Sono-Tek Corporation (SOTK) Q2 2027 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Sono-Tek Corporation fiscal year 27 midyear results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your touch tone phones. To withdraw your questions, you may press *2. Please also note today's event is being recorded. At this time, I would like to turn the floor over to Kirin Smith, with PCG Advisory. Please go ahead.

Thank you, Jamie, and thank you, everyone, for joining us today. Sono-Tek released their second quarter and first half fiscal 27 results this morning. If you do not have a copy of the release, please visit the company's website at www.sonotech.com and navigate to the Investors section. The product market and geography sales tables on the last page of the release will be part of today's discussion. With me on the call today are Dr. Christopher Coccio, Executive Chairman Steve Harshbarger, CEO and President and Steve Bagley, Chief Financial Officer. Before turning the call over to management, I would like to make the following remarks concerning forward looking statements. Please note that various remarks that may be made on this conference call about future expectations plans and prospects for the company constitute forward looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 2 thousand. Actual results may vary materially from those indicated by these forward looking statements. As a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call. As a reminder, this is our second quarter and first half call for the period ended 08/31/2026. Our next call will be our full year fiscal 27. Update for the period ended 02/28/2027. And will be held in May 2027. I would now like to turn the call over to Christopher L. Coccio, Executive Chairman of Sono-Tek. Christopher, please go ahead.

Thank you, Kirin, and good morning, everyone. You for joining us today to review Sono-Tek's fiscal second quarter and the first half 27 results. Steve Harshbarger will review the operational performance and business trends and then Steve Bagley will provide more detail on the financial results. The first half of fiscal 27 represented solid progress for Sono-Tek. With revenue growth, meaningful gross margin expansion, and improved operating profitability. Our balance sheet also remains very strong with no debt. Our results also reflect an important shift in the composition of our business with particularly strong growth in the medical market and increasing demand for higher value production systems. Now for the first half, revenue increased 6% to approximately 10.9 million gross margin expanded to 55% compared to 51% in the prior year period Operating income increased 41% to approximately 1.28 million and net income increased 22% to approximately 1.1 million. The medical market sales increased 289% to approximately 7.1 million The medical market continues to be an important growth driver for the company. We are seeing customers increasingly move from process development and qualification toward commercial manufacturing. Where Sono-Tek's precision ultrasonic coating technology can play a critical role. At the same time, we continue to see opportunities to expand our installed base and our relationships with customers as their production requirements grow. I also want to highlight the significance of the recent orders we announced from an existing alternative energy customer. We recently announced 3 orders totaling approximately $7.2 million which covered 10 production scale systems and represent the largest aggregate co. Customer order in Sono-Tek's history. What is particularly important about this order is that it represents an expansion of an established customer relationship The customer has successfully deployed our technology in an alternative energy manufacturing process. It is now expanding its use of Sono-Tek production systems across 3 geographic locations. that is a good example of the long term opportunity we see across our business. Supporting customers as they move from development into higher volume manufacturing and then expanding our relationships as their prospects scale. Together with the more than $3.6 million medical diagnostic production line order, announced in August. These programs alone now represent more than $10.79 million of backlog with the majority currently expected to be delivered in fiscal year 28. Importantly, these opportunities involve different customers and 2 distinct growth, medical devices and alternative energy. While the timing of individual production system orders can result in variability from quarter to quarter, we believe that increasing scale of these opportunities demonstrates a long term potential of our technology and our customer relationships. With that overview, I will turn the call over to Steve Harshbarger, our CEO and President. Steve?

Thank you, Christopher, and good morning, everybody. As Christopher highlighted, we had a solid first half with continued progress across several important areas of the business. Our results reflected strong medical sector demand a higher value production systems, improved gross margins, and disciplined execution across the whole organization. For the first half, revenue increased 6% to $10.9 million while gross profit increased 14% to approximately 6 million Gross margin expanded to 55% and operating income increased 41%. Perhaps most importantly, we continue to see our encouraging demand for our technology and applications customers are moving beyond development and into production. The medical market was the largest contributor to our first half growth, Medical sales increased 289% to approximately 7.1 million, and demand was driven by continued activity in drug eluting balloon coating systems, specialty stent applications and other medical device coating applications. We are seeing increasing adoption of our technologies as customers move from development and qualification into commercial manufacturing. That transition is really important because production applications evolve larger, more sophisticated systems, and they can create opportunities for follow on equipment services, and additional production lines as customers' volumes increase. From a production perspective, multi axis coating systems were a significant contributor to our first half growth. Increasing approximately 50% and that was driven primarily by specialty medical coding systems. OEM systems also increased approximately 67%, and that was supported by demand from our European fluxing OEM partner, and a China based semiconductor OEM customer. Inline coating systems declined 14% for the first half and that is primarily reflecting the difficult comparison with the prior year when we had 6 high ASP systems that were totaling about $4.4 million that were shipped. So while product line results can vary significantly based on the timing of these larger high ASP system shipments, the underlying demand for high value production platforms remains very encouraging. We also saw continued improvement in our industrial business which increased approximately 156% during the first half. And that was influenced by an optics related shipment to the defense sector. And this defense sector is going to be an area that we will continue to put increased focus on in the coming years. Alternative energy in the first half reflected reduced demand associated with changes in government policy and spending, and that was related to green hydrogen, electrolysis and fuel cell electrolysis and fuel cell applications. However, we continue to view alternative energy as a meaningful long term opportunity. And our recent $7.19 million order announcement that Dr. Coccio just touched upon earlier is a very good example of why we continue to believe in the long term potential in this market. These orders are from an existing customer that has successfully deployed Sono-Tek technology in an advanced clean energy manufacturing The customer continues to expand that deployment into additional production lines across 3 geographic locations. The 10 systems are currently expected to ship primarily during fiscal 28. This continued expansion demonstrates the strength of our business model where successful process development leads to high volume manufacturing opportunities and additional orders as our customers expand their production capabilities. On August 31, our backlog was approximately $9.5 million and that is up 23% from the end of the fiscal quarter. Now since quarter end, the 3 new clean energy auditors totaling $7.19 million have substantially increased our backlog in Q3 FY 27. A significant amount of this backlog is currently expected to ship in fiscal 28. Importantly, the recent alternative energy orders as well as that previously announced medical diagnostic production line order that was more than $3.6 million represents 2 different customers in 2 distinct markets. And with approximately 5 months or so remaining before fiscal 2028, we still have additional time to build upon this backlog even further. Now turning to our outlook, we are reiterating our expectation for flat to modest revenue growth for this current fiscal 27. And as we have discussed previously, the timing of several large production systems orders can create variability for us from quarter to quarter. At the same time, we continue to see encouraging demand particularly in medical devices and by the increasing value and scale of these systems we are supplying. Our focus remains on supporting our customers as they move from development into commercial manufacturing, expanding our installed base and continuing to invest in engineering, application development and commercial capabilities. The recent record order activity also gives us increased visibility into fiscal 2028 while we continue to pursue additional opportunities across medical, microelectronics, industrial, and alternative energy applications. And lastly, our balance sheet remains pristine. With cash continuing to grow and no outstanding debt. Positioning us really nicely for further execution on our growth strategy. With that, I will now turn the call over to Steve Bagley, our CFO, for a financial review of the results.

Very good. Thank you, Steve, and good morning, everyone. I will begin with some additional detail on our financial performance for the second quarter and first half of fiscal 27. For the second quarter ended 08/31/2026, total revenue was approximately $5.23 million compared with $5.16 million for the prior year period. And that is an increase of 69 thousand For the first half, revenue increased 6% to approximately $10.9 million and that compares with 10.3 million in the first half of fiscal 26. The first half increase was driven primarily by the significant increase in medical market sales and higher sales of multi axis and OEM systems. Gross profit for the second quarter approximately $2.8 million and that is the increase of approximately 7% from the prior year Gross profit margin was approximately 53% in the second quarter primarily reflecting an unusually favorable product and geographic mix. For the first half, gross profit increased 14% to approximately 6 million while the gross profit margin, expanded to 55% and that compares with 51% in the prior year period. The improvement in gross profit margin reflects a favorable product and geographic mix including a higher contribution from medical systems and other higher value production equipment. Now gross margins can vary significantly from period to period based on a specific system shipped customer and geographic mix, distributor involvement installation requirements and other factors. Accordingly, the gross margin levels achieved during the first half of fiscal 27 should not necessarily be viewed as indicative of margins expected in the future periods. And now a review of our operating expenses. Remained well controlled as we continue to invest in the business. Research and product development costs increased in the second quarter fiscal 27 to increases in employee health insurance, R&D materials, and other engineering expenses. For the first half, R&D costs remained steady at approximately 1.3 million compared to the prior year. As the costs I just mentioned were partially offset by decreases in some salaries and supplies. Marketing and selling expenses increased in both the second quarter and first half of fiscal 27 due to increases in salary related to our sales application lab our forward-deployed engineering, group, employee health insurance, and trade show expenses. Now our sales and marketing costs are variable and a large portion of the costs are dependent on trade shows and where geographically our sales are generated. General and administrative expenses, increased in both the second quarter and first half of fiscal 27 due to increases in salaries, employee health insurance, corporate expenses, stock based compensation and legal and accounting fees. Our operating income for the second quarter decreased by 9% or 39 thousand to $382 thousand due to an increase in operating expenses However, first half operating income increased 41% to approximately 1.28 million compared with approximately 905 thousand in the prior year. And this improvement reflects the combination of higher revenue, improved gross margin and disciplined expense management. Net income for the first half increased 22% to approximately 1.11 million compared with approximately 909 thousand in the prior year. Our balance sheet remains very strong And as of 08/31/2026, cash and marketable securities totaled approximately 17.7 million and that compares with 14.8 million at the end of fiscal 26. And we continue to have no debt strength of our balance sheet provides us with the flexibility to continue investing in the business support working capital requirements associated with larger production system orders and pursue opportunities to expand our capabilities. Now as Steve discussed, backlog at August 31 approximately $9.5 million representing a 23% increase from the end of the first quarter. Following quarter end, we received 3 additional orders totaling approximately $7.19 million Now those orders, together with the previously announced medical diagnostic production line order of more than 3.6 million significantly increases the backlog heading into fiscal 28. Overall, we believe that our balance sheet and backlog position the company very well as we move through the remainder of fiscal 27 and prepare for our next fiscal year. And with that, I will turn it back over to Steve.

Thank you. Thanks, Steve. To summarize, we believe the first half demonstrated continued progress in the business. We delivered revenue growth, meaningful gross margin expansion and stronger operating profit. While the medical market continued to be a significant growth driver. At the same time, we are seeing increasing evidence of customers moving from development into commercial manufacturing, which can create opportunities for larger and more sophisticated production systems. Now this recent record clean energy order is an excellent example of this progression and together with a medical diagnostic program, provides significant early visibility into fiscal 28. You know, our priorities remain super straightforward. You know, execute well for our customers. We can continue expanding our installed base and invest selectively in our technology and commercial capabilities and capitalize on opportunities in microelectronics, medical, industrial, and alternative energy applications. With that, we will open the call for questions.

And at this time, we will begin the question and answer session. To ask a question, you may press *1 on your touch tone phones. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press *2. Once again, that is *1 join the question queue. We will pause momentarily to assemble the roster. Once again, that is *1 to ask a question. Our first question today comes from Bill Nicklin from Bill Will Insights. Please go ahead with your question.

Hey. Good morning.

Good morning, Bill.

All right. Thanks for taking my questions. It looks as though the majority of your high-ASP orders are coming from opportunities where you become fully integrated into your customer's production lines? You think that is a fair assessment and maybe there should be some kind of a breakout going forward to show that these are integrated orders because it appears to me that the integrated orders create kind of a flywheel effect where you can get a new customer, but then you get these continuing orders without getting a new customer. So I wonder if you would comment on that and kind of how it affects your outlook for the next months and years?

Sure. Sure. You know, it does because it certainly makes a difference of where we are going to be putting our investments. You know, we have a substantial amount of cash as you know on hand. And I think there is a couple of areas where we will continue to invest as our business grows and our financial position strengths. First, I should point that, you know, people are always asking, where are you going to put that money? And on the acquisition side, we continue to have both inbound and outbound activity. And that is really nothing new for Sono-Tek, you know, giving the nature of our business we have always had companies approaching us, and we are always going keep an eye on opportunities, you might say, for potential opportunities. But I would say that activity certainly has picked up in that area for our business and is certainly gaining momentum there. And I certainly want to emphasize, though, that we proactively continue looking at acquisition opportunities we are really focusing only on companies that we really know very, very well. And these are areas where we have a great understanding of the markets in the business. We are not looking to venture into areas too far away from what is our core understanding. But probably the more interestingly is where we are going to look to invest organically. And that kind of goes back more to the core of your question. The core ultrasonic technology business that is the foundation of the business and we will certainly make unique investments there. But over the last several years, we are really starting to put a much greater emphasis on expanding our systems integration capabilities, which is what you were just talking about there. You know, particularly through our forward deployed engineering team. Or that, FDE team as we call it. And what this team does and it does it with excellence it is really to work very closely with customers to take our existing ultrasonic technology and integrate it into much larger, more sophisticated production platforms. And that is been a really important change in our business. You know, instead of just like selling, say, a coding system, we are increasingly providing a much more complete production solutions And of course that translates then into significantly higher ASPs higher average selling prices, basically. And what is exciting for us I think there is now that we have proven this model works finally. We are seeing that these large production platform orders coming our way more frequently. And we believe our investments in the integration and capabilities are really a big part of that reason why And just to give you an idea of our commitment here, you know, 2, oh, maybe it was 2.5 years ago, I should say, Our FDE team consisted of just 1 person, And now today, we are up to 4 people on that team. And I would expect us to continue expanding capabilities over the next year or 2. And there is another really important reason why we are putting more resources in that particular area and that return on investment. When we invest in developing the next major innovation, say in our core ultrasonic technology, in areas like that. It can take, I do not know, 5, maybe 6 years before that investment really starts having, you know, a really meaningful impact on our business. But we invest in our integration capabilities that what we find is we can start seeing a meaningful return in as little as maybe just 1 or 2 years. that is a pretty significant difference in my opinion. So and again, do not get me wrong both types of investments are very important to us. And we certainly take certainly not do not back away from developing in the new ultrasonic coating technology area. But I like the idea of our decades of investment that we have already made in our ultrasonic coding technology with this strategy. Leveraging that is super important to us. So we are not necessarily having to invent something new every time we want to grow. You know, we already developed something really pretty remarkable technology. And now we are really investing in the engineering capabilities that allow us to take technology into much larger production platforms. And what we are finding is that these investments are showing to generate a return much more quickly than say a typical traditional R&D investment from us. So we are really getting more commercial value out of the technology that we have already spent these decades of time developing. And I believe that is going to be 1 of the most important investments areas for Sono-Tek over the next few years for us. I know that was kind of long winded, Bill, but hopefully, gave you a little bit of an overview.

You touched on a couple questions I have not even asked yet. that is pretty good. Yeah. So in my mind, if you look at these larger integrated orders, it is really an indication of like a flywheel effect where, it is not like you have to go out and get a new customer, each time you wanna get an order. So, your FTEs are out there getting new orders. But they are also working with customers where as your customer expands, they pretty much have to come to you. You are getting a double effect. You are getting a new customer, but then you are getting, this follow on business because if you are integrated with their manufacturing, the odds are if their manufacturing grows your orders are gonna grow.

that is that is exactly right. And this last order that we just announced for $7.2 million is really a prime example of that. You know, that is a customer that we walked through in the R&D phase very successfully and in the pilot line phase. We developed a really sophisticated high volume production system for them And that system sold well, they loved it, but it does not end there. You know, as that customer has success, the orders keep coming because every production line that they build, you know, we are attached at the hip with them, you know, because we are their quoting expert. So, it really changes our business model significantly start having customers like that where you would have these integrated partners to you.

Good. Following on that, back to the. Your whole forward deployed engineering strategy. I think you said you had 4 full time forward deployed engineers now. What might you have a year to 18 months from now? And what does that indicate about the momentum you see in your business?

Yeah. Well, now that we have proven the model is successful, you know, the. it is now-- there is no doubt about it now. You know, we put the first guy in there. It worked really well. Then we doubled it to 2, and then we doubled it to 4. And I should say it is 4 people in total. there is 1 support technician in there with 3 actual 4 forward-deployed engineers. That we have proven that model works for getting these significantly large orders. And now we are going to be doubling down on that. You know, that we are going to be continuing to add this more personnel into their continuing to make that bet because there is still the demand on the demand side that is pulling us there. So as long as we see our customer base pulling us into that area and wanting it, and desiring it, there is no reason for us not to double down on that. So, you know, we have not really said exactly how many we are gonna be hiring there, but I would not be surprised to see that team doubled in another year or 2, maybe even quicker. The challenge for us there is mostly that these are really skilled, experienced people with our technology and how to do integration. So finding them is always a little bit of a challenge. But, you know, we have some great guys in that area that I think are in the pathway to join that team.

Great. That sounds promising. I appreciate it. Thank you.

Good chatting, Bill. Take care.

And our next question today comes from Dick Ryan from Oak Ridge Financial. Please go ahead with your question.

Hey. Morning, Dick. You there? I was break.

I had a bad Mister Ryan, it is it is it seems that your line is breaking up. If you could give us a callback, disconnect, and rejoin, we can get you back in the question queue. And our next question does come from Ted Jackson from Northland Securities. Please go ahead with your question.

How's it going, Ted?

Could not be better. I love these days, know, reporting season and companies are doing well. I got a few questions. I wanted to start out just with the medical market. You know, you have had a lot of success there. You know, the company, its initial success was really in the coating of stents and kind of done 2 things within it as you, you know, upped the game in terms of the kind of systems you sell and the ASP to them, and then you have expanded into you know, the balloon market. And I guess I am curious, do you see additional opportunity in these balloon. You know, these are blood. You know, these medical balloons do you see different applications beyond the 2 that you had the success with and what those might be And do you see-- I am guessing-- So I guess I am asking, is there an opportunity for you to expand the customer account with regards to, you know, this newer, you know, balloon opportunity? And then maybe some discussion about you know, other things where you feel you are well positioned. I mean, I think things like implants and such would be logical. So that is my first question. Thanks.

Sure. it is a good question because the medical markets really evolving for us quickly these days. You know, what basically happened is we gained all this high volume production in the clean energy sector and that was primarily in the electrolysis area for things like fuel cells. And as that market started to shift with government policy and slow down for us in that particular sector, we have immediately then shifted resources over to the medical sector and what that allowed us to do is to take product lines like this developing balloon drug eluting balloon product line that we make machines for. And could develop a system that was much more extensive and had a lot more capabilities than say like our stent coding system. When we first started going into the stent coating market we sold relatively small systems because that was what our capability we had internally at that time. So, we were selling maybe $75 thousand to $100 thousand systems. Entering into the balloon market, where we now have a lot more capabilities internally to offer the customer a much larger package that had a lot more offerings to it. All of a sudden, the ASP of these machines took up off much higher. So they were more in the $250 thousand to $300 thousand area. The customers wanted that, really. They would have even liked to have it back in the days for stent coating market, but we did not have that capabilities at that time. So as we enter into DEB which is, I have to say, somewhat-- it is-- I would not call it its infancy, but it is coming out of its infancy. This is a market that is really maturing right now that we are what I would consider the industry leader for coating drug eluting balloons, the largest companies in that area pretty much use Sono-Tek machines for that process. Not everyone, but a good chunk of the major ones use us for that process. And I think there is a lot of a lot more road ahead of that. You know, that when we look at their forecast from our customers, if things go as they plan, we should be able to continue to support them as they add on additional manufacturing lines. And that is their intent in the future for most of our customers in that particular market. what is probably more exciting for me, though, is that most of these companies that make the drug eluting balloons or make the stents also make other medical devices as you have indicated. You know, they make whether it is heart valves or, meshes internal meshes that go into the body or diabetes devices. So many of these devices now need thin film coatings onto them to prove some sort of functionality. And Sono-Tek is no longer now being considered say, a stent coating company. Now we are being considered a medical device implantable company. And 1 that has the capabilities for high volume production, and it is proven. I know our customer base sees these press releases out there and they know we are shipping to the largest medical device companies in the world and they see that we are a financially stable company and so, it brings us huge amount of credibility. So, customers that would not have necessarily come to us in the past now have a very high level of confidence coming to us with their next gen medical device to bring it into our lab, prove it in. And that is something we have happening on a weekly basis here where somebody is bringing their next gen medical device in and proving it in. And as those get proven in they will prove their R&D sector and then they will go through FDA and then they will be in the full line. And that is where we start to really see the benefit of selling multiple machines at high ASPs. Well, it is pretty exciting.

Yeah. it is definitely. it is super exciting. I mean, to see the to see what you hope for actually happening is super exciting to see that actually go through successfully. And then, it ties into this, I think, somewhat, but you talked a bit in your prepared remarks about a lot of excitement in developing markets and new things that were coming Is that excitement that you are seeing in the-- that is driving that commentary from you greater than these newer opportunities in the medical market maybe use some discussion on other areas where you are seeing where you have some enthusiasm. I know in the past you kind of bounced around some of the next gen display stuff, but maybe some color with regards to what your excited about for new markets that Sono-Tek really has not tapped yet?

Yeah. I mean, there is most definitely a plethora of new applications that are outside of what we have announced. You know, as an example, like the defense has a lot of applications that are out there that we can have a nice fit into. The micro electronics sector, including semiconductor, has a lot of nice applications. And then there is a lot of them that are what I would describe as a little bit more in their infancy but have huge upside potential like we have spoken before, like the micro LED markets or the insulation market for conductive coatings. These are all areas that companies not just Sono-Tek but other associated companies are putting many millions of dollars of investment into this. So if you are making, say, a large cell phone company or a display company, They all have these very active and expensive R&D programs which Sono-Tek is now very often part of. And they all will not be home runs. But the ones that are successful we are more than likely to be the chosen technology because we are the 1 that is proven on the R&D and pilot line level. And when they pull the trigger to go to high volume it is sometimes difficult for us to predict because it is not within our control. This is the transition of developing the whole product and bringing it to market. But when they do it, we see the benefit. And now we are starting to see that happen with many our customers. Things that we were working on 2, 3, 4 years ago, all of a sudden, it is got their approvals, they have got whether it is a large phone manufacturer or a TV manufacturer who said, yes, we are gonna make the switch to this technology. And Sono-Tek will be the standard. So it is spread over a large breadth of industries but the concept of us getting in on the R&D level proving it, making it work well, building a relationship where the customer were attached at the hip, and then transitioning to high volume production is the real strategy. And it is almost always focused on the high-tech industry sectors primarily. that is really where we are putting our focus in.

Okay. And then my final question. Just to refresh on the capacity in your current facility. I know you have gone through a number of expansions and sort of restructurings to bring it up. Like, where do you stand with regards to what you can produce out of your current footprint? And how long do you think that will last?

Yeah. The. We are intending to start a major we consider a major expansion at the end of this current calendar year, it would be like December, maybe January. We will start actually making things happen there. I actually have a meeting tomorrow on this because it is with these latest orders it is kind of accelerated things to get things going quicker. And that will allow us to take our existing manufacturing footprint from approximately what we believe is around $27 million capped up to around $33 million to $36 million peak. Within our existing buildings that we are in today. And Intel is pretty much building up mezzanine structure and also doing some optimization, I should point out of our manufacturing flow. We are in several buildings, so optimizing flow of our manufacturing will really bring us some efficiencies. And following that we still have 1 building here on our campus that we do not occupy, and we have a very short term lease on it. Of which that will be the last phase and that would take us up to around $44 million to $45 million in manufacturing capability. And that is on the radar. We have a plan place for that. We have not started or implemented that, but we have a plan in place for that retrofit as well. Now due to this increased frequency of these large higher ASP orders now coming in, we do have to start thinking about, well, where do we go from 45 to get up to 85? You know? So, we have we are going to have to start that process coming up here in that planning phase We will not start the building phase or anything like that, but we will have to start that planning phase in particular because some of the orders coming in now it only takes 3 or 4 orders that are significant size that could require us to make a significant structural move for more space. So, we have got to at least have it on paper a plan in place to be able to take us to that next phase. But that will be something that I am looking forward to having that prepared for us it is not like the old days where if you got 2 or 3 more orders, it did not make any significant difference. Now if we get 2, 3, 4 more orders of these multimillion dollar systems, it all of a sudden makes a big shift in our outlook.

Okay. All right. Well, thanks for taking the time to answer my questions.

Hey. Good catching up, Ted.

And our next question comes from Dan Dufault from Oak Ridge Financial. Please go ahead with your question.

Hey, Dan.

Hey, guys. it is, Sam. I am gonna field some questions for Sam.

How you doing, Sam?

Good. How are you guys?

Doing good. Thanks.

Yes. Congrats on the quarter. I guess my question, I will kind of leapfrog off Ted's question on the capacity side. You know, you mentioned mezzanine structure kind of building out some of that capacity. what is some of the capital requirement you guys anticipate spending to get this expansion underway?

Yeah. The, initial CapEx we had estimated at around 700 thousand of which we are optimistically thinking that we are probably going to get New York State to be able to participate maybe with, oh, 150 thousand to $200 thousand as part of that. that is just for that initial mezzanine phase, Sam. Then for retrofitting the next building, which is the building we do not occupy, that will also be somewhere in the area of about a 600 thousand CapEx investment. So it is not huge dollars, but it is significant enough that we want to do it at the right timing for us here. And of course, the first phase is going to be underway no matter what that is kind of a decision that we have already said we have to do it. there is no choice.

Got it. And do you think or anticipate the state helping out with that phase 2 at all or mostly just on the Phase I for now?

I would hope they would. I mean, that. You know, as we grow, and in particular, as we start thinking getting from the 30 to 40 and then 40 to 80 type of model. That we have to at least consider other options outside of New York State we have also already look. Been looking and talking to places like South Carolina. there is a lot of very attractive incentives to manufacture outside of New York State as at least an expansion like so maybe we would have 2 locations. And so with those incentives, I would hope New York would give us at least close to equally attractive incentives to encourage us not to leave and set up manufacturing in a less expensive area. But know, we have to do the responsible thing and look at both options. And then from there, we will make a final decision. So, I think that we will continue to see state sponsorship or contributions, I should say, whether it is in New York or alternative states, I think we will see contributions to help our expansion.

Got it. And then on the margin side, I mean, you guys seen some elevated gross margins over the last few quarters. How much of that can you attribute to whether it is selling mix versus some advantages now with the higher ASP machines?

Yeah. It. it is a little bit of both, but I think the most significant impacts we see there is we are finding on these high ASP production machines that we the value we bring is very significant and that is in the application's expertise and all these additional things were added able to add on for the capabilities of our machines. And the customers are willing to pay for that increased value. So they definitely drive higher ASPs, but we are and better gross margins, but where it really starts to impact the gross margin is not on machine #1. it is on machine number 2 through 15. You know, they. We. By then, we start to optimize the costs after machine number 1. We can really start to drive margins higher. So, repeat high ASP machine orders are kind of the best case scenario. Scenario for us. And it just happens to be that a lot of those at least initial customer wise, are ending and landing in The U. S. Marketplace. A lot of our customers are been on shoring recently, especially these high-tech accounts. And that certainly is not a bad thing for Sono-Tek because our costs become better from a standpoint of eliminating distributor discounts to take place when they go overseas that very often happen. So, it is definitely a promising thing for us and that is going to be nice for us heading forward. You know, the. These last orders announced that are gonna be shipping in fiscal 2028, that $7.2 million as already disclosed, that is REAP repeat orders. So they should come in at nice margins for us with relatively low install costs and so forth.

Yeah. That was gonna be my follow-up You given the order you know, with the follow on orders in the you know, green energy side. So can you maybe allude to or, you know, provide some commentary on margins going forward, whether it is 2028 or kind of you know, the current levels are sustainable or there is room for growth going forward?

Yes. You noticed probably in our commentary, we cautiously worded our margin expansion over the last 2 quarters. And that was intentional because we knew we had some high ASP margin systems that were shipping to U. S. And then we had some really excellent gross margins that came out Q1 and Q2 as a result of that. And that probably the coming quarter maybe not quite as attractive because we have those same high ASP systems in them. But what is exciting is what is flowing into our backlog is again more of these high ASP, high volume production systems. So what is we are describing as unusually favorable right now Optimistically hoping that we take that unusual away as things go forward and we start to get more and more orders that look like those orders where it will not become unusual anymore. We will have to see how that all plays out, but that would be what I would hope to anticipate is more of that type of orders reaching us high ASP repeat orders where we are able to optimize the costs. Reaching us more commonly so it does not become the unusual. It becomes the norm, hopefully, but we will have to see how that all plays out.

Got it. Well, appreciate the commentary. And, again, congrats on the quarter.

Hey, thanks, Sam. Good talking to you.

And our next question comes from Greg Weaver from Invicta Capital. Please go ahead with your question.

Questions here.

Good morning, Greg.

Hey, Steve. You touched on this a bit with your answer to Ted's questions, but maybe I will put a finer point on it. Could you characterize your visibility on your medical business? Can continuing at these nice levels given the noted commercial manufacturing transition?

Yes. I can say that the level of I activity in our labs and the level of activity with our FDE team, the forward-deployed engineering team. Is very high. And that is both for existing successes that we are actually out there implementing as well to expand upon those with more production lines as well as new products that are coming into the mix, which then would have the potential to mature into something where it becomes significant with multiple lines, high volume manufacturing. So the medical side is continuing to be 1 that is really progressing very nicely for us. it is been exciting to see that we had this success with Alt Energy making that transition very cleanly. Now we are making it happen very successfully. In the medical side. But I would like to see that continue next on to the microelectronics side. I mean, we have some pretty large systems in the microelectronics side, but I think they could become significantly larger also. So it is kind of taking 1 chunk off at a time for where we have the most expertise in those areas, but we are gaining that expertise very quickly because of that new forward deployed engineering team that we got some really smart guys in that area that know their business.

Excellent. Alright. Yeah. You have you have filled that giant hole the alternative energy there nicely, but it does not show on the top line, but you can see it in the segments for sure. How about kind of related to that, on the spares and repair side of things, you are on the spot $4 million-ish run rate right now. But I guess with transition of these larger production systems, you think there will be a pickup in that business as especially some of these medical systems come off warranty?

Yeah. That. We just actually had this conversation yesterday and that is part of what is exciting about these high volume multisystem border going out there in the field I think we will see 2 significant things happen. 1 is high volume production orders first. They. These machines cannot be down ever. it is not like an R&D machine. So having things like calibration contracts and service contracts in place are much more likely to be welcomed because there is a higher level of criticality to make sure everything is running perfect And even through government agencies like the FDA, there is a higher level of scrutiny to make sure that you have things like your machines calibrated which comes at a cost. So, we would anticipate as these machines fall out of warranty these newer high volume production machines that we will start to see a reoccurring revenue stream start to fold into our process. And that is been 1 of things that we have been spending a lot of time on is trying to get a real steady significant services related reoccurring revenue stream. And we are optimistic thinking that will be the start of something significant for us in the coming year as these machines start to fall out of warranty for us. And there should be also associated fairly nice spare parts business there also both are spare parts being kept on the shelf because they are critical lines that cannot be down. As well as just normal consumables that will wear over time. And because most again, these lines in general many of them run 3 shifts a day, 24 hours, you know, 7 days a week. So the wear on them is significant and over periods of time they should start to need replacement parts and support as well. So the larger the fleet we have out there in the field, the larger potential revenue stream we should see from services coming from that as well.

Excellent. Yeah. it is good to see a nice revenue base build up here. And I guess on that note, kind of, you have made a lot of investments over the past few years as you have kind of readied the business to do this rinse and repeat production orders. Larger systems. Could we talk a little bit maybe about what you foresee as operating leverage from this $22 million run rate? What should we think about as flow through for incremental dollars of sales? How much should we see go down to the bottom line?

Yeah. The. You know, I got to believe we are gonna see And, we will see how it flows up, I gotta believe we are gonna see some significant leverage here at least from this next phase from that 2022 to say $40 million area. There should not be a lot of significant extra cost there. So it is going to flow through. And on all honesty, I do not really know how far it is gonna flow through and how much of an impact it is gonna happen. But it is got to happen. I mean, we certainly do not need to be increasing cost for a lot of things here, you know, other than direct personnel building these machines. You know, we have got so much accomplished already there. And the 1 area though outside of that we will continue to really be investing heavily will increase our cost, would be in that forward-deployed engineering team, Eric. Because I just believe that is really a key aspect to having customers that are very attached to our hip and loyal to us, and they really recognize the benefit that we are bringing.

Sure. Yeah. it is definitely shown to be a good investment. Makes sense. And just 1 last 1 for me. You highlighted this optics order for defense and then kind of made a comment off the cuff about you were bullish on defense. Can you talk a little bit about what you are seeing there and the maybe what is the use case for this particular system you sold?

Yeah. The. This particular 1 is. I cannot say too much because it being a defense sector area, but there is lots of optics related technologies when it comes to flying objects. That they there. there is. They are all over it, and they all need sensors and, different type of, optics related things that have to happen on them. And we see that there is a market there. there is a demand there. it is growing. We see our technology has some really good fits for several of the applications. it is not an area that we presently, like, say, go to defense sector trade shows are market very heavily to it. Even if you look at our website, you do not see a defense sector chunk of our website which I suspect there probably should be something that we are more focused to that sector. it is kind of 1 of those ideal candidates for us. You know, we are always looking for markets that are high-tech, that are not so price sensitive. That can, you know, spend. We can get the margins that we hope for in them. And the defense sector certainly falls on that category. It may require us to do a little bit of work on some of our internal requirements of how we maintain and keep documents that defense sector requires some special compliances in that area. They are not they are all areas that after a little bit of investment, we could comply. So we are looking at that as well. So I would not be surprised and say, you know, another quarter so if you are like, oh, Sono-Tek now has a in another tab in addition to clean energy, microelectronics, and medical. Now they have a tab that says defense sector. And we will start advertising and focusing on areas that we know we have had some proven successes in.

Great. Appreciate that. Keep up the good work. Thanks.

Hey. Good talking.

Next question comes from Kirin Nairobi from Encore Holdings Group. Please go ahead with your question.

Hi, Kirin. You with us still?

Kirin, is it possible your phone is on mute? And we will move on to Jason Arasner from Bumbershot Holdings. Please go ahead with your question.

Good morning. Thanks for taking the questions, and, appreciate the calls getting long. So I will I will try to keep it quick. Yeah. Focusing for a second on the semiconductor and microelectronics side. I think I saw you guys are currently at SemiCon West, and then also going to SemiCon Europa. I do not really. You know, in defense, I kinda do not participate in the trade shows. I do not really remember you doing much participation in the events in semiconductors either in the past. So if maybe you could talk about that opportunity kind of specifically in semi. Is it entirely spray coating of photoresist? You know, or is it mostly the alternative substrates? 200-millimeter below, or are you also move in up to 300-millimeter wafer stuff? Sure. that is a lot of interest in optical components in semi as well as the phone. So just any kinda color there.

Yeah. Sure. there is there is. it is a very broad area for us. Broader than I actually recognize myself even when we first started jumping into it because in the beginning, I thought it was all photoresist. But what we are recognizing as we start to introduce products that are high volume manufacturing capable, all of a sudden we are starting to receive inquiries in areas that are outside of photoresist. And I cannot go into, unfortunately, to too much detail because there super tight lipped with confidentiality's and NDA's in this particular industry because this is usually on most of, like, the next gen chips that are being used, like, in the AI world. So they really tight lipped us on very much what do there. But we think there is both areas for our continued marketplace for photoresist both in 200-millimeter, which we are already attacking, but also making a shift towards larger 300-millimeter wafers and trying to bring that from the lab and low volume production area to the fab area. And that is that is gonna be our focus at Semicon Europe. Semicon West that we are at right now, we are not so much focusing on that because it is just a little bit too early, just a few months too early, but we will be focusing on that in semicon Europe. But I firmly believe there will be more applications outside of photoresist as well that may actually even pull us there into the larger 300-millimeter area, maybe even faster than the planned photoresist area. there is a lot of unique thin film processes that take place in that whole semiconductor manufacturing area. And it. All we need is to find 2 or 3 of them that are like, oh, that is a perfect fit for Sono-Tek and now it. And these are companies in general that would not have even asked us to be that fit if we did not now have the capabilities that we have today. Because they are not even interested in talking to somebody unless you have proven it that you can work in super high volume production. But now they see that all right, this company is made that transition where they can provide us the appropriate equipment if the application is successful. So, do have some things happening on the laboratory area to prove for high volume manufacturing. And that is the main thing that they want proof to transition into high volume manufacturing capabilities. And so, I think although that is it is not as short term say, like medical or Alt Energy, but I think that is on the horizon as maybe even the potentially largest sector for us to come in the future. it is just the 1 that we have kind of approached third in line here for our focus, but it is now coming up. Rising up to the surface for us here in this coming year.

And is it sort of process steps that are finally needing higher technology thin film kind of precision requirements, or is it process that sort of never existed before? And I guess it sounds like you do not quite have the pilot lines yet where you could see that progression. Similar with the solar customer where it could pull you forward into kind of production spending or the fab more quickly. It sounds like it is kind of maybe an inning or 2 earlier.

That. that is probably right. I mean, they are to the point where they would. Are saying, hey. Let us come to your lab, prove this works. And then Sono-Tek designed the machine for us to meet high volume production. I do not think we will have to go to the extent of, say, doing pilot line because we have had, I think, enough credibility now. That they would say, hey, just make us a production machines for this these sort of applications. But they do recognize that our technology is unique enough that they are able to do things that they are not able to do with their existing coding technologies. And that is I think the primary driver. So to answer your question whether it is new or existing processes, it is typically a processes that is not working that well for them. They are getting away with it, trying. But they are like, we really do not like what we are doing today. And Sono-Tek is showing them, oh, we can solve the headaches that you may have. And let us prove that to you.

And just in terms of timing, I guess my question a little bit is with kind of the highest technology edge of AI chips, stuff that is going at the data centers, kinda optical components, all that stuff. Things tend to move really quickly when a technology is kind of unique and solving a problem that has not? Is it I guess, how do you evaluate kind of the speed at which some of these could potentially turn into real opportunities kinda quicker or kinda not so fast.

I think speed for the next gen, like, next rev will be very quick to give us the thumbs up or thumbs down, like, that, hey. This meets the need. Speed in general for actual implementation once you have a proven known good processes does tend to be a little bit slower, believe it or not, in semiconductor industry where they tend to move very quickly on proven methodologies. And are a little more cautious on things that have been only lab proven or pilot line proven. So I suspect for a really significant impact we may be out 1, 2 years, maybe even 3 years for really significant impact for the point where saying, Hey, I want to buy 10 of these machines. To go into this fab. I think we could be looking a few years out But I think we will start to see some level of impact relatively quick from the standpoint of oh, we got our first machine in or we got the first couple machines in for this new processes. That we will be able to I think, get under our belt relatively quickly, meaning within, say, like a year or something along those lines.

Okay. And then just following up on the question you got on operating leverage Obviously, in the quarter and I guess the outlook for the second half of the fiscal year, you are kind of getting through this gap of you know, tougher order period, of you start to see this bigger resumption of growth in fiscal year 28? Obviously, it stepped up the marketing spend. I guess, it is around 1 million a quarter. You leveraged that up pretty nicely in Q1, kind of less so in this quarter and maybe the outlook presumably for the second half? Is this gonna be. You know, you have to carry that cost because you are seeing pretty significant benefits But are not gonna have the revenue at least for or 2. Is that kind of the right way to be thinking about it?

I think so. You know, the we are now starting to say, hey, let's in order to really accelerate things we have to start making some more significant investments prior to that. And we have got the money and we are profitable enough that we could say, hey, you know, double down on this bet. Know, like, if. Do you want. Really wanna only hire 1 or 2 guys this area when you could hire 4 and get the. A much more significant benefit in a year from now. So although the short term Q3, Q4 it may not be as attractive a margins as say like the earlier first half. But right behind that is going to be orders that we are anticipating will be higher revenue and it should based upon our existing backlogs looking like maybe better margin orders as well. And I am hoping that we will see more of that fall into the backlog of these high ASP, high volume orders which give really good gross margins. We still have a pretty good amount of time left in this current fiscal year to fill up next fiscal year. So I am hoping that we will see this we need to make these large high ASP orders not happen twice a year. We need to make them be happening every month. So that is that is our strategy that we need to get to that point.

And when and when you talk about the ASP progression and kind of the high ASP orders, I know I guess, in the past, you have sort of delineated it between orders less than 75 thousand kinda have that middle range, 75 thousand to 150 thousand and then the upper range of over 150 thousand Is the 150 thousand kinda still a good gauge of a commercial I guess, like, how do I square that versus a $7 million order Or, you know, is there kind of big r and d orders that kind of get lumped into the high ASP versus it sounds like what you are really trying to do is kinda move up into this system aggregator where you are, you know, much bigger orders than, let's say, a 150 thousand. So it is a bit hard to tell from that progression chart.

Yeah. You are right. And, you know, perhaps we should break out another segment in there of the 150 thousand to say 500 thousand and then have the 500 thousand and over possibly. Some of these larger orders like take this last $7.2 million order. that is 10 machines, but they are each around 700 thousand. So they are they are not even million dollar machines, but they are significantly large machines. And there is quantity 10 of them. And that is because it is a mature customer shipping a lot of machines. The order prior to that for $3.6 million was a single manufacturing line. And that is a customer that was buying machines that was around $7.8 million. And they probably could have been buying even back when we sold them $7.8 million machines. They could have been buying machines that were 3.6 million from us had we had the capabilities at that time. So in an ideal world, when that customer says, I want 3 or 5 machines, I do not know when that will be, You know, that is gonna be driven by their manufacturing needs that we will not be selling 3 or $5.07 or $800 thousand machines. We will be selling 3 or 5, $3.6 million machines. So continuing to drive that ASP higher is super vital for our strategy. And right now, what we are seeing is the high ASP orders are more coming in through like the mid-area, that $500 thousand $700 thousand single price ASP machine, but they are coming through for lots of them. Ultimately, we certainly would like to see those coming through for $1 million plus, maybe even $2 million plus order machines So that is going to be a super important part of our strategy to make those machines. Give that. Offer this customer so much capabilities and so much incentive to wanna buy the whole existing platform with as much as we can provide will be very important to drive the company's growth.

Okay. And when you talk about the capacity kinda going from that I guess, mid twenties to mid thirties to maybe using the last phase, mid-forties, and then you kinda have that next phase where you start talking about, like, 40 to 80 But when you think about the capacity versus the order when you are going from, let's say, a 700 thousand ASP machine to a 3 million because you are adding on various capabilities I am assuming a lot of those capabilities are things that your forward deployed engineering team is kind of aggregating together, but things you are not necessarily making in house. Is. I guess, how do you kinda square some of that with what you are talking about with capacity?

Yeah. You are. You hit the nail on the head. it is it is definitely not equipment that we are making say, the core components in house, but we are we are doing all the systems integration, which is very significant. And even more so, we are doing the application engineering process integration. So understanding, for example, what type of post cleaning process or after a curing process, you know, and how to do, say, a measurement machine in process and what type of measurement machine. So we are actually the FDE team becomes these experts in not just applying a thin film coating but it is how to measure the coating, how to clean product prior, how to cure the product after. So a very difficult challenging area unless you have that application to know how. So, no 1 really wants to buy those machines from somebody else other than Sono-Tek because we are the only 1 that is gonna prove to them that what we spec in will work for your particular coding need. And they are willing to pay a premium in order to get rid of that risk where they have to try to figure it out themselves. But it also then drastically reduces our time to be able to figure out how to make that particular product and become experts in everything. And for sure as we sell more and more of a particular expertise then we certainly would consider bringing it in house, but we certainly like we prefer to become experts in understanding it before we consider manufacturing it.

And our next question once again is Kirin Naiwara from Encore Holdings Group. Kirin, please go ahead with your question. And once again, Kirin once again, Kirin, it possible your phone is on mute? We are unable to hear you.

I am not on mute. But I am just. I hear you now.

Okay, Kirin.

I hear you, Kirin. How are doing?

I am good. Thank you so much. So I wanted to follow-up on the earlier discussions where some of the other people in the call have touched upon the go-to-market motion. Where, a, I think I would want to understand anything with the forward deployed engineers We said we have 4 available. I am curious if they are assigned by industry or industry agnostic. And then maybe a second quick follow-up to that is like maybe how many accounts or how many clients is each forward-deployed engineer associated with?

Sure. And I should specify there is actually 3 forward-deployed engineers, but 4 in the group. there is also a project manager that works with that forward deployed engineering team that helps to coordinate everything coming in. And that is the area where we are considering bringing in more of the forward deployed engineers. And these are guys that have in-depth experience in both ultrasonic coding, but also equipment integration and the processes. Most of them have gone through the area of the application engineering area for many, many years. It would be common for a mature proven application, something that we consider, this has got high priority for it to shift from our existing application engineering team, which has typically already proven things in the lab for the customer. And then they say, listen. This group is now ready to scale. And we are going to then shift that customer over to the FDE team for them to show them how we can scale into production for their requirements. And it would be typical for them to work on maybe 2 to 3 major accounts. That are. And possibly that are orders in house to some level. While also feeding in every month, maybe 1 to 2 other proposals that they would be putting together for new potential customer. So they might look at a dozen things or maybe even 2 dozen things potentially per year Some of them only may be taking a day, but some of them stretching over several months. Maybe even a full year for a very big 1. So for example, this last $7.2 million order, that engineer there, he has been working with that customer, on and off probably 25% of his time for 3 years. And that customer has given us, oh, in the area of now $14 million of orders, something in that area. And we anticipate and hope for more orders from that customer also. So he will probably actually always be into that account 25% of his time as long as the is still moving forward with us. So, it is not a huge group and that is why it is critical that as we start to see and get pulled in by enough customers where we say oh, we could really use 2 more forward deployed engineers. it is really very easy bets to make. I mean, they are they are low risk bets. For us to say big return. And so far that strategy seems to be working nicely.

Okay. Then quick last question. So it is a good job. You forward deployed engineers that are reporting to the project manager. And who is the project manager reporting to.

Yeah. So the project manager is more coordination for the forward-deployed engineering team. They are. he is it is kind of a support role, I would describe it, for the forward deployed engineering team so they can be spending their time on the really hardcore technical stuff where the project manager is more likely just to coordinate how we are gonna be deploying what the forward-deployed engineers has already decided. And 1 more time with the question there. I apologize, Kirin. I take care.

I just want to understand the reporting structure. Right? Because I think that at least what was missing from me from the discussions that I have had is that it seems as if maybe there might be an information flow gap between the forward-deployed engineering team and maybe, like, sales in terms of being able to predict or understand when the orders come next? I am trying to understand that reporting. Yeah. Yeah.

Sure. So the forward-deployed engineers, they report to our application engineering manager who actually manages 2 teams. He manages the application engineering team. Which is, again, those are the guys that are taking orders into the lab proving it primarily on the R&D level. And feeding it back to the customers for R&D machines and then he and. With consulting with the sales team, will make a decision and say, hey. This is a significant opportunity that is ready to shift from R&D to production. And then they feed it off to the forward deployed engineering team. And then once it treats the forward-deployed engineering team and if it does turn into an order, we actually then have another team that comes in and says, alright. This is gonna be a significant production system going through our processes. So we have to then get, you know, the quality system in and everybody else from a manufacturing standpoint of how we are going to build the machines and how we are gonna do it at a economical cost, of course.

Okay. Thank you. Thank you so much.

And nice talking to you, Kirin.

And with that, we will be concluding today's question and answer session. I would like to turn the floor back over to management for any closing remarks.

Sure. Let me just see here. I apologize. Long conversations there. I just want to thank everybody today for joining us. I hope you enjoyed the conference call. And we look forward to updating you again at the end of the fiscal year. And thanks again for everybody that joined the conference call. Take care.

And with that, ladies and gentlemen, we will be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.