Nanotechnology

[shmoopy38]

A nanomicrocap with 22 consecutive quarters of profits:
Form 10QSB for SONO TEK CORP. (SOTK.ob)
12-Jan-2007
Quarterly Report

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward-Looking Statements

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, press 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. The following risks are by no means all inclusive but are designed to highlight what we believe are important factors to consider when evaluating our trends and future results.

- Our ability to respond to competition in national and global markets.

- General economic conditions in our markets.

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

Overview

Sono-Tek has developed a unique and proprietary series of ultrasonic atomization nozzles, which are being used in an increasing variety of electronic, medical, industrial, and nanotechnology applications. These nozzles are electrically driven and create a fine, uniform, low velocity spray of atomized liquid particles, in contrast to common pressure nozzles. These characteristics create a series of commercial applications that benefit from the precise, uniform, thin coatings that can be achieved. When combined with significant reductions in liquid waste and less overspray than can be achieved with ordinary pressure nozzle systems, there is lower environmental impact.

We have had a well established position in the domestic electronics assembly industry for many years, based on our SonoFlux spray fluxing equipment, which accounted for a significant portion of our business. Our SonoFlux equipment saves customers from 40% to 80% of the liquid flux required to solder printed circuit boards over more labor intensive methods, such as foam fluxing. Less flux equates to lower material cost, fewer chemicals in the workplace, and less clean-up. Also, the SonoFlux equipment reduces the number of soldering defects, which reduces the level of rework.

Several years ago, we recognized that the trend in the electronics assembly industry was a move toward offshore production into China and other developing countries. The change in the global structure of this business created the need for Sono-Tek to change as well.

One change that has proven to be successful is our diversification into the medical device market. In the past three years, we have focused engineering resources on the medical device market, with emphasis on providing coating solutions for the new generation of drug coated stents. We have sold a significant number of specialized ultrasonic nozzles and MediCoat stent coating systems to large medical device customers. Sono-Tek's stent coating systems are

superior compared to pressure nozzles in their ability to uniformly coat the very small arterial stents without creating webs or gaps in the coatings. We also sell a bench-top, fully outfitted stent coating system to a wide range of customers that are manufacturing stents and/or applying coatings to be used in developmental trials.

Another change that has stimulated an increase in business has been the development of the WideTrack coating system, a broad based platform for applying a variety of coatings to moving webs of glass, textiles, plastic, metal, food products and packaging materials. The WideTrack is a long term product and market development effort. Thus far, we have made successful inroads with WideTrack systems into the glass, medical textile (bandages) and solar and fuel cell industries. We plan to increase our marketing efforts into the broader textile and food industry markets. This will require a continuation of market and technology development in these areas in the years ahead. Some of these WideTrack applications involve nano-technology based liquids. We believe there is an excellent fit between the thin, precise films required in nano-technology coating applications and our ultrasonic nozzle systems.

In the electronics, medical device and WideTrack coating markets, it has been incumbent upon us to focus our attention and resources on the development of a much greater international presence. We believe we have accomplished this and plan to continue our marketing efforts. Our international sales have risen from approximately 20% of total revenues in Fiscal Year 2003 to over 54% today, and we expect to increase that percentage in the years ahead.

Past history shows the cyclical nature of the electronics business. This cycle, coupled with the increasing trend toward moving electronics production offshore, created a need to diversify. As expected, our US based electronics business has declined this year and is approximately 20% below previous levels, as a result of the trend toward production moving offshore, coupled with a slower economy and the reduced competitiveness of our US based automotive customers. We have been able to offset this reduction in US electronics sales with an increase in our international electronics, medical device and WideTrack coating sales.

The creation of technological innovations and the expansion into new geographical markets requires the investment of both time and capital. These investments are clearly shown in the year over year increase in both R&D and Marketing and Sales expenses, resulting in a reduction in our reported net income. However, the Company is in a good position to make these expenditures based on its strong balance sheet with an excellent cash position and virtually no debt. Although there is no guarantee of success, we expect that over time, these newer markets will be the basis for Sono-Tek's continued growth and will contribute to future profitability. It is management's opinion that this strategy will be a better one than being bound to a shrinking domestic market.

Liquidity and Capital Resources

Working Capital - Our working capital increased $394,000 from a working capital of $3,699,000 at February 28, 2006 to $4,093,000 at November 30, 2006. The Company's current ratio is 6.24 to 1 at November 30, 2006 as compared to 5.33 to 1 at February 28, 2006.

Stockholders' Equity - Stockholder's Equity increased $525,000 from $4,230,000 at February 28, 2006 to $4,755,000 at November 30, 2006. The increase is the result of net income of $473,000, stock option exercises of $2,500 and an adjustment for stock based compensation expense of $50,000.

Operating Activities - Our operations provided $638,000 of cash for the nine months ended November 30, 2006, an increase of $333,000 when compared to the nine months ended November 30, 2005.

Investing Activities - We used $215,000 for the purchase of capital equipment and patent application costs during the nine months ended November 30, 2006 compared to the use of $135,000 during the nine months ended November 30, 2005.

Financing Activities - For the nine months ended November 30, 2006, we used $16,500 in financing activities resulting from the repayment of notes payable of $19,000 and the proceeds of stock option exercises of $2,500. For the nine months ended November 30, 2005, the net cash provided by financing activities was $343,000 resulting from: the issuance of stock and stock option exercises of $623,000, repayment of the outstanding line of credit of $350,000 and the net proceeds of notes payable of $70,000.

Results of Operations

During the nine month period ended November 30, 2006, our sales increased $157,000 or 3% to $5,240,000 as compared to $5,083,000 for the nine months ended November 30, 2005. For the three months ended November 30, 2006, our sales decreased $47,000 when compared to the three months ended November 30, 2005. During the nine month period ended November 30, 2006, sales of our Nozzles, Medi-Coat systems and Fluxer units increased. The increase in sales of these units was offset by a decrease in sales of WideTrack units and EVS systems.

Our gross profit increased $129,000 to $2,615,000 for the nine months ended November 30, 2006 from $2,486,000 for the nine months ended November 30, 2005. The gross profit margin was 49.9% of sales for the nine months ended November 30, 2006 as compared to 48.91% of sales for the nine months ended November 30, 2005. Our gross profit decreased $6,000 to $811,000 for the three months ended November 30, 2006 from $817,000 for the three months ended November 30, 2005. The gross profit margin was 49.94% of sales for the three months ended November 30, 2006 as compared to 48.91% of sales for the three months ended November 30, 2005.

Research and product development costs increased $150,000 to $597,000 for the nine months ended November 30, 2006 from $447,000 for the nine months ended November 30, 2005 and $67,000 to $219,000 for the three months ended November 30, 2006 from $152,000 for the three months ended November 30, 2005. The increases were due to increased engineering personnel, engineering materials, food industry initiatives and increased depreciation expense.

Marketing and selling costs increased $134,000 to $966,000 for the nine months ended November 30, 2006 from $832,000 for the nine months ended November 30, 2005 and $53,000 to $306,000 for the three months ended November 30, 2006 from $253,000 for the three months ended November 30, 2005. The increases were due principally to increased international travel expenses, international representative commissions and trade show expenses.

General and administrative costs increased $28,000 to $629,000 for the nine months ended November 30, 2006 from $601,000 for the nine months ended November 30, 2005 and $2,000 to $190,000 for the three months ended November 30, 2006 from $188,000 for the three months ended November 30, 2005. The increase was principally due to recording the current period stock based compensation expense of $50,000. We are now required to directly expense the effects of stock based compensation expense, a non-cash expense item.

Interest income increased $41,000 to $49,000 for the nine months ended November 30, 2006 compared to the nine months ended November 30, 2005. Our present investment policy is to invest excess cash in short term commercial paper with an S & P rating of at least A1+.

Our net income was $473,000 and $114,000 for the nine and the three month periods ended November 30, 2006 as compared to $666,000 and $280,000 for the nine and three month periods ended November 30, 2005.

The Company's backlog of firm orders was $253,000 at November 30, 2006. All of these orders are deliverable before the end of the Company's current fiscal year, which is February 28, 2007.