increase in the gross profit margin was a result of an increase in sales and a
decrease in production and warranty costs.
Research and product development costs decreased $22,949 to $111,249 for the
three months ended May 31, 1999 from $134,198 for the three months ended May 31,
1998. The decrease was due to a decrease in engineering supplies and the
reimbursement for engineering services provided to outside companies.
Marketing and selling costs increased $50,843 to $217,105 for the three months
ended May 31, 1999 from $166,262 for the three months ended May 31, 1998. The
increases were due to expenses related to start up costs associated with the
sale of pressure nozzles of $30,000, sales related travel of $8,000, additional
commissions and labor costs of $8,000, and trade shows of $5,000.
General and administrative costs increased $896 to $116,199 for the three months
ended May 31, 1999 from $115,303 for the three months ended May 31, 1998 as the
Company stabilized administrative costs.
Interest expense increased $99,167 to $112,768 for the three months ended May
31, 1999 from $13,601 for the three months ended May 31, 1998. The increase is
primarily due to a non-cash charge of $102,626 for the costs associated with
600,000 warrants that were issued on May 13, 1999 offset by a decrease in
interest expense after the conversion of the convertible secured subordinated
promissory notes into stock in February 1999.
For the three months ended May 31, 1999, the Company had a loss of $(91,094) or
$(0.01) per share as compared to a loss of $(98,704) or $(0.02) per share for
the three months ended May 31, 1998. The decrease in net loss was primarily a
result of an increase in sales combined with a lower cost of goods sold offset
by increases in marketing and selling expenses and the non-cash charge of
$102,626 for warrants issued May 13, 1999.
Year 2000 Compliance
- --------------------
The Company has performed a thorough assessment to determine its readiness for
the Year 2000 (Y2K). This assessment identified areas that needed to be
modified, and resulted in the Company upgrading both hardware and software used
internally.
As part of its assessment, the Company evaluated its phone, security and
manufacturing machinery and determined that all of these systems are Y2K
compliant. The Company has also evaluated the software and hardware used in its
products and determined that they are Y2K compliant. The Company has surveyed
its major suppliers for their Y2K readiness. Because all major components and
materials used by the Company in the manufacture of its products are readily
available from several suppliers, management considers this area to be of
minimal risk.
At the present time, a contingency plan has not been developed. The Company will
continue to monitor the need for a contingency plan. The Company has incurred
internal staff costs, as well as the expense to purchase additional hardware and
software of approximately $25,000. The additional costs related to the Y2K
compliance is approximately $10,000 and is not anticipated to have a material
effect on the Company's business, results of operations or financial condition.
Despite its efforts to survey its customers, suppliers and service providers,
the Company cannot be certain as to the actual Y2K readiness of these third
parties or the impact that any non-compliance on their part may have on the
Company's business, results of operations or financial condition. This is a Year
2000 readiness disclosure entitled to protection as provided in the Year 2000
Information and Readiness Disclosure Act.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds.
On April 1, 1999, the Company issued warrants to purchase
5,000 shares of common stock to Donald Neville in consideration of his
efforts in drafting the Private Placement Memorandum. These warrants
are exercisable at a price equal to $0.30 per share of common stock and
expire April 1, 2004. On May 13, 1999, the Company issued warrants to
purchase 300,000 share of common stock to Samuel Schwartz, a Director
of the Company, in consideration of Mr. Schwartz's forbearance on
demand loans Mr. Schwartz previously made to the Company. These
warrants are exercisable at a price equal to $0.30 per share of common
stock and expire May 13, 2004. Also on May 13, 1999, the Company issued
warrants to purchase 300,000 shares of common stock to James L. Kehoe,
the Company's Chairman, Chief Executive Officer and a Director, in
consideration of Mr. Kehoe's forbearance on demand loans Mr. Kehoe
previously made to the Company. These warrants are exercisable at a
price equal to $0.30 per share of common stock and expire May 13, 2004.
All of the above issuance of warrants were made in reliance on
exemptions from registration provided under Section 4(2) of the
Securities Act of 1933, as amended.
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
Exhibit No. Description
27. Financial Data Schedule - EDGAR filing only
(b) Reports on Form 8-K
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: July 15, 1999
SONO-TEK CORPORATION
(Registrant)
/s/ James L. Kehoe
By: ____________________________________
James L. Kehoe
Chief Executive Officer
/s/ Kathleen N. Martin
By: ____________________________________
Kathleen N. Martin
Treasurer & Chief Financial Officer