Q2 2024 Sono-Tek Corp Earnings Call

October 12, 2023

Okay.

Good morning, and welcome to the Sony Corporation midyear fiscal year. Its one each money for earnings conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Stephanie Prince from P. C. G Advisory. Please go ahead.

Thank you Andrea and thank you to everyone joining us today.

Check released their second quarter, and first half fiscal 'twenty 'twenty four results pre market. This morning.

Don't have a copy of the release. Please go to the company's website at Santa Checkmark Com and click on the press release news tab in the investors.

Product market and geography sounds tables on the last page of the release will be part of today's discussion.

With me on the call today are Dr. Chris coaches, Unattached, Chairman and CEO , Dave Harshbarger, President and C O L and Steve Bagley Chief Financial Officer.

Before turning the call over to management I'd like to make the following remarks concerning forward looking statements.

[laughter] Disney plus.

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.

Private Securities Litigation Reform Act 1995.

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.

C C.

<unk> assumes no obligation to update the information contained in this conference call.

Now I'd like to turn the call over to Chris That's your chairman and CEO Scott Chris.

Good morning, and thank you Stephanie and thank you everyone for joining us.

They're ever going to discuss our second quarter and first half of fiscal year 2024.

That were released this morning before the market opened.

I will begin with some opening remarks, and then Steve Bagley, our Chief Financial Officer will provide a financial review.

Harsh Gardner President and CEO will then go through the business and operational results.

Following his comments, we'll open the call for your questions.

As a reminder, solid tech currently holds two earnings calls for fiscal year. This is our midyear call for the six months ended August 31.

2023.

Our fiscal year ended February so fiscal 'twenty 'twenty four will end on February 29 2024.

And our next earnings call for the 12 months of fiscal 'twenty 'twenty four will be in May of 2024.

That was many of you already know sinopec developed evolutionary method of applying thin film <unk>.

Coating several decades ago.

The proprietary technology involves the use of our advanced high frequency ultrasonic novel.

Incorporated into specialty emotional control systems.

And these are able to achieve uniform micron and Adam didn't coatings onto our question as products are.

Our solutions offer dramatic savings in raw material water and energy usage and our environmentally friendly therefore now the first one.

The advantage of our ultrasonic coating systems.

The ability to apply precision thin films, which are vitally important in today's world with thousands of products and micro components now requiring a functional or protective coating to be added to that.

The strategic shift that we made several years ago to offer more complex complete solutions has meaningfully broadens our addressable market.

It resulted in significant growth in our average unit selling prices.

Excuse me, our larger machines now carbon myself over $300000.

Those prices can reach $1 billion or more which significantly impacts our quarterly revenue.

This is what happened in the second quarter. When we finally were largely free of the supply chain constraints that held back our sales growth over the past year.

We reported our strongest quarter ever.

50% higher than a year ago and ahead of expectations. We shipped one of our newest multi access systems valued at over $1 1 billion.

In addition to new orders.

Sales reached 564 million.

Now in addition to the high sales backlog still increased 26% from the end of our last fiscal year six months ago.

$10 7 million the highest in our history.

This growth was due to our strategic.

Our strategic shift to large complex systems and platforms and also our focus on opening new markets right.

Film coating technology.

This includes three main areas with very strong global growth that we've talked about before microelectronics semiconductors.

Medical devices and alternative or clean energy, we serve these industry sectors for many years and are continuing to advance our products and our system solutions. In these areas was the latest generational technology.

Clean energy, including fuel cells green hydrogen generation carbon capture and advanced solar cells, our markets, we've been providing R&D in quite a while so close to a decade.

Having a lot of success with these customers transitioning.

From production to production scale systems as a result.

Prior R&D and process development work, they did with our experienced application engineers.

Over the past year, we've announced nearly $6 million in large orders primarily from the clean energy, but also the medical sector.

The largest the most recent order is valued at 2.1 line.

And it's the largest order from the clean energy sector to date as well as the largest since all effects history.

These orders are among the first from our deliberate shift in strategy to large customized systems.

Although our proprietary ultrasonic atomization technology, where sinopec began more than 40 years ago remains at the heart of all of our system.

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We've been able to achieve this year through our own research and development work, which we consider to be our lifeblood.

The trigger increase in sales both in this quarter and to come.

A direct result of our investments in R&D with a strong focus on product expansion.

In the first half of the year alone, we've already invested 4.4 million compared to $1 million in the.

A year ago period.

To further support our growth and expansion for these large blackboard custom engineered systems, we've increased our head count by approximately 10%. This year, mainly in the areas of engineering R&D and sales engineers, we want to ensure that we stay fully staffed and I'm proud of our needs.

We're excited about the investments that they've begun to pay off.

Our outlook for growth has been greatly enhanced by the early success of our strategy.

Shift to larger more complex system for our production application for production applications with multiple repeat orders.

We're already working on the next generation of machines looking.

Looking ahead to the second half of this year, we're confident that shipments of previously delayed that new orders will continue to positively impact yeah.

We're expecting at least 25% year over year sales growth for fiscal 'twenty 'twenty four ending next February .

We expect that these also put us back on a pre build the COVID-19 kroeker.

Thank you now and I'll turn it over to C battery, our CFO who'll provide additional details on our financial results.

Thank you, Chris and good morning, everyone.

For the second quarter of fiscal 2024, net sales increased 50% to 5.64 million and increased 57% from the $3 6 million reported in the first quarter of this fiscal year ended may 31 2023 steep.

Steve Harshberger will go into more detail with respect to sales.

During the quarter approximately 43% of sales originated outside of the United States and Canada.

Paired with 56% in the second quarter of fiscal 2023.

Gross profit increased 48% to $2 8 million compared with the prior year period.

Gross profit margin was 49, 7% compared to 54% for the prior year period.

The decrease.

The decrease in the gross profit margin was due to product mix.

Operating expenses increased 30% to $2 2 million compared to one 7 million in the prior year's second quarter.

As Chris pointed out earlier technical head count increased approximately 10% across several areas.

Research and product development costs increased 56%.

$789000, primarily due to increased headcount and related salaries and the higher costs of research and development materials and supplies.

All of which are used.

Oh excuse me all of which are used in the development of new products for new and existing markets.

Marketing and selling expenses increased 22% to 945000 for the quarter.

The increase was due to increased headcount salaries commissions travel and trade show expenses, partially offset by a decrease in insurance expense.

General and administrative expenses increased 15% to 501000, primarily due to increased salaries and professional fees, partially offset by decrease in stock based compensation expense.

Operating income increased 218% to 566000 for the second quarter.

The increase was primarily due to increases in revenue and gross profit offset by an increase in operating expenses.

Operating margin for the quarter increased to 10% from 5% in the prior year period.

Interest and dividend income increased to 124000 in the second quarter.

Fiscal 'twenty 'twenty four compared with 19000 for the second quarter of fiscal 2023, primarily.

Primarily due to the current higher interest rate environment.

Large cash balances.

Net income was 541004 three per share compared to 162000 or one since one cents per share for the second quarter of fiscal 2023.

The increase primarily resulted from an increase in gross profit and interest and dividend income, partially offset by an increase in operating expenses and income tax expense.

Diluted weighted average shares outstanding increased slightly to approximately $15 7 million shares.

We've continued to add to our cash holdings.

Cash cash equivalents and marketable securities at August 31, 2023 were $12 3 million.

Approximately $900000 higher than our fiscal yearend and we continue to carry no debt on our balance sheet.

Capex for the six months was 246000, well the witches directed.

Two ongoing upgrades of our manufacturing and development lab facilities, we expect we expect to invest.

Approximately 500000, new equipment for the full year.

And now I'll turn the call over to Steve Harshberger, President and C. L O for an operational review of the second quarter Steve.

Thank you, Steve and good morning, everybody and thanks for joining us today.

As most of our listeners likely know so I don't take breaks down our sales in three ways.

By market by product and by geography, and that's how I'm going to address these in my upcoming comments. Please.

Please refer to the short tables on the last page of our earnings release for all the details.

For the second quarter, and we were excited to report net sales of $5.64 million. This came in ahead of our expectations and is a 50% increase from a year ago, and a 57% increase compared to the first quarter of the fiscal year, which ended now on May 31 2023.

The increase was primarily driven by increased shipments of our multi access coating systems, which are commonly used in the clean energy and medical device markets further.

For the quarter sales of these multi axis coating machines were up 96% and totaled $2 9 million are these systems contain some of our newest and highest E. S. P platforms and they were also the most severely supply constrained product line up through our first quarter of this year.

We were able to finally break out of this last year's supply chain issues and meaningfully increased shipments as a result of a significant program, we implemented to broaden our supply chain options, which included increasing our own vertical integration with the introduction of a new multi access product line there'll be called the <unk>.

Coke this vertical integration expansion is a process process that is ongoing and we're continuing to build and increase the depth of our in house manufacturing capabilities everyday.

Integrated coating system sales doubled to 853000, <unk> driven by sales of our newly developed float glass coating platform, which is continuing to gain acceptance into the market.

Flexing systems sales dipped against a tough comparison to last year.

Sales of our newly released spray flexing platform called the son of flux X two were strong over the years, we've installed thousands of spray flux machines and our customers continue to upgrade their equipment to our latest models spray fluctuation will advance our technology.

Although there was been a dip in flux yourselves for the quarter and the first half there is a large customer base and quote activity still remains very strong in this area.

Our OEM sales were lower in the quarter as well, which we had expected.

Cause many of our OEM partners built up excess inventory to combat their own supply chain concerns of last year.

This was largely offset by an increase of spare parts and service related revenue, which is a growing revenue stream for us that falls in the other product category and grew 64% this quarter.

Sales of spare parts and other maintenance packages that support our large platform multi axis machines are growing in importance as we place more and more of these machines well with high Asp's average selling prices into the field and in fact, we believe that the follow on service and support spare Paragon packages.

Could reach as much as 10% to 15% of the total or order value of our large full systems.

Looking at our market baskets sales to the alternative clean energy market grew 161% and were positively impacted by the growing number of subtlety customers transitioning from our R&D machines to production scale systems that carry much higher E S piece.

And many of our large contract.

Excuse me many of our recent large contract announcements.

Our from this area and are used in the manufacturing of critical membranes for carbon capture green hydrogen generation and fuel cell applications.

Sales this quarter included the shipment of a 1.1 million dollar system in.

And a second system for the same customer as similar values still remains in our backlog.

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Our medical sales rebounded strongly in Q2 with 117% growth.

This was driven by several large multinational companies taking delivery of specialty multi specialty implantable medical device coding systems during this quarter.

Our industrial sales grew by 104% due to the recent introduction of several new generation systems.

Including the shipment of a large float glass coating machine that we delivered into Latin America.

By geography, approximately 57% of our sales were to the U S and Canada compared to 44% in the comparable period of fiscal 2023.

Sales to the U S and Canada increased by 94% and were positively impacted by the continuing trend of Onshoring. In addition to several U S government initiatives that are investing in the clean energy sector and other advanced research markets are these include the chips axiom that replace and reduction Act, which we've talked about before.

Sure.

The difference now is that our cash is starting to reach our customer base and they're spending it on equipment such as ours.

Asia Pacific sales decreased by 35%, primarily due to decreased sales to China are while other areas of Asia remained very strong. However, now that China is back open to international visits after the Covid Lockdown, we are working to regain our momentum there.

Our backlog continued to grow during the quarter and on August 31st add more than doubled to $10.7 million compared to $5 million last year and was up 26%.

Excuse me from $8 5 million six months ago at the end of our last fiscal year.

Uh huh.

I apologize I have a little cold.

This is the highest reported backlog in our history.

[laughter].

Excuse me one second as I grab a drink.

Oh.

Okay.

Hum.

Yeah.

[noise] again.

Apologies.

Would you like overseas.

Oh.

Yeah.

Alright, I think I'm back.

Hum.

That is the highest reported backlog in our history and it reflects the increasing order activity from the clean energy sector in particular.

This also includes the recent 2.19 million dollar order.

We announced which is the largest order from this from the order from this sector to date and the largest in or order history.

Customer deposits reached $3 4 million at August 31st.

Reflecting the continued receipt of several large new orders.

Regenerative require deposits up 50% or greater.

Orders valued at over several hundred thousand dollars.

In closing and as Chris mentioned earlier, our outlook is strong and we're expecting a very good second half of the year with a minimum of 25% year over year sales growth for the full fiscal year ending February 22024.

Again, I apologize for my cough there.

Quite a little cold over the weekend, that's still lingering with me.

And now we'll turn it back over to the operators for some Q&A if I can speak.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone you will need to pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Once again that was star then one to ask a question at this time, we will pause momentarily to assemble the roster.

Yes.

Okay.

Yeah.

And our first question will come from Ted Jackson of Northland. Please go ahead.

Good morning, Ted I don't know if you can hear me, but I can't hear you yet.

We can hear you Ted.

Okay.

I don't think anybody here does anybody here to Jackson.

Okay.

Yes.

Maybe we can come back to Ted and.

Maybe picks out figure out the audio there.

Right.

Okay. Once again, if you would like to ask a question. Please press Star then one.

Okay.

Yeah.

Okay.

Yeah.

Operator: Good morning and welcome to the Sono Tek Corporation mid-year fiscal year 2024 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signify conference specialist by pressing the start key followed by zero.

Yeah.

Suspect maybe everybody is afraid to ask me a question because they'll start coughing.

Operator: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw your question please press star then two. Please note this event is being recorded.

[laughter].

Ted Jackson Nelson Opus at a question.

Yes.

Stephanie Prince: I would now like to turn the conference over to Stephanie Prince from PCG Advisory. Please go ahead. Thank you Andrea and thank you to everyone joining us today. Sono Tek released their second quarter and first half fiscal 2024 results pre-market this morning. If you don't have a copy of the release please go to the company's website at Sono Tek.com and click on the press release news tab in the investor section. Product, market and geography sales tables on the last page of the release will be part of today's discussion.

Okay.

Yeah.

Given our conference coordinator.

Good question.

Okay.

[noise] theyre, having technical issues according to App.

Yeah.

Yeah. It looks like we have several people in the queue for questions, but it doesn't sound like we can get them through to so we can hear the questions.

Stephanie Prince: With me on the call today of Dr. Chris Coccio, Sono Tek's chairman and CEO, Steve Harshbarger, president and COO and Steve Bagley's 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 1995.

Yeah.

Maybe just.

A technical issue on the chorus call.

Yes.

Okay.

For those of you still with US speaking here is that a just hang tight we're trying to work out the technical issues through the the chorus call group that organized this is for us.

Correct.

[noise] course folks are saying that's never.

Stephanie Prince: 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.

Before so.

Hi.

I think it's that Guy Murphy running around.

[laughter].

Sure.

Okay.

Christopher Coccio: I would now like to turn the call over to Chris Coccio, chairman and CEO, Sono Tek. Chris? Good morning and thank you Stephanie and thank you everyone for joining us. Whenever going to discuss our second quarter and first half of fiscal year 2024 results that were released this morning we put the market open. I will begin with some opening remarks and then Steve Bagley our chief financial officer will provide a financial review.

Pardon me. The next question will come from Nelson Opus with Winfield capital. Please go ahead.

Operator: Steve Hartzler, president and CEO will then go through the business and operational results. Following his comments we will open the call for your questions.

Yeah, Hi, there can you hear me.

We got to Nelson Thanks for joining today I'm just curious what the EBIT comparison was in the quarter.

Mr. Begley do you have the EBITDA there.

Please give me a second because I do not have the calc right in front of me.

And then on the second leg.

Yes.

I would say well alright.

Got it got it.

But we typically don't.

Christopher Coccio: As a reminder, Sono Tek currently holds two earnings calls for fiscal year. This is our mid-year call for the six months ended August 31st, 2023. Our fiscal year end is February so fiscal 2024 will end on February 29th, 2024 and our next earnings call for the 12 months of fiscal 2024 will be in May of 2024. As many of you already know, Sono Tek developed a revolutionary method of applying thin film precision coating several decades ago.

Look at EBITDA I know.

Financial companies do.

We're more focused on our growth and our earnings and our cash.

Yes, it's very helpful for figuring out.

But the private market value is switches are better.

I think thats something you should think about okay. It's not just financial companies basically.

Cross the entire board.

And that should get credit for your cash.

You should see enough with that at this point EBITDA I've got our income before taxes of 715 and in fact, my depreciation amortization I'm coming in around 90 94.

Christopher Coccio: The proprietary technology involves the use of our advanced high-frequency ultrasonic nozzles, incorporated into specialty emotional control systems, and these are able to achieve uniform micron and nanospin coatings onto our questionless products. Our solutions offer dramatic savings in our raw material, water, and energy usage in our environmentally friendly, therefore, and the first physical advantage of our ultrasonic coating systems is the ability to apply precision thin films, which are vitally important in today's role with thousands of products and micro components now requiring a functional or protective coating to be added to them.

Very nice.

No look I mean don't get me wrong I'm not.

Not a fan of quarterly reporting but.

We're in an interesting period, where it looks like the.

The economy, maybe slowing down you are an industrial company that is.

Operating in a way, which is very counter to a lot of what industrial accounting companies.

Companies are concerned which is an economic slowdown.

Okay.

Can you just help me, what's the rationale for not having particularly in this environment not having quarterly calls because I think that.

A typical and you should get credit for it and Youre going to put our Q out and why not put color in it I think that's something the board think about but can you help me out is the only company except of course for foreign companies.

Christopher Coccio: A strategic shift that we made several years ago to offer more complex, complete solutions has meaningfully broadened our addressable market and resulted in significant growth in our average unit selling prices. Our larger machines now commonly sell over $300,000 and assistance prices can reach $1 million or more, which significantly impacts our quarterly revenue. This is what happened in the second quarter when we finally were largely free of the supply chain constraints that held back our sales growth over the past year.

Don't have conference calls quarterly either they don't have them.

They have them quarterly but in this particular situation given the time, we're in given the promise to your company.

Doesn't that make sense to consider during our quarterly.

Yes, that's good.

That's good input and Alison I will say that.

We we had typically never done any.

Lee calls at all so this is all relatively new for us and we thought as a start we get our feet wet with doing them semi annually.

Christopher Coccio: We reported our strongest quarter revenue 50% higher than a year ago in ahead of expectations. We shipped one of our newest multi-axis systems, valued at over $1.1 million. In addition to new waters, and sales reached $5.64 million, now in addition to the high sales backlogs still increased 26% on the end of our last fiscal year, six months ago, it was $10.7 million the highest in our history. This growth was due to our strategic shift to large complex systems and platforms, and also our focus on opening new markets for our leaked and film coating technology.

But you know it's good input maybe we should be thinking about going to quarterly conference calls all in and we had at some point plan to make that transition once we kind of get our feet wet into this whole process. As you know the IR aspects of this is relatively new for our organization.

But that might be a good next step for us to follow on and I'll discuss that with our <unk> going forward I think youre hiring your light under a bushel basket, you've given us numbers that are quite attractive.

Attractive and quite counter to what a lot of industrial companies.

We're experiencing so plenty to go.

Anyway to that bushel basket, I think would be something to think about.

The other yes.

Question is look I understand why the gross margins.

Christopher Coccio: This includes three main areas with very strong global growth that we've talked about before, microelectronics and semiconductors, medical devices, and alternative or clean energy. We've served these industry sectors for many years and are continuing to advance our products and system solutions in these areas for the latest generational technology. Clean energy, including fuel cells, green hydrogen generation, carbon capture, and advanced solar cells, are markets we've been providing R&D and PIDO lines for close to a decade.

Hum.

<unk> are down slightly in terms of the mix in terms of your gearing up for a lot of.

A lot of additional work and hiring some more specialists, but as you look out.

Do you do you anticipate.

Perhaps in a normalized environment are.

Some operating leverage which would reflect a which would be reflected in higher gross margins.

On a higher revenue base.

Or is that not in the cards.

I think that we will see well go ahead, Chris you want to speak to this I was going to say that there.

Christopher Coccio: We don't have a lot of success with these customers transitioning from two production scale systems as a result of prior R&D and process development work they did with our experience application in the years. Over the past year, we've announced nearly $6 million in large orders, primarily from the clean energy, but also the medical sector. The largest, the most recent order is valued at 2.19 million, and it's the largest order from the clean energy sector to date, as well as the largest and sound effects history.

Trends.

They're competing with each other.

Quickly when a company starts to bring in more outside equipment into their into their sale you would expect.

The margins to go down gross margins.

But that hasn't happened here and I think that's the other side of the coin is that we're probably getting some.

Credit for our our dominance in this market that's been holding it actually.

Actually it's been in the high Forty's, but.

Our history is is in the 40 in that staying in there. So there are things going on.

Christopher Coccio: These orders are among the first some of our delivery systems strategy to large, customized systems although our proprietary ultrasonic atomization technology where Sono Tek began more than 40 years ago remains at the heart of all of our systems. We've been able to achieve this shift through our own research and development look which we consider to be our lifeblood. We attribute increase in sales both in this quarter and to come a direct result of our investment in R&D with a strong focus on product expansion.

Yes.

The one thing I would add to that that this past quarter Nelson that we had a couple of things occur.

The gross margin one is our OEM sales were unusually low as a result of our OEM partners building up excess inventory.

Basic didn't anticipate that they were going to they thought they're going to supply chain issues. So they built up excess inventory and our OEM sales are very high margin items.

And that happened in combination with some new products that we introduced.

Christopher Coccio: In the first half of the year alone, we've already invested 1.4 million compared to 1 million in the year ago period. And to further support our growth and expansion for these large platform custom engineered systems, we've increased our headcount by approximately 10% this year mainly in the areas of engineering, R&D, and sales engineers. We want to ensure that we stay fully staffed in front of our needs. We're excited about these investments that they've begun to pay off.

In this quarter and these new products side of it was that Novo Cove platform.

Platform that I mentioned earlier.

They're quite complex big platform systems that a lot went into and your first release of those new products.

You don't put as much focus into.

Reducing costs as you do to get them out there and having them functioning well for the need.

And as for most of our product lines. Once we release a product line, we will typically six months or so of follow that product line.

Christopher Coccio: Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger more complex systems from production applications with multiple repeat orders. In fact, we're already working on the next generation of machines. Looking ahead to the second half of this year, we're confident that shipments are previously delayed and do orders. We'll continue to positively fill. We're expecting at least 25% year-over-year sales from the fiscal 2024 ending next February. We expect that these also put us back on our pre-dovid COVID growth ban.

With some reduction in cost which.

Which don't affect quality of course, but there are just things that you can say, hey, listen, we're where can we make some efficiencies in that manufacturing process with the different parts or different ways to build things that will reduce some costs out of there. So I do think there'll be a couple of things that will occur simultaneously here.

It will help margins in the future. In addition to just general operational leverage.

We are bound to see some of that happened I would say at some point here.

Very helpful look last question.

Its one heck of a ramp in sales by the way you should be happy you guys of course that your gross margins held practically at 50%, but last question I mean, you had a big ramp in sales.

Stephen Bagley: Thank you now, and I'll turn it over to Steve Bagley or CFO who will provide additional details on our financial results. Thank you, Chris, and good morning everyone. For the second quarter of fiscal 2024, net sales increased 50% to 5.64 million and increased 57% from the 3.6 million reported in the first quarter of this fiscal year and it made 31st 2023.

What's your capacity utilization I mean, do you have the ability to grow.

To grow physically into this incredible ramp up in revenues.

Yeah within the existing facility here were fortunate we bought our industrial complex.

Which is five buildings of which were in three of those five buildings right now.

And is that there was within those three buildings right. Now we think we can get up to around the $25 million to $30 million area.

Stephen Bagley: Steve Harshberger will go into more detail with respect to sales. During the quarter, approximately 43% of sales originated outside of the United States and Canada, compared with 56% in the second quarter of fiscal 2023. Gross profit increased 48% to 2.8 million 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 due to product mix.

And that will then moving our existing tenants out, which we have short term leases on the remaining two tenants.

One one of the men's in May of this coming year and other one and then shortly after that.

Should be able to get up into the 40 millions of maybe mid forty's or so of revenue within the existing facility now once we go beyond that we will have to start thinking about further expansion, but at least we have enough existing space within our complex right now to get up into that mid forties of for for revenue.

Stephen Bagley: Operating expenses increased 30% to 2.2 million compared to 1.7 million in the prior year's second quarter. As Chris pointed out earlier, technical headcount increased approximately 10% across several areas. Research and product development costs increased 56% to $789,000, primarily due to increased headcount and related salaries and the higher costs of research in development materials and supplies. All of which are used in the development of new products for new and existing markets. Marketing and selling expenses increased 22% to 945,000 for the quarter.

Okay, great. Thank you great quarter.

Thank you.

Yeah.

The next question comes from Bill Nicklin. Please go ahead.

Yeah.

Hi.

You guys must be working hard because you're all sick.

[laughter] from a shareholder in fact that we really appreciate your sacrifice.

So anyway I just wanted to touch back quickly on the gross margin thing because you've been running about 50 preferred.

You're now doing the larger production machines, which have more spare parts associated with your order and also service. So it would seem to me that your margins are a lot of day as high as they were in the past with which therefore is.

Stephen Bagley: The increase was due to increased headcount, salaries, commissions, travel and trade show expenses partially offset by a decrease in insurance expense. General and administrative expenses increased 15% to 501,000, primarily due to increased salaries and professional fees, partially offset by a decrease in stock based compensation expense. Operating income increased 218% to 566,000 for the second quarter. The increase was primarily due to increases in revenue and gross profit, offset by an increase in operating expenses.

Keeps them above the 50 preferred.

<unk> margin, which I think the.

The analysts have in their models out there so.

I missing something.

You bring up a good point there build it you know one of the areas that we're just now starting to roll into our revenue stream.

Is it for these large E. S. P machines that we send out there in the field, we're finding that the customers are buying 10% to 15%.

Extra revenue from us for service contracts or spare parts packages and those are both obviously very high margin areas. Now today, you know we only have a handful of these million dollar plus lines out there.

Stephen Bagley: Operating margins for the quarter increased to 10% from 5% in the prior year period. Interest and dividend income increased to 124,000 in the second quarter of fiscal 2024, compared with 19,000 for the second quarter of fiscal 2023, primarily due to the current higher interest rate environment and a large cash balances. Net income was 541,000 for 3 cents per share, compared to 162,000 for 1 cent per share for the second quarter of fiscal 2023.

That are in operation, but as that fleet of machines starts to increase.

We should start to see a much more significant revenue stream come in where it will start to become significant and it should be a high margin revenue stream, it's going to take some time for that to build.

But the more and more of these we put out in the field and you know that's a recurring thing too it's not they don't they don't just buy those service contracts one year. It's every year kind of recurring revenue stream.

Stephen Bagley: The increase primarily resulted from an increase in gross profit and interest and dividend income, partially offset by an increase in operating expenses and income tax expense. Deluted weighted average shares outstanding increased slightly to approximately 15.7 million shares. We continue to add to our cash holdings, cash equivalents, and marketable securities at August 31, 2023, were 12.3 million, approximately $900,000 higher than a fiscal year end, and we continue to carry no debt on our balance sheet. CapEx for the six months was 246,000, while the winch is directed to ongoing upgrades of our manufacturing and development lab facilities.

Maybe for the life of the machine 10, 15 years or something like that so.

That should definitely impact our margins for in a positive way.

Thanks second question.

This recent.

Production equipment or is this an anomaly or is this something you expect to see.

Going forward something that has legs.

Yeah, I certainly don't think it's an anomaly that you know that there is in particular in the Green energy sector right now the clean energy sector.

There are so many of these customers that are transitioning.

Two high volume production.

Got it established process with our machines for either R&D and pilot lines scale Ah.

And now they have found the money all of a sudden from all these government initiatives and private industry I should say to that is complementing the government initiatives.

Stephen Bagley: We expect approximately 500,000 in new equipment for the full year.

To immediately scale to high volume production.

Steve Harshbarger: And now I'll turn the call over to Steve Harsberger, president and COO for an operational review of the second quarter. Steve. Thank you, Steve. Good morning, everybody. Thanks for joining us today. As most of our listeners likely know, a final pick breaks down our sales in three ways by markets, by product, and by geography, and that's how I'm going to address these in my upcoming comments. Please refer to the short tables on the last page of our earnings release for all the details.

And that's a customer base that we've had for a long time, it's been a huge customer base of ours, but they've never had the financial backing to say I'm going to make that transition over to high volume production, but they do now.

So we anticipate that to continue both with our existing customers that are already buying them, but also new customers. You know there's so many companies that you may not have heard of say three or four years ago, but theyre now public companies are growing and they're saying well you know that.

Steve Harshbarger: For the second quarter, we were excited to report net sales of $5.64 million. This came in ahead of our expectations and is a 50% increase from a year ago, and a 57% increase compared to the first quarter of the fiscal year, which ended now on May 31, 2023. The increase was primarily driven by increased shipments of our multi-axis coating systems which are commonly used in the clean energy and medical device markets.

We are in the clean energy sector, and we are scaling for high volume production right now so I anticipate that to continue for some time to come and it will also I should say continue in other sectors outside of the Green energy sector for us. It just happens to be the Green energy is the most a hot area for US right now, but you know once you have the ability.

<unk> to scale to high volume you can really do that for any sector, whether it's the semiconductor sector or whether its the industrial sector or medical sector.

Steve Harshbarger: For the quarter, sales of these multi-axis coating machines were of 96% and total 2.9 million. These systems contain some of our newest and highest ASP platforms and they were also the most severely supply constrained product line up through our first quarter of this year. We were able to finally break out of this last year supply chain issues and meaningfully increase shipments as a result of a significant program we implemented to broaden our supply chain options which included increasing our own vertical integration with the introduction of a new multi-axis product line that we call the noble coat.

Once you have that in house technical capabilities to scale for Super high volume throughput than it's easy to do so across all the industry sectors.

Oh, thank you.

I heard that you're on the second.

Part of one of your large orders if you look out are behind that.

Sales funnel or pipeline, whatever you want to call it.

Do you see these same customers are having an appetite for.

Steve Harshbarger: This vertical integration expansion is a process that is ongoing and we're continuing to build and increase the depth of our in-house manufacturing capabilities every day. Integrated coating systems sales doubled to 853,000, driven by sales of our newly developed flow-class coating platform which is continuing to gain acceptance into the market. Fluxing systems sales dipped against a tough comparison to last year when sales of a newly released spray-fluxing platform called the Sono Flux X2 were strong.

Multiple machines in some instances there may be many of this is beyond what you've already got in your backlog.

Yeah for our existing customers that are purchasing these large platform high ASP machines all of them have indicated they are at the beginning phases of their requirements. You know that a couple machines doesn't come anywhere close to meeting their ultimate needs.

For production throughput requirements. So we're optimistically are anticipating that we will see follow on sales from those customers.

Steve Harshbarger: Over the years, we've installed thousands of spray-fluxing machines and our customers continue to upgrade their equipment to our latest model spray-fluxers when we advance our technology. Although there has been a dip in fluxer sales for the quarter in the first half, there is a large customer base and quad activity still remains very strong in this area. OEM sales were lower in the quarter as well which we had expected because many of our OEM partners built up excess inventory to combat their own supply chain concerns of last year.

Other manufacturing lines to continue.

Yeah.

Alright, and then.

Are there kind of a general question.

You're talking about your transition it seems to me that your customer if you're making an even more dramatic transition in their business. What is it that's not attack heads and their solution set is such a critical part of the customer transition.

Yes, I guess the important word you just used in your question was the word solutions.

Steve Harshbarger: This was largely offset by an increase of spare parts and service-related revenue which is a growing revenue stream for us that falls in the other product category and grew 64% this quarter. Sales of spare parts and other maintenance packages that support our large platform multi-axis machines are growing and important as we place more and more of these machines with high ASPs, average selling prices into the field. In fact, we believe that the follow-on service and support spare package could reach as much as 10 to 15% of the total order value of our large full systems.

You know what are some of the <unk> solutions that are vitally critical to our customers transitioning with our new or different coding need.

When we partner with our customers to provide full system solutions and it tells all aspects of what we're.

Guiding them through to a successful transition to coat their products, sometimes we're providing the solution.

With the proper application engineering expertise or a newer ultrasonic coating equipment or providing complex parts handling or software or Mike would likely even a combination of all of these together so.

Steve Harshbarger: Looking at our market baskets, sales to the alternative clean energy market grew 161%. We're positively impacted by the growing number of Sonotec customers transitioning from our R&D machines to production scale systems that carry much higher ASPs and many of our recent large contract announcements are from this area and are used in the manufacturing of critical membranes for carbon capture, green hydrogen generation and fuel cell applications. Sales this quarter included the shipment of a $1.1 million system and a second system for the same customer a similar value still remains in our backlog.

So when you are at the forefront working with technology based customers introducing next gen products, which is worse I don't take really finds itself very often these days.

We're almost by default guiding these customers through retransmission process.

Some of our customers may be transitioning from a product thats never had a coating on it prior to their next gen product that now requires a functional coating on it.

In other cases, such as what we're seeing in the clean energy sector. Our customers may already have defined the quoting process using cytotec machinery, and they're simply just transitioning to high volume production machinery from us.

And it's really actually a transition that both sinopec customers are going through as well as the transition to Sinopec Corp is going through with our customers simultaneously, we're simultaneously transitioning our organization to expand our capabilities to meet the needs of our growing customer base.

Steve Harshbarger: Medical sales rebounded strongly in Q2 with 117 percent growth. This was driven by several large multinational companies taking delivery of specialty and plantable medical device coding systems during this quarter. Industrial sales grew by 104 percent due to the recent introduction of several new generation systems, including the shipment of a large flow-glass coding machine that we delivered into Latin America. By geography, approximately 57 percent of our sales were to the US and Canada compared to 44 percent in the comparable period of fiscal 2023.

I know that was kind of a long winded, but to swing back to your original question. It's really a multitude of critical deliver deliverables that we're providing our customers to guide them through the transition to sinopec machines, but at the end of the day, it's all focused around sinopec, providing the customer what is ever is necessary to create the <unk>.

Xyrem didn't film coating on the product that they want to manufacture.

Right all right. So I think what I heard is that there's some commonality here.

These transitions.

But there are really many different transitions, taking place across several different industries or markets.

Yes.

That's exactly correct Bill.

Steve Harshbarger: Sales to the US and Canada increased by 94 percent and were positively impacted by the continuing trend of ensuring, in addition to several US government initiatives that are investing in the clean energy sector and other advanced research markets. These include the CHIPSACs and the Replacian Reduction Act, which we've talked about before. The difference now is that our cash is starting to reach our customer base and they're spending it on equipment such as ours.

Really is.

Okay.

If I'm right you had a comment bill the way it.

It shows up in our in our business our factory is both.

And the systems engineering aspect.

Overall product engineering, I mean, a lot of it ends up being common.

And just go into a different market cycles. So we're taking advantage of that where iron ore a lot of people as we mentioned we have the skills to do that systems integration.

Steve Harshbarger: Asia's Pacific sales decreased by 35 percent, primarily due to decreased sales to China, while other areas of Asia remained very strong. However, now that China is back, open to international visits after the COVID lockdown, we are working to regain our momentum there. Our backlog continued to grow during the quarter and on August 31st, it had more than doubled to $10.7 million compared to $5 million last year and was up 26 percent, excuse me, from 8.5 million six months ago at the end of our last fiscal year.

The software and hardware integration and that I think that that'll be a great asset for us as we go forward.

And one final question, Thanks, Chris and one final question.

Question on the flexing, one, which as you mentioned, it's kind of an.

In early basic business, where you've come out with a new product.

And I had a specific question around displays and this whole many L E D.

T V.

Transition, that's taking place in the display industry.

Steve Harshbarger: I apologize, I have a little cold. This is the highest reported backlog of our history. Excuse me one second as I grab a drink. Again, apologies. Would you like to get overstated? All right, I think I'm back. That is, the highest reported backlog on our history and it reflects the increasing order activity from the clean energy sector in particular. This also includes the recent 2.1 million dollar order that we announced, which is the largest order from the sector to date and the largest in order history. Customer deposit reached 3.4 million at August 31st, reflecting and the continued receipt of several large new orders. We generally require deposits of 50 percent or greater on orders value at over several hundred thousand dollars.

It would seem to me that you folks would have some participation there.

And if that's true I would like to know a little bit about it and how far down the road. It is before you might see something.

Affecting your Fluffing product there.

Sure. We always are exploring new high tech areas, you know and the there is a particular technology that's getting a lot of press these days, which is micro OLED.

You know this is kind of what people are anticipating would be the next gen.

It monitors and Tvs out there to come.

And there is some processes in that area that could use coating applications.

It is an area that sinopec.

It is most definitely participating in.

And that we are have actively sold.

Some machines to in that area received some orders for machines in that area.

I'm not going to Kid get go into too much more detail for competitive reasons on that area, but it's certainly an area that we're anxious to participate in.

Alright that does it for me, thank you and be well, we need you to keep pumping out there [laughter].

Steve Harshbarger: In closing, and as Chris mentioned earlier, our outlook is strong and we're expecting a very good second half of the year with a minimum of 25 percent year sales growth for the full fiscal year ending February 20, 2024. Again, I apologize for my cough there. Quite a little cold over the weekend that's still lingering with me.

I appreciate that.

<unk>.

Okay.

The next question comes from Chad Jackson of Northland. Please go ahead.

Hey, Ted you there.

Okay.

What is going on.

Operator: And now we'll turn it back over to the operators for some Q&A if I can speak.

Got you.

Okay.

Got to throw my phone against the wall [laughter].

Operator: We will now begin the question and answer session to ask a question you may press star then one on your telephone keypad. If you're using a speaker phone, you will need to pick up your handset before pressing the keys. To withdraw your question, please press star then two. Once again, that was star then one to ask a question and at this time we will pause momentarily to assemble the roster.

Anyway.

So I'm going to start with just a little worried anything but you know it.

It's the.

The opex with.

You know quite a bit relative to I'd say my expectations, and obviously, you're investing in the business and that's what you need to do but can you just provide a little color on how I should think about that for the back half of this.

This fiscal year and next.

Yeah, I mean, the Opex was certainly the area that they grew the most and it was there was certainly a result of what we are doing so many more of these high ESP large platform custom engineered solutions right now and anticipating based upon our quoting that we're going to be continuing that trend.

And and so what has occurred is we had to really beef up staffing.

In that area, mostly.

Edward Jackson: In our first question, we'll come from Ted Jackson of Northland. Please go ahead. Good morning, Ted. I don't know if you can hear me. I can't hear you yet. We can hear you, Ted. I don't think anybody here. Does anybody here, Ted Jackson? No. Hold on. Yeah, I don't hear you.

On the the sales engineer area.

As well as the mechanical and the ease and.

As the infrastructure guys the programmers.

All of those areas needed to get beefed up in order to support future growth of these custom engineered complex machines.

So that's what you're telling me it can be made a big investment there to.

To support that and we would only youre doing that because we see that the customer base is growing for us in that area and we want don't want those customers to turn them away, we want to be able to say yeah. We can take on these large complex projects, we have the personnel and the capability to do that so that was the big increase you saw there.

Operator: Maybe we can come back to Ted and maybe fix out, figure out the audio there.

Operator: Okay, once again, if you would like to ask a question, please press star then one. To expect maybe everybody's afraid to ask me a question because I'll start coughing.

Yes, we're adding different types of engineers, but I would say that as Steve mentioned the concentration of additions is really in systems and controls engineering because.

The equipment's going from let's call it straightforward equivalent to smart equipment.

Things need to be integrated both within our the line that we supply, but also with the customers.

Product line.

Manufacturing lines. So that requires the addition of some other skills that we had not previously had we would sell.

Let's call it Microsoft based type of control.

Computer basically digital computers, and a lot of our customers out there in those big plants have TLC types of controls.

So we're moving in that direction as well because we can access a much bigger market. So yes. There is upfront cost if you will in terms of hiring but if you look at the whole picture.

Operator: There was Ted Jackson, Nelson Oblos had a question. I don't see his... Get out of the way for another question. There are many technical issues, according to... It looks like we have several people in the queue for questions, but it doesn't sound like we can get them through so we can hear the questions. Yeah.

Plenty of sales going forward could justify it so that's what we're doing.

Yes, I don't question that at all I mean, I think it's very much an appropriate investment I just wanted to be more kind of understand now that you've had.

I had a couple of times, where you've had to put a you had a tick up in expenses at the operating line and that's been a result of wage pressure, which is obviously still there and the hiring and I guess I'm just kind of asking how we need to think about that as you know in 2024, you know now that you have this higher base is it.

I said, a little more back in sort of like you know what I'm, saying, our normalized growth or is that something youre still going to be investing in and I should expect another good sized pickup in it.

Kind of the coming quarters.

Operator: Let me decide. The technical issue on the chorus call. Right. For those of you still with us, we can hear us that just hang tight, we're trying to work out the technical issues through the chorus call group that organizes this for us. Correct. The chorus folks are saying that's never happened to them before. So I think it's that guy Murphy running around.

I think it wouldn't I don't think it will be growing at the same rate that you just saw there over this past quarter, but I do anticipate that we will be growing because as an organization, we're going to be growing and we're always looking to develop that next thing that we haven't done yet.

Always looking to expand upon our capabilities.

So it is as long as we're heading down the growth path of the organization that is going to be the one sector that I see continued growth will be required just to be able to support that customer base growing.

Okay.

And then some more like bond and kind of grow the questions. When you look at.

Medical and Alta energy areas, you had a very robust quarter for both of them.

And I'm curious with regards to that robustness, how much of that was from some of the delayed business that you know its been impacting.

The financial since the second half of last year, and how much of that was a problem and stuff that's been.

Nelson Obus: I made the next question will come from Nelson Obus with Winfield Capitol. Please go ahead. Yeah. Hi there. Can you hear me? Oh, we got you. Nelson, thanks for joining today. I'm just curious what the EBITDA comparison was in the quarter. Mr. Bagley, do you have the EBITDA there? Excuse me a second, because I do not have the talc right in the front of me. Well, around a second, guys. Yeah. It's a, I would say while we got an answer to you that we typically don't even look at EBITDA.

More recently won and then also maybe within both of those buckets some color in terms of the.

Specific applications that drove the revenue.

Yeah got you.

It was it's probably about 50 50 split we were just looking at that you know what was things that we had hoped to shipped out of here earlier, and then and what was new stuff that was coming into us.

So as far as the split from from that aspect.

The systems that we shipped a lot of this past quarter were to these big multinational medical companies, where they were our customers for more simple.

Nelson Obus: I know financial companies do, but we're more focused on our growth and our earnings and our cash. It's very helpful for figuring out what the private market value is, which is a better, I think that's something you should think about. It's not just financial companies, it's basically across the entire board. And that if you get credit for your cash, which is nice and see enough with that. At this point, EBITDA, I've got the income before taxes of $7.15. I'm in fact, my depreciation amazement. I'm coming in around $9.94. Well, very nice. Now look, I mean, don't get me wrong.

Medical device systems, primarily our steady coating systems, but now they're just returning to us and buying our medical device systems for all of these really complex new devices, new implantable systems.

Which is.

Now recognize that we're not just a one application company for medical you know they know that hey, if it's any medical device and you want to quote it simultaneous is a good alternative that you should be considering and that's what's happening so they're they're just returning back to us.

Listing customers, but for new applications that they've never done before and that takes a lot of work in the development lab, whether application engineers to help define those processes, but they are beginning to look at us as their expert you know that we are in basic they're putting arm for many of these large medical device companies and they're coming to us.

Nelson Obus: I'm not a fan of quarterly reporting. But, you know, we're in an interesting period where it looks like the economy may be slowing down. You're an industrial company that is operating in a way which is very counter to a lot of what industrial companies are concerned of, which is an economic slowdown. Can you just help me? What's the rationale for not having particularly in this environment? Not having quarterly calls, because I think that you're a typical and you should get credit for it.

Nelson Obus: And you're going to put a queue out. And why not put color in it? I think that's something the board should think about. But can you help me out? It's the only company, except of course for foreign companies, that don't have conference calls quarterly, they don't have them, or they have them quarterly. But in this particular situation, given the time we're in, given what the Prime Minister company has, doesn't that make sense to consider during a quarterly?

Saying, Hey help us I don't think we don't want to figure this out but you guys we know Ken.

And that was the big impact for us, primarily because the medical and the industrial ones.

There's more new platforms are.

It sold.

We're of people upgrading from their old platforms.

Mhm, Okay, I've asked about kind of the ultimate energy, but.

Is that more you know in terms of the delivery day or is that more carbon capture or is that more than film on panels.

Okay.

Clean hydrogen.

Gotcha, yeah, the existing shipments that went out this past quarter was worth.

Focus towards the coding of the critical membranes that are used in fuel cells carbon capture and green hydrogen generation, but our backlog has been increasing fairly drastically.

Nelson Obus: Yeah, that's good input, Nelson. I will say that we had typically never done any quarterly calls at all. So this is all relatively new for us. And we thought as a start, we'd get our feet wet with doing them semi-annually, but it's good input. Maybe we should be thinking about going to quarterly conference calls. And we had at some point planned to make that transition, once we kind of got our feet wet into this whole process.

More in the thin film solar area.

And that's been a very exciting.

Turn for us because thin film solar kind of took a dive down years ago, but there are some companies that are still very very profitable and doing well in this area and we've made some good partnerships in that area for.

Nelson Obus: You know, the guys you know, the IR aspects of this is relatively new for our organization, but that may be a good next step for us to follow on. And I'll discuss that with our BOD going forward. I think you're hiding your light under a bushel basket. You know, you've given us numbers that are quite attractive and quite counter to what a lot of industrial companies are experiencing. So putting a little getting rid of that bushel basket, I think would be something to think about.

For the future for.

Multiple systems heading forward, we believe.

Oh, it's all very exciting.

My last question and then I will get out of line. If there is one left.

And you touched on it already as you know the backlog.

Up in the quarter and a really strong quarter.

Like.

Very exciting it really.

It makes me feel really good about not just the rest of the year, but next fiscal year can you give some color.

Nelson Obus: The other question is, look, I understand why the gross margins percentages are down slightly in terms of the mix, in terms of your gearing up for a lot of additional work and hiring some more specialists. But as you look out, do you anticipate perhaps in a normalized environment, some operating leverage, which would be reflected in higher gross margins on a higher revenue base, or is that not in the cards? You know, I think that we will see, look, go ahead, Chris, do you want to speak to this?

We kind of from an application.

Perspective, what comprises that backlog you know that that would be my last question sure. It its fairly mixed however, the most heavily weighted is certainly going to be the clean energy sector.

Hum.

And again that's just.

Where we're just seeing so much activity with the transition to high volume production machines, and I shouldn't even say, there's still a lot of companies coming in that are brand new companies coming in and asking for R&D machines as well in combination.

Two the companys transitioning to high volume production machines. So.

Nelson Obus: Yeah, I was going to say that there are the trends that they're competing with each other. You know, typically you want a company starts to bring in more outside equipment into their into their sale. You would expect the, you know, the margins to go down gross margins. But that hasn't happened here. And I think that's the other side of the coin is that we're probably getting some credit for our, our dominance in the smart that's been holding it into the 40s.

I don't see that sector is slowing down at least for the next several years, you know and maybe far beyond but it seems like that's just a really good place right now and if these high volume companies.

Are you able to successfully transition into high volume production all the way through it I mean, it's the the upside potential is very strong in that area for sure.

Okay, well that's it for me congratulations on a fabulous quarter.

Ted good talking to you.

Nelson Obus: Actually, it's been in the high 40s, but you know, our history is, is in the 40s and it's staying in there. So there are things going on. The one thing I would add to that that this past quarter, Nelson, that we had a couple of things occur that affected the gross margin. One is our OEM sales were unusually low as a result of our OEM partners building up excess inventory. They basically didn't anticipate that they were going to, they thought they were going to supply chain issues so they built up excess inventory and our OEM sales are very high margin items.

Thank you. The next question comes from <expletive> Ryan with Oak Ridge Financial. Please go ahead.

Thank you.

Nelson Obus: And that happened in combination with some new products that we introduced in this quarter. And these new products, it was that NOVO code platform that I mentioned earlier. They're quite complex, big platform systems that a lot went into and your first release of those new products, you don't put as much focus into reducing costs as you do to get them out there and have them functioning well for the need. And as for most of our product lines, once we release a product line will typically, it was six months or so, follow that product line with some reduction in cost, which don't affect quality, of course.

Congratulations on a strong quarter guys.

Thanks, Nick Steve I just circle.

Circle back on the backlog.

It looks sounds like Theres, a $1 1 million in there and then the 2.19 million is in there. So that's kind of 30% of the backlog are there any other million dollar plus system in that backlog and how should we look at the timing of that backlog being delivered.

Yeah. Those are the two most significant orders that are in the backlog presently.

There are several other orders that are in those few hundred thousand dollars plus area.

Which is becoming kind of a more common type of machine for us to be selling now these $300000 plus machines are the backlog split right now and it's going to be somewhat close which is delivered next fiscal year. This fiscal year, it's going to be good either either way.

But it's about a 50 50 split if we had to guess between what's going to be shipping this fiscal year that should the existing backlog and what's going to be shipping next fiscal year.

Nelson Obus: But there are just things that you could say, hey listen, where can we make some efficiencies in that manufacturing process with different parts or different ways to build things that will reduce some costs out of there. So I do think there will be a couple of things that will occur simultaneously here that will help margins in the future. In addition to just general operational leverage, you know that we'll bound to see some of that happen at some point of year.

Is it a good ballpark.

Maybe 60 40 for 40 next year 60, this year, but it's it's a pretty good chunk. That's already planned for next fiscal year, because the build time of the delivery of some of these large complex machines. It takes quite a while you know they can take 912 months in many cases.

Sure sure.

You, probably don't want to quantify it but you talked about your quote activity picking up can you kind of describe how your your quotation book looks now versus.

Nelson Obus: Very helpful. Look, last question. You know, it's one heck of a ramp and sales. By the way, you should be happy that, of course, that your which is five buildings, or which were in three of those five buildings right now, and that was within those three buildings right now, we think we can get up to around the $25 to $30 million area and then moving our existing tenets out, which we have short-term leases on the remaining two tenets.

Six months ago, or if you would care to quantify that would be that in.

And maybe tying into that does the traffic in the labs feed into the quote book I mean, and if so what's your traffic in your labs.

Sure no problem.

We don't quantify the quotes out to the public but.

The one thing I will say is that the closure rate on the quotes is increasing.

The percentage of that you know that we're reporting out.

I would actually buy a machine.

Is increasing and the quotes are for higher dollar values in typical compared to say last year the higher asp's.

Nelson Obus: One of the men's in May of this coming year and another one then shortly after that, we should be able to get up into the $40 million, maybe mid-forties or so, of revenue within the existing facility. Now, once we go beyond that, we will have to start thinking about further expansion, but at least we have enough existing space within our complex right now to get up into that mid-forties for revenue. Good. Okay. Great. Thank you. Great quarter.

So that's what significant there the laboratory facility.

The facility is jam packed right now.

It's every week, we're just always trying to find the space to try to bring the next person in.

Operator: Thank you.

Right now, we're booked out two or three months and.

It's a challenge that will probably at some point, we've expanded our lab several times now, but we'll probably have to expand the lab again at some point here to accommodate the growth that we're experiencing.

Yeah.

Okay.

Last one you talked about your Alt all day energy customers.

Bill Nicklin: The next question comes from Bill Nicklin. Please go ahead. Hi. Thanks. You guys must be working hard because you're all sick. From a shareholder in fact, I really appreciate your sacrifice. So anyway, I just want to touch back quickly on the growth margin thing because you've been running about 50%. You're now doing the larger production machines which have more spare parts associated with your order and also service. So it would seem to me that your margins ought to stay as high as they were in the past, which therefore keeps them above the 50% margin which I think analysts have in their models out there.

Moving from R&D to higher levels of production Youre seeing that less broaden I mean are you dealing with you know one two or three customers there or are you kind of approaching double digits that.

This thing really can't have some legs and when we look out over the next few years.

As far as customers that we're actually delivering or have it delivered systems too. It's still just a handful right now that are doing this in super high volume, but as far as where the quoting activity is for those customers to expand to becoming double digits, it's very high.

What we're seeing right now where the customers that.

I've already made the transition to our high volume production machines really at the forefront.

But there's a whole another wave of customers behind them, which are not there yet, but theyre heading there.

Bill Nicklin: So am I missing something? You bring up a good point there, Bill, that one of the areas that we're just now starting to roll into our revenue stream is for these large ASP machines that we send out there in the field. We're finding that the customers are buying 10 to 15% extra revenue from us for service contracts or spare parts packages. And those are both obviously very high margin areas. Now today we only have a handful of these million dollar plus lines out there that are in operation.

So we're optimistically thinking that that group of customers will transition at some point here in the future as well.

Bill Nicklin: But as that fleet of machines starts to increase, we should start to see a much more significant revenue stream come in where it will start to become significant. And it should be a high margin revenue stream. It's going to take some time for that to build. But the more and more of these we put down in the field, that's the recurring thing too. They don't just buy those service contracts one year. It's every year kind of recurring revenue stream. Maybe for the life of the machine 10, 15 years or something like that.

Okay, I guess I had one last one you talked about solar you know what historically well how big was solar in its heyday for you guys and is there opportunity to kind of get back to that level of growth from there.

Yeah to 10 years ago before the solar wave crashed.

That's about 10 years ago I think.

I think so I don't take was doing two or $3 million of solar there.

Which was at that time, we were a smaller company. So it was significant I think that was.

About 40% of our sales or something like that.

But now two or $3 million isn't really going to shift to lever significantly for us.

The existing solar customer base now that we are communicating with I mean, I think we anticipate it to be significantly larger than that.

It was only two or $3 million would be a big disappointment for us.

Bill Nicklin: So that should definitely impact our margins for a positive way.

It's it has much larger potential in the reason primary reason is is we're not selling R&D machines. There anymore, we're selling high volume production machines with high Asp's and that makes all the difference in the world.

Bill Nicklin: Thanks, second question. This recent production equipment order, is this an anomaly or is this something you expect to see going forward, something that has legs? I certainly don't think it's an anomaly that there's in particular in the green energy sector right now, the clean energy sector. There's so many of these customers that are transitioning to high volume production. They've got an established process with our machines for either R&D and pilot line scale, and now they have found the money all of a sudden from all of these government initiatives, I am private industry I should say too, that is complementing the government initiatives to immediately scale to high volume production.

Okay great.

That's it from me Thanks, Stephen our guys and congratulations I appreciate it.

Yeah.

This concludes our question and answer session I would now like to turn the call back over to Chris Casino for any closing remarks.

Alright, well, thank you and thank you everyone for joining us today.

Looks like the outlook is strong based on our.

Angola successful platform initiatives and the high Tech and clean energy markets.

We look forward to our next call that will review our year end fiscal 2020 core results next may.

Please contact us directly if you have any questions before them.

Stay safe.

Bill Nicklin: That's a customer base that we've had for a long time, it's been a huge customer base of ours, but they've never had the financial backing to say I'm going to make that transition over to high volume production, but they do now, so we anticipate that to continue both with our existing customers that are already buying them, but also new customers, there's so many companies that you may not have heard of say three or four years ago, but they're now public companies that are growing and they're saying, well, we are in the clean energy sector and we are scaling for high volume production right now, so I anticipate that to continue for some time to come. And it will also, I should say, continue in other sectors outside of the green energy sector for us, it just happens to be the green energy is the most hot area for us right now, but once you have the ability to scale to high volume, you can really do that for any sector, whether it's the semiconductor sector or whether it's the industrial sector or medical sector, once you have that in-house technical capabilities to scale for super high volume throughput, then it's easy to do so quickly. Thank you for all the industry sectors.

The conference has now concluded. Thank you for your participation you may now disconnect your lines.

[music].

Bill Nicklin: Oh, thank you. I heard that you're on the second part of one of your large orders, if you look out behind that into your sales funnel or pipeline, whatever you want to call it, do you see these same customers having an appetite for multiple machines in some instances, there may be many instances beyond what you've already gotten in your backlog? Yeah, for our existing customers that are purchasing these large platform high ASP machines, all of them have indicated they are at the beginning phases of their requirements.

Okay.

[music].

Bill Nicklin: You know, that a couple machines doesn't come anywhere close to meeting their ultimate needs for production throughput requirements, so we're optimistically anticipating that we'll see follow on sales from those customers for other manufacturing lines to continue.

Hum.

Bill Nicklin: All right, and then another kind of a general question. You're talking about your transition. It seems to me that your customers are making an even more dramatic transition in their business. What is it that Sonatec has in their solutions to this such a critical part of the customer's transition? Yeah, I guess the important word you just used in your question was the word solutions. What are the Sono Tek solutions that are vitally critical to our customers transitioning with our new or different coding need?

[music].

Bill Nicklin: When we partner with our customers to provide full system solutions, it tells all aspects of what we're guiding them through to a successful transition to quote their products. Sometimes we're providing the solution with a proper application engineering expertise or a new ultrasonic coding equipment or providing complex parts handling or software. Or might likely even a combination of all of these together. So when you're at the forefront working with technology-based customers, introducing next-gen products, which is where Sono Tek really finds itself very often these days, we're almost by default guiding these customers through a transition process.

Bill Nicklin: Some of our customers may be transitioning from a product that's never had a coding on it prior to their next-gen product that now requires a functional coding on it. In other cases, such as what we're seeing in the clean energy sector, our customers may already have defined the coding process using Sono Tek machinery and they're simply just transitioning to high-volume production machinery from us. And it's really actually a transition that both Sono Tek customers are going through, as well as a transition that Sono Tek Corporation is going through with our customers simultaneously.

Bill Nicklin: We're simultaneously transitioning our organization to expand our capabilities to meet the needs of our growing customer base. So I know that was kind of long-winded, but to swing back to your original question, it's really a multitude of critical deliverables that we're providing our customers to guide them through the transition to Sono Tek machines. But at the end of the day, it's all focused around Sono Tek providing the customer what is ever as necessary to create the desired thin film coding on the product that they want to manufacture.

Right.

Hum.

[music].

Bill Nicklin: All right, so I think what I heard is that there's some commonality here in these transitions, but there are really many different transitions taking place across several different industries or markets that you see here. That's exactly correct, Bill. There really is. If I may add a comment, Bill, the way it shows up in our business, our factory is both in the systems engineering aspect and the overall product engineering. I mean, a lot of the ends up being common even if it and just going to a different market segment.

Bill Nicklin: So we're taking advantage of that. We're hiring a lot of people, as we mentioned, who have the skills to do that systems integration, you know, the software and hardware integration, and that I think that'll be a great asset for us as we go forward.

Bill Nicklin: And one final question. Thanks, Chris. And one final question on the fluxing line, which as you mentioned, this kind of an early basic business where you've come out with a new product. And I had a specific question around displays in this whole mini LED TV transition, this taking place in the display industry. It would seem to me that you folks would have some participation there. And if that's true, I'd like to know a little bit about it and how far down the road it is before you might see something affecting your fluxing product there.

Bill Nicklin: Sure, we always are exploring new high-tech areas, you know. And there's a particular technology that's getting a lot of press these days, which is micro LED. You know, this is kind of what people are anticipating will be the next gen monitors and TVs out there to come. And there is some processes in that area that could use coding applications. And it is an area that Sonotech is most definitely participating in, and that we are have actively sold some machines to in that area, received some orders from machines in that area. I'm not going to but it's certainly an area that we're anxious to participate in.

Bill Nicklin: Alright, that does it for me. Thank you and be well. We need you to keep pumping out there. Thanks. Appreciate that bill.

Edward Jackson: The next question comes from Ted Jackson of Northland. Please go ahead. Hey Ted, you there.

Edward Jackson: What is going on? Oh, we got you now too. Okay, I'm about to throw my phone against the wall. Anyway, so I'm going to start with some just a little weedy thing, but you know, it's, you know, the apex was up, you know, quite a bit relative to my expectations and obviously you're investing in the business and that's what you need to do. But can you just provide a little color now, at least I should think about that for the back half of this fiscal year next, you know.

Edward Jackson: Yeah, I mean, the apex was certainly the area that they grew the most and it was a certainly result of we are doing so many more of these high ASP large platform custom engineered solutions right now and anticipating based upon our quoting that we're going to be continuing that trend. And so what has occurred is we had to really beef up staffing in that area, mostly both on the sales engineer area, as well as the mechanical and ease and the IT infrastructure guys, the programmers, that all of those areas needed to get beefed up in order to support future growth of these custom engineers.

Edward Jackson: So that's what we've done. We've made a big investment there to support that and we would only are doing that because we see that the customer base is growing for us in that area and we don't want those customers to turn them away. We want to be able to say we can take on these large complex projects. We had the personnel and the capability to do that. So that was the big increase you saw there.

Edward Jackson: Yeah, we were adding different types of engineers, but I would say as Steve mentioned the concentration of additions is really in systems and controls engineering because, you know, the equipment's going from what's called straight forward equipment to smart equipment and things need to be integrated both within our line that we supply, but also with the customers. Product line, you know, manufacturing ones. So that requires the addition of some other skills that we had not previously had.

Edward Jackson: We would sell. Let's call it Microsoft base type of controls computer, you know, basically digital computers and a lot of our customers out there and those big plans have TLC types of controls and so, you know, we're moving in that direction as well because we can access the much bigger market. So yeah, there's upfront costs, if you will, in terms of hiring, but if you look at the whole picture, you know, there's plenty of sales going forward to justify it.

Edward Jackson: So that's what we're doing. Yeah, and I don't question that at all. I mean, I think it's a very much an appropriate investment. I just want to more kind of understand, you know, now you know, you've had a couple of times where, you know, you've had to put a you had a tick up and at the operating line, and that's been a result of wage pressure, which is obviously still there, and then hiring.

Edward Jackson: And I guess I'm just kind of asking how I need to think about that as I, you know, in 2024, you know, now that you have this higher base, is it, you know, is it a little more back to sort of like, you know, I'm saying a normalized growth, or is that something you're still going to be investing in, and I should expect another, you know, good size pickup in it, as we think about me, kind of coming quarters. I think it wouldn't, I don't think it will be growing at the same rate that you just saw there over this past quarter, but I do anticipate that we will be growing because as an organization, we're going to be growing, and we're always looking to develop that next thing that we haven't done yet, you know, and always looking to expand upon our capabilities.

Edward Jackson: So as long as we're heading down to growth path of the organization, that's going to be the one sector that I see continued growth will be required, but to be able to support that customer base growing. Okay, then to some more like fun and kind of growthy questions, you know, when you look at the medical and alternative areas, you had a very robust quarter for both of them. And I'm curious with regards to that robustness, you know, how much of that was from some of the delayed business that, you know, it's been impacting the financial since the second half of last year, and how much of it was, you know, from stuff that's been, you know, more recently won, and then also maybe within both of those buckets, some color in terms of, you know, the specific applications that drove the revenue.

Edward Jackson: Yeah, gotcha. It was, it's probably about 50-50 split. We were just looking at that, you know, what was things that we had hoped to ship out earlier, and then, and what was new stuff that was coming into us. So, you know, as far as a split from that aspect, the system that we shipped a lot of this past quarter were to these big multinational medical companies where they were our customers for more simple medical device systems.

Edward Jackson: Primarily are stent coding systems, but now they're just returning to us and buying our medical device systems for all these really complex new devices, new implantable systems, which, you know, they now recognize that we're not just a one application company for medical, you know, they know that, hey, if it's any medical device and you want to code it, Sonotec is a good alternative that you should be considering, and that's what's happening. So, they're just returning back to us these existing customers, but for new applications that they've never done before.

Edward Jackson: And that takes a lot of work in the development lab of their application engineers to help define those processes, but they're beginning to look at us as their expert, you know, that we are, in basic, they're coding arm for many of these large medical device companies, and they're coming to us and saying, hey, help us, Sonotec, we don't want to figure this out, but you guys, we know can. And that was the big impact for us primarily with the medical, the industrial ones, where there's more new platforms that sold with people upgrading from their old platforms.

Edward Jackson: Actually, I've asked about kind of the alt in energy, but, you know, I mean, if that more, you know, in terms of delivery there, is that more apartment capture? Sure, that's it, more than film on panels, clean hydrogens. Gotcha. The existing shipments that went up this past quarter was more focused towards the coding of the critical membranes that are used in fuel cells, carbon capture and green hydrogen generation. But our backlog has been increasing fairly drastically, more in the thin film solar area, and that's been a very exciting turn for us because thin film solar kind of took a dive down years ago, but there are some companies that are still very, very profitable in doing well in this area, and we've made some good partnerships in that area for the future for multiple systems heading forward, we believe.

Edward Jackson: Oh, that's all very exciting, Steve. I last question and then I will get out of line if there's one left, and you touched on it already, is the backlog up in the quarter in a really strong quarter, like very exciting, it really makes me feel really good about not just the rest of the year, but next fiscal year. Can you give some color exactly from an application perspective what comprises that backlog?

Edward Jackson: That would be my last question. Sure. It's fairly mixed, however, the most heavily weighted is certainly going to be the cleat energy sector, and again, that's just where we're just seeing so much activity with the transition to high volume production machines, and I shoulda even say there's still a lot of companies coming in that are brand new companies coming in and asking for R&D machines as well, in combination to the companies transitioning to high volume production machines.

Edward Jackson: I don't see that sector slowing down at least for the next several years, and maybe far beyond, but it seems like that's just a really good place right now, and if these high volume companies are able to successfully transition into high volume production all the way through, I mean, it's the upside potential is very strong in that area for sure. Okay, well that's it for me, congratulations on a fabulous quarter, I'm popular. Hey, appreciate it. Good talking to you. Thank you.

Dick Ryan: The next question comes from Dick Ryan with Oak Ridge Financial, please go ahead. Thank you. Congratulations on a strong quarter, guys. Say, Steve, there's a circle back in the backlog, you know, there's a look, sounds like there's a 1.1 million in there, and then the 2.1 9 million is in there, so that's kind of 30% of the backlog. Are there any other million dollar plus systems in that backlog? And how should we look at the timing of that backlog being delivered?

Dick Ryan: Yeah, those are the two most significant orders that are in the backlog, presently. There are several other orders that are in those that have a few hundred thousand dollar plus area, which is becoming kind of a more common type of machine for us to be selling now, these three hundred thousand dollar plus machines. The backlog split right now, and it's going to be somewhat close, which is delivered next fiscal year or this fiscal year.

Dick Ryan: It's going to be good either way, but it's about a 50-50 split if we add to guess between what's going to be shipping this fiscal year that's in the existing backlog and what's going to be shipping next fiscal year is a good ballpark, maybe 60-40 for 40 next year or 60 this year, but it's a pretty good chunk that's already planned for next fiscal year because the build time and the delivery of some of these large complex machines takes quite a while. They can take nine, twelve months in many cases.

Dick Ryan: You probably don't want to quantify it, but you talked about your quote activity picking up. Can you kind of describe how your your quotation book looks and now versus, you know, six months ago, or if you would care to quantify that, that is very also, and maybe trying into that. In your labs, we don't quantify the quotes out to public, but the one thing we'll see is that the closure rate on the quotes is increasing.

Dick Ryan: So the percentage that, you know, that we're quoting out, excuse me, would actually buy a machine is increasing and the quote are for higher dollar values and typical, you know, compared to say last year, the higher ESPs. So that's what's significant there. The laboratory facility is jam packed right now. It's every week we're just always trying to find the space to try to bring the next person in.

Dick Ryan: I think right now we're booked out two or three months and it's a challenge that, you know, we'll probably, at some point, we've expanded our labs several times now, but we'll probably have to expand the lab again at some point here to accommodate the growth that we're experiencing. Okay. One last one, you talked about your alt energy customers moving from R&D to higher levels of production, you're seeing that list broad. I mean, are you dealing with, you know, one, two, or three customers there?

Dick Ryan: Are you kind of approaching double digits that this thing really can have some legs when we look out over the next few years? As far as customers that were actually delivering or have delivered systems to, it's still just a handful right now that they're doing this in super high volume, but as far as where the quoting activity is for those customers to expand to becoming double digits, it's very high. You know, what we're seeing right now, we're the customers that have already made the transition to our high volume production machines really at the forefront, but there's a whole nother wave of customers behind them, which are not there yet, but they're heading there.

Dick Ryan: So we're optimistically thinking that that group of customers will transition at some point here in the future as well. Okay. I guess I had one last one. You talked about solar, you know, what historically, how big was solar in a day day for you guys, and is there opportunity to kind of get back to that level or grow from there? Yeah, 10 years ago, before the solar wave crashed, that's about 10 years ago, I think Sonotech was doing two or three million dollars of solar there, which was at that time we were a smaller company, so it was significant.

Dick Ryan: I think that was, I don't know, 40% of our sales or something like that, but now two or three million isn't really going to shift the lever significantly for us. You know, the existing solar customer base now that we are communicating with, I mean, I think we anticipated to be significantly larger than that. If it was only two or three million, it would be a big disappointment for us. You know, it has much larger potential, and the primary reason is we're not selling R&D machines.

Dick Ryan: They're anymore worse selling high volume production machines with high ASPs, and that makes all the difference in the world. Yeah, okay, great. That's it for me, thanks Steve and guys and congratulations. Appreciate it, take good talking.

Dick Ryan: Yeah.

Operator: This concludes our question and answer session.

Christopher Coccio: I would now like to turn the call back over to Chris Coccio for any closing remarks. All right, well thank you, and thank you everyone for joining us today. Sono Tek felt we'll get a strong based on our ongoing success with platform initiatives in the high-tech and clean energy markets.

Christopher Coccio: We look forward to our next call that will review our year-end fiscal 2024 results next May. Please contact us directly if you have any questions before them.

Christopher Coccio: Be well and stay safe.

Operator: The conference has now concluded. Thank you for your participation.

Operator: You may now disconnect your lines. .

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