SONO TEK CORP - Quarter Report: 2023 August (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

SONO TEK CORP

For the quarterly period ended: August 31, 2023

OR

Commission File No.: 000-16035

(Exact name of registrant as specified in its charter)

2012 Rt. 9W, Milton, NY 12547

(Address of Principal Executive Offices) (Zip Code)

Issuer's telephone no., including area code: (845) 795-2020

Securities Registered Pursuant to Section 12(b) of the Act:

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  ☑    No  ☐

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐    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:

SONO-TEK CORPORATION

INDEX

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Six Months Ended August 31, 2023

Three and Six Months Ended August 31, 2022

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

SONO-TEK CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED AUGUST 31, 2023 and 2022

NOTE 1: BUSINESS DESCRIPTION

Sono-Tek Corporation (the “Company”, “Sono-Tek”, “We” or “Our”) was incorporated in New York on March 21, 1975. We are the world leader in the design and manufacture of ultrasonic coating systems for applying precise, thin film coatings to add functional properties, protect or strengthen surfaces on parts and components for the microelectronics/electronics, alternative energy, medical, industrial and emerging research & development and other markets. We design and manufacture custom-engineered ultrasonic coating systems incorporating our patented technology, in combination with strong applications engineering knowledge, to assist our customers in achieving their desired coating solutions.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended February 28, 2023 (“fiscal year 2023”) contained in the Company’s 2023 Annual Report on Form 10-K filed with the SEC on May 25, 2023. The Company’s current fiscal year ends on February 29, 2024 (“fiscal 2024”).

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents - Cash and cash equivalents consist of money market mutual funds, short term commercial paper and short-term certificates of deposit with original maturities of 90 days or less. At August 31, 2023, $3,031,739 of the Company’s bank deposits exceeded the insured limit provided by the Federal Deposit Insurance Corporation.

Consolidation - The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Industrial Park, LLC (“SIP”) in conformity with generally accepted accounting principles in the United States (“GAAP”). SIP operates as a real estate holding company for the Company’s real estate operations. All intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments - The Company applies Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best information available in the circumstances.

The carrying amounts of financial instruments reported in the accompanying unaudited condensed consolidated financial statements for current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of the financial instruments.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:

Level 1 — Assets with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.

The fair values of financial assets of the Company were determined using the following categories at August 31, 2023 and February 28, 2023, respectively:

Schedule of Significant Accounting Policies - Fair values of financial assets of the Company

Marketable Securities include certificates of deposit and US Treasury securities that are considered to be highly liquid and easily tradeable totaling $8,862,000 and $8,090,000 as of August 31, 2023 and February 28, 2023, respectively. US Treasury securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 and certificates of deposit are classified as Level 2 within the Company’s fair value hierarchy. The Company’s marketable securities are considered to be trading securities as defined under ASC 320 “Investments – Debt and Equity Securities.”

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 August 31, 2023 and February 28, 2023, there were no accruals for uncertain tax positions.

Inventories - Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method for raw materials, subassemblies and work-in-progress and the specific identification method for finished goods. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market conditions.

Land and Buildings - Land and buildings are stated at cost. Buildings are being depreciated by use of the straight-line method based on an estimated useful life of forty years.

At August 31, 2023 and February 28, 2023, the Company had land stated at cost of $250,000.

At August 31, 2023 and February 28, 2023, the Company had buildings, equipment, furnishings and leasehold improvements totaling, $2,593,229 and $2,624,996, respectively, net of accumulated depreciation.

Management Estimates - The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements - 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 has adopted ASU 2016-13 as updated and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

Other than Accounting Standards Update ASU 2016-13 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.

Product Warranty - Estimated future product warranty expense is recorded when the product is sold.

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. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:

Uncertainties - Although the World Health Organization declared in early May of 2023 that COVID-19 no longer constitutes a public health emergency the Company continues to actively monitor the COVID-19 developments and potential impact on the Company's employees, business and operations. The effects of COVID-19 did not have a significant impact on the Company's result of operations or financial condition for the three months ended August 31, 2023. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, the Company is not able to estimate the effects COVID-19 may have on future results of operations or financial condition.

The Company has encountered challenges in procuring supplies of various materials and components, and electronic components in particular, due to well-documented shortages and constraints in the global supply chain. Lead times for ordered components may vary significantly, and some components used to manufacture our products are provided by a limited number of sources. The Company experienced lengthened lead times throughout its supply chain as a result of supply chain constraints and material shortages that have occurred through fiscal year 2023.

NOTE 3: REVENUE RECOGNITION

The Company’s sales revenue is derived primarily from short term contracts with customers, which, on average, are in effect for less than twelve months. Sales revenue from manufactured equipment transferred at a single point in time accounts for a majority of the Company’s revenue.

Sales revenue is recognized when control of the Company’s manufactured equipment is transferred to its customers, in an amount that reflects the consideration the Company expects to receive based upon the agreed transaction price. The Company’s performance obligations are satisfied when its customers take control of the purchased equipment, which is based on the contract terms. Based on prior experience, the Company reasonably estimates its sales returns and warranty reserves. Sales are presented net of discounts and allowances. Discounts and allowances are determined when a sale is negotiated. The Company does not grant its customers or independent representatives, the ability to return equipment nor does it grant price adjustments after a sale is complete.

The Company does not capitalize any sales commission costs related to the acquisition of a contract. All commissions related to a performance obligation that are satisfied at a point in time are expensed when the customer takes control of the purchased equipment.

The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one-year or less.

At August 31, 2023, the Company had received approximately $3,394,000 in cash deposits, representing contract liabilities.

At February 28, 2023, the Company had received approximately $2,838,000 in cash deposits, representing contract liabilities. During the six months ended August 31, 2023 the Company recognized $2,368,000 of these deposits as revenue.

The Company’s sales revenue by product line is as follows:

 Schedule of Revenue Recognition - Sales Revenue by Product Line

NOTE 4: INVENTORIES

Inventories consist of the following:

Schedule of Inventory, Current

The Company maintains an allowance for slow moving inventory for raw materials and finished goods. The recorded allowances at August 31, 2023 and February 28, 2023, totaled $354,143 and $332,525, respectively.

NOTE 5: STOCK BASED COMPENSATION

Stock Options - Until May 2023, options were available to be granted to officers, directors, consultants and employees of the Company and its subsidiaries to purchase up to 2,500,000 shares of the Company's common stock, under the Company’s 2013 Stock Incentive Plan (the "2013 Plan"). Under the 2013 Plan options expire ten years after the date of grant. As of August 31, 2023, there were 247,483 options outstanding under the 2013 Plan, of which 158,520 are vested. No additional options may be granted under the 2013 Plan.

In August 2023, the Company’s shareholders approved the Company’s 2023 Stock Incentive Plan (the “2023 Plan”) under which 2,500,000 options may be granted to officers, directors, consultants and employees of the Company and its subsidiaries. As of August 31, 2023, there were 23,250 options outstanding under the 2023 Plan.

The Company accounts for stock based compensation under ASC 718, “Share Based Payments.” which requires companies to expense the value of employee stock options and similar awards.

During the six months ended August 31, 2023, the Company granted options to acquire 9,094 shares to employees exercisable at prices ranging from $4.79 to $5.60 and options to acquire 18,380 shares to non-employee members of the board of directors with an exercise price of $4.79. The options granted to employees and directors vest over three years 3 and expire in ten 10 years. The options granted during the first six months of fiscal 2024 had a combined weighted average grant date fair value of $2.91 per share.

The weighted-average fair value of options are estimated on the date of grant using the Black-Scholes options-pricing model. The weighted-average Black-Scholes assumptions are as follows:

Schedule of weighted-average Black-Scholes assumptions

For the three and six months ended August 31, 2023 and 2022, net income and earnings per share reflect the actual deduction for stock-based compensation expense. For the three months ended August 31, 2023 and 2022, the Company recognized approximately $46,000 and $43,000 of stock based compensation expense, respectively. For the six months ended August 31, 2023 and 2022, the Company recognized approximately $95,000 and $112,000 of stock based compensation expense, respectively. Such amounts are included in general and administrative expenses on the unaudited consolidated statements of income.

NOTE 6: EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

 Schedule of Computation of basic and diluted earnings per share

NOTE 7: REVOLVING LINE OF CREDIT

The Company has a $1,500,000 revolving line of credit at prime which was 8.50% at August 31, 2023 and 7.75% at February 28, 2023. The revolving credit line is collateralized by the Company’s accounts receivable and inventory. The revolving credit line is payable on demand and must be retired for a 30-day period, once annually. If the Company fails to perform the 30-day annual pay down or if the bank elects to terminate the credit line, the bank may, at its option, convert the outstanding balance to a 36-month term note with payments including interest in 36 equal installments.

As of August 31, 2023, there were no outstanding borrowings under the line of credit and the unused portion of the credit line was $1,500,000.

NOTE 8: CUSTOMER CONCENTRATIONS AND FOREIGN SALES

Export sales to customers located outside the United States and Canada were approximately as follows:

 Schedule of Customer Concentrations and Foreign Sales

During the first half of fiscal 2024 and fiscal 2023, sales to foreign customers accounted for approximately $3,675,000 and $4,224,000, or 40% and 54% respectively, of total revenues.

During the second quarter of fiscal 2024 and fiscal 2023, sales to foreign customers accounted for approximately $2,440,000 and $2,110,000, or 43% and 56% respectively, of total revenues.

The Company had one customer which accounted for 14% of total sales during the first half of fiscal 2024. The Company had one customer which accounted for 20% of total sales during the second quarter of fiscal 2024. Three customers accounted for 39% of the outstanding accounts receivable at August 31, 2023.

The Company had three customers which accounted for 17% of total sales during the first half of fiscal 2023. The Company had four customers which accounted for 24% of total sales during the second quarter of fiscal 2023. Four customers accounted for 44% of the outstanding accounts receivable at February 28, 2023.

NOTE 9: COMMITMENTS AND CONTINGENCIES

The Company did not have any material commitments or contingencies as of August 31, 2023.

The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. As of August 31, 2023, the Company did not have any pending legal actions.

ITEM 2 – 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 continued abatement of the COVID-19 pandemic and any residual effects; 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 the forecasted range of sales guidance.

We undertake no obligation to update any forward-looking statement.

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 functional or protective materials over surfaces such as glass or metals. Our solutions are environmentally-friendly, efficient and highly reliable. They enable dramatic reductions in overspray, savings in raw materials, 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 the 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 40% of our sales generated from outside the United States and Canada in the first six months of fiscal 2024. Our direct sales team and our distributor and sales representative network are located in North America, Latin America, Europe and Asia. We continue to expand our sales capabilities by increasing the size of our direct sales force and 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 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. Providing customers that visit our labs with a high level of application engineering expertise to develop their unique coating processes is an area of focus in our sales efforts, as we continually expand Sono-Tek’s services to best support the needs of our customers.

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 in part due to the increase of larger orders in the Company’s sales mix.

Second Quarter Fiscal 2024 Highlights (compared with the second quarter of fiscal 2023 unless otherwise noted) We refer to the three-month periods ended August 31, 2023 and 2022 as the second quarter of fiscal 2024 and fiscal 2023, respectively.

First Half Fiscal 2024 Highlights (compared with the first half of fiscal 2023 unless otherwise noted) We refer to the six-month periods ended August 31, 2023 and 2022 as the first half of fiscal 2024 and fiscal 2023, respectively.

RESULTS OF OPERATIONS

Sales:

Product Sales

Total sales for the second quarter and first half of fiscal 2024 grew by 50% and 18%, respectively, driven by increased demand for our Multi-Axis Coating systems which are commonly used in the clean energy sector and medical device markets. In addition, Integrated Coating System sales accelerated from sales of our newly developed float glass coating platform which is continuing to gain acceptance in the market. Fluxing system sales dipped, although the outlook for this product line remains positive as indicated by quoting activity. A dip in OEM sales occurred as many of our OEM partners had previously built up excess inventory to combat supply chain concerns. This, was largely offset by an increase in spare parts and service related revenue, which is a growing revenue stream that falls in the Other product category.

Market Sales

Sales to the Alternative/Clean Energy market recorded growth of 161% in the second quarter of fiscal 2024, and 103% for the first half of fiscal 2024, which were positively impacted by a growing number of our customers transitioning from our R&D systems to production scale systems that carry much higher average selling prices. Electronics market revenue decreased for the first half of fiscal year 2024, influenced by softening sales of our PCB spray fluxers in Latin America. Medical sales rebounded strongly with 117% growth in the second quarter of fiscal 2024, however, sales for the first half of fiscal year 2024 were down 15% year over year. Industrial Sales remain very strong, showing growth of 104% and 144%, respectively, in the second quarter and first half of fiscal 2024, influenced by several new generation systems introduced to the market.

Geographic Sales

In the first half of fiscal 2024, approximately 40% of sales originated outside of the United States and Canada compared with 54% in the first half of fiscal 2023.

In the second quarter of fiscal 2024, approximately 43% of sales originated outside of the United States and Canada compared with 56% in the second quarter of fiscal 2023.

We continue to record strong sales from the U.S., growing 94% and 55%, respectively in the second quarter of fiscal 2024 and the first half of fiscal 2024. U.S. government initiatives such as the CHIPS ACT and the Inflation Reduction Act have influenced these strong sales, as well as the continuing trend of onshoring for high technology products. Asia sales dropped 35% and 28% respectively, for the second quarter of fiscal 2024 and first half of fiscal 2024. This dip was due to decreased sales to China, while other areas of Asia remain more resilient.

Gross Profit:

For the second quarter of fiscal 2024, gross profit increased by $905,000, or 48%, compared with the prior year period. The gross profit margin was 49.7% compared with 50.4% for the prior year period. The decrease in the gross profit margin was influenced by product mix, inclusive of a decrease in OEM systems sales which typically have high profit margins.

For the first half of fiscal 2024, gross profit increased by $575,000, or 14%, to $4,578,000 compared with $4,003,000 in the first half of fiscal 2023. The gross profit margin was 49.5% compared with 51.2% for the prior year period. The decrease in the gross profit margin is due to changes in product mix, particularly decreased OEM sales.

Operating Expenses:

Research and Product Development:

Research and product development costs increased in the second quarter of fiscal 2024 due to increased salaries and research and development materials and supplies, which are used in the focused growth initiatives that we continue to implement.

Over the past twelve months the number of full-time employees engaged primarily in our research and product development efforts increased by approximately 40%. We added headcount in this area to facilitate completion of complex engineered systems that comprise much of our backlog and to accelerate the development of future custom machine solutions and higher value subsystems that we expect to be the cornerstone of our future business.

Marketing and Selling:

Marketing and selling expenses increased in the second quarter of fiscal 2024 due to increased salaries, commissions, travel and trade show expenses. These increases were partially offset by a decrease in insurance expenses.

Marketing and selling costs increased in the first half of fiscal 2024 due to increased salaries, travel and trade show expenses. These increases were partially offset by decreases in commission and insurance expenses.

Over the past twelve months the number of full-time employees engaged in our sales and marketing efforts increased by approximately 21%. We have primarily added more technical personnel to support the growing diversity and complexity of our customers’ requirements for thin film coating applications.

General and Administrative:

General and administrative expenses increased in the second quarter of fiscal 2024 due to increased salaries and professional fees. These increases were partially offset by a decrease in stock based compensation expense.

General and administrative expenses increased in the first half of fiscal 2024 due to increased salaries and professional fees. These increases were partially offset by decreases in stock based compensation, insurance and corporate expenses.

Operating Income:

In the second quarter of fiscal 2024, operating income increased $388,000, or 218%, to $566,000 compared with $178,000 for the second quarter of fiscal 2023. Operating margin for the quarter increased to 10% compared with 5% in the prior year period. In the second quarter of fiscal 2024, increases in revenue and gross profit offset by an increase in operating expenses were key factors in the increase of operating income.

In the first half of fiscal 2024, operating income decreased by $84,000, to $474,000, compared with $558,000 for the first half of fiscal 2023. Operating margin for the first half of fiscal 2024 decreased to 5% compared with 7% in the first half of fiscal 2023. In the first half of fiscal 2024, an increase in operating expenses partially offset by an increase gross profit were key factors in the decrease of operating income.

Interest and Dividend Income:

Interest and dividend income increased by $105,000 to $124,000 in the second quarter of fiscal 2024 as compared with $19,000 for the second quarter of fiscal 2023. In the first half of fiscal 2024 interest and dividend income increased by $204,000 to $230,000 as compared with $26,000 for the first half of fiscal 2023. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. At August 31, 2023, the majority of our holdings are rated at or above investment grade.

Income Tax Expense:

We recorded income tax expense of $142,000 for the second quarter of fiscal 2024 compared with $15,000 for the second quarter of fiscal 2023. For the first half of fiscal 2024, we recorded income tax expense of $121,000 compared with $85,000 for the first half of fiscal 2023.

The increase in income tax expense in the second quarter and first half of fiscal 2024 is due to the increase in income before income taxes partially offset by an increase in permanent timing differences and the application of available research and development tax credits.

Net Income:

Net income increased by $379,000 to $541,000 for the second quarter of fiscal 2024 compared with $162,000 for the second quarter of fiscal 2023. The increase in net income during the second quarter is primarily a result of an increase in gross profit and interest and dividend income partially offset by an increase in operating expenses and an increase in income tax expense.

Net income increased by $127,000 to $595,000 for the first half of fiscal 2024 compared with $468,000 for the first half of fiscal 2023. The increase in net income during the first half of fiscal 2024 is primarily a result of an increase in gross profit and interest and dividend income partially offset by an increase in operating expenses and an increase in income tax expense.

Impact of COVID-19

With the exception of some lingering supply chain challenges, the residual effects of the COVID-19 pandemic did not have a significant impact on the Company's results of operations or financial condition for the three months ended August 31, 2023.

Liquidity and Capital Resources

Working Capital – Our working capital increased $452,000 to $11,569,000 at August 31, 2023 from $11,117,000 at February 28, 2023. The increase in working capital was mostly the result of the current period’s net income and noncash charges partially offset by purchases of equipment.

The Company aggregates cash and cash equivalents and marketable securities in managing its balance sheet and liquidity. For purposes of the following analysis, the total is referred to as “Cash.” At August 31, 2023 and February 28, 2023, our working capital included:

The following table summarizes the accounts and the major reasons for the $871,000 increase in “Cash”:

Stockholders’ Equity – Stockholders’ Equity increased $689,000 from $14,634,000 at February 28, 2023 to $15,323,000 at August 31, 2023. The increase is a result of the current period’s net income of $594,000 and $95,000 in additional equity related to stock-based compensation awards.

Operating Activities – We generated $1,107,000 of cash in our operating activities in the first half of fiscal 2024 compared to $224,000 of cash in the first half of fiscal 2023, an increase of $883,000. The increase was mostly the result of decreases in accounts receivable and prepaid expenses combined with increases in accounts payable and customer deposits. These sources of cash were partially offset by an increase in inventories.

Investing Activities – We used $1,007,000 in the first half of fiscal 2024 in our investing activities compared with using $755,000 in the first half of fiscal 2023. For the first halves of fiscal years 2024 and 2023, we used $246,000 and $244,000, respectively, for the purchase or manufacture of equipment, furnishings and leasehold improvements. For the first half of fiscal 2024 and 2023, we invested $761,000 and $511,000, respectively, in our marketable securities.

Net Changes in Cash and Cash Equivalents – In the first half of fiscal 2024, our cash balance increased by $100,000 as compared to a decrease of $532,000 in the first half of 2023. In the first half of fiscal 2024, our operating activities generated $1,107,000 of cash. In addition, we invested $761,000 in marketable securities and used $246,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations are based upon the unaudited condensed 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.

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. The Company believes that critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to the Company’s consolidated financial statements included in Form 10-K for the year ended February 28, 2023.

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. 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. 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.

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, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has 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.

Impact of New Accounting Pronouncements

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 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company does not issue or invest in financial instruments or derivatives for trading or speculative purposes. Substantially all of the operations of the Company are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk. All of our sales transactions are completed in US dollars.

Although the Company's assets included $3,454,000 in cash and $8,862,000 in marketable securities, the market rate risk associated with changing interest rates in the United States is not material.

ITEM 4 – Controls and Procedures

The Company has established and maintains “disclosure controls and procedures” (as those terms are defined in Rules 13a –15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”). Christopher L. Coccio, Chief Executive Officer (principal executive) and Stephen J. Bagley, Chief Financial Officer (principal accounting officer) of the Company, have evaluated the Company’s disclosure controls and procedures as of August 31, 2023. Based on this evaluation, they have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to Management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding timely disclosure.

In addition, there were no changes in the Company’s internal controls over financial reporting during the second fiscal quarter of 2024 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

PART II - OTHER INFORMATION

None

There are no material changes from risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended February 28, 2023.

None

None

None

None

31.1 – 31.2 – Rule 13a - 14(a)/15d – 14(a) Certification

32.1 – 32.2 – Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

101 – The financial information from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2023 formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

104 – Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: October 12, 2023