Operator: Good day, everyone, and welcome to the Sono-Tek Corporation Fiscal Year 2027 Mid-Year Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touchtone phones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Kirin Smith with PCG Advisory. Please go ahead.
Kirin Smith: Thank you, Jamie, and thank you everyone for joining us today. Sono-Tek released their Q2 and H1 fiscal 2027 results this morning. If you do not have a copy of the release, please visit the company's website at www.sono-tek.com and navigate to the Investors section. The product market and geography sales tables on the last page of the release will be part of today's discussion. With me on the call today are Dr. Chris Coccio, Executive Chairman, Steve Harshbarger, CEO and President, and Steve Bagley, Chief Financial Officer.
Kirin Smith: 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.
Kirin Smith: Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call. As a reminder, this is our Q2 and H1 call for the period ended 31 August 2026. Our next call will be our full-year fiscal 2027 update for the period ended 28 February 2027, and will be held in May 2027. I would now like to turn the call over to Chris Coccio, Executive Chairman of Sono-Tek. Chris, please go ahead.
Chris Coccio: Thank you, Kirin, and good morning, everyone. Thank you for joining us today to review Sono-Tek's fiscal Q2 and the H1 2027 results. Steve Harshbarger will review the operational performance and business trends, and then Steve Bagley will provide more detail on the financial results. The H1 of fiscal 2027 represented solid progress for Sono-Tek, with revenue growth, meaningful gross margin expansion, and improved operating profitability. Our balance sheet also remains very strong with no debt.
Chris Coccio: Our results also reflect an important shift in the composition of our business, with particularly strong growth in the medical market and increasing demand for higher value production systems. For the H1, revenue increased 6% to approximately $10.9 million. Gross margin expanded to 55%, compared to 51% in the prior year period. Operating income increased 41% to approximately $1.28 million, and net income increased 22% to approximately $1.1 million.
Chris Coccio: The medical market sales increased 289% to approximately $7.1 million. The medical market continues to be an important growth driver for the company. We are seeing customers increasingly move from process development and qualification toward commercial manufacturing, where Sono-Tek's precision ultrasonic coating technology can play a critical role. At the same time, we continue to see opportunities to expand our installed base and our relationships with customers as their production requirements grow.
Chris Coccio: I also want to highlight the significance of the recent orders we announced from an existing alternative energy customer. We recently announced three orders totaling approximately $7.2 million, which cover 10 production scale systems and represent the largest aggregate customer order in Sono-Tek's history. What is particularly important about this order is that it represents an expansion of an established customer relationship.
Chris Coccio: The customer has successfully deployed our technology in an alternative energy manufacturing process and is now expanding its use for Sono-Tek production systems across three geographic locations. This is a good example of the long-term opportunity we see across our business, supporting customers as they move from development into higher volume manufacturing and then expanding our relationships as their processes scale.
Chris Coccio: Together with the more than $3.6 million medical diagnostic production line order announced in August, these programs alone now represent more than $10.79 million of backlog, with the majority currently expected to be delivered in FY 2028. Importantly, these opportunities involve different customers in two distinct growth markets, medical devices and alternative energy. While the timing of individual production system orders can result in variability from quarter to quarter, we believe the increasing scale of these opportunities demonstrates the long-term potential of our technology and our customer relationships.
Chris Coccio: With that overview, I'll turn the call over to Steve Harshbarger, our CEO and President. Steve?
Steve Harshbarger: Thank you, Chris, and good morning, everybody. As Chris highlighted, we had a solid H1 with continued progress across several important areas of the business. Our results reflected strong medical sector demand, higher value production systems, improved gross margins, and disciplined execution across the whole organization. For the H1, revenue increased 6% to $10.9 million, while gross profit increased 14% to approximately $6 million. Gross margin expanded to 55%, and operating income increased 41%.
Steve Harshbarger: Perhaps, and most importantly, we continue to see our encouraging demand for our technology in applications where customers are moving beyond development and into production. The medical market was the largest contributor to our H1 growth. Medical sales increased 289% to approximately $7.1 million, and demand was driven by continued activity in drug-eluting balloon coating systems, specialty stent applications, and other medical device coating applications.
Steve Harshbarger: We are seeing increasing adoption of our technologies as customers move from development and qualification into commercial manufacturing. That transition is really important because production applications involve larger, more sophisticated systems, and they can create opportunities for follow-on equipment, services, and additional production lines as customers' volumes increase. From a production perspective, multi-axis coating systems were a significant contributor to our H1 growth, increasing approximately 50%, and that was driven primarily by specialty medical coating systems.
Steve Harshbarger: OEM systems also increased approximately 67%, and that was supported by demand from our European fluxing OEM partner and a China-based semiconductor OEM customer. Inline coating systems declined 14% for the H1, and that's primarily reflecting the difficult comparison with the prior year, when we had six high ASP systems that were totaling about $4.4 million that were shipped.
Steve Harshbarger: While product line results can vary significantly based on the timing of these larger high ASP system shipments, the underlying demand for high-value production platforms remains very encouraging. We also saw continued improvement in our industrial business, which increased approximately 156% during the H1. That was influenced by an optics-related shipment to the defense sector. This defense sector is going to be an area that we will continue to put increased focus on in the coming years.
Steve Harshbarger: Alternative energy in the H1 reflected reduced demand associated with changes in government policy and spending. That was related to green hydrogen, electrolysis, and fuel cell applications.
Steve Harshbarger: However, we continue to view alternative energy as a meaningful long-term opportunity. Our recent $7.19 million order announcement that Dr. Coccio just touched upon earlier is a very good example of why we continue to believe in the long-term potential in this market. These orders are from an existing customer that has successfully deployed Sono-Tek technology in an advanced clean energy manufacturing process. The customer continues to expand that deployment into additional production lines across three geographic locations.
Steve Harshbarger: The 10 systems are currently expected to ship primarily during FY 2028. This continued expansion demonstrates the strength of our business model, where successful process development leads to high volume manufacturing opportunities and additional orders as our customers expand their production capabilities. on 31 August, our backlog was approximately $9.5 million. That is up 23% from the end of the fiscal quarter.
Steve Harshbarger: Since quarter end, the three new clean energy orders totaling $7.19 million have substantially increased our backlog in Q3 FY 2027. A significant amount of this backlog is currently expected to ship in FY 2028. Importantly, the recent alternative energy orders as well as that previously announced medical diagnostic production line order that was more than $3.6 million, represents two different customers in two distinct markets.
Steve Harshbarger: With approximately five months or so remaining before the beginning of FY 2028, we still have additional time to build upon this backlog even further. Turning to our outlook, we are reiterating our expectation for flat to modest revenue growth through this current FY 2027. As we have discussed previously, the timing of several large production systems orders can create variability for us from quarter to quarter.
Steve Harshbarger: At the same time, we continue to see encouraging demand, particularly in medical devices, and by the increasing value and scale of these systems we are supplying. Our focus remains on supporting our customers as they move from development into commercial manufacturing, expanding our install base, and continuing to invest in engineering, application development, and commercial capabilities.
Steve Harshbarger: The recent record order activity also gives us increased visibility in FY 2028, while we continue to pursue additional opportunities across medical, microelectronics, industrial, and alternative energy applications. Lastly, our balance sheet remains pristine, with cash continuing to grow and no outstanding debt, positioning us really nicely for further execution on our growth strategy. With that, I will now turn the call over to Steve Bagley, our CFO, for a financial review of the results.
Steve Bagley: Very good. Thank you, Steve, and good morning, everyone. I will begin with some additional detail on our financial performance for the Q2 and H1 of fiscal 2027. For the Q2 ended 31 August 2026, total revenue was approximately $5.23 million, compared with $5.16 million for the prior year period, and that is an increase of $69,000. For the H1, revenue increased 6% to approximately $10.9 million, and that compares with $10.3 million in the H1 of fiscal 2026.
Steve Bagley: The H1 increase was driven primarily by the significant increase in medical market sales and higher sales of multi-axis and OEM systems. Gross profit for the Q2 was approximately $2.8 million, and that is an increase of approximately 7% from the prior year. Gross profit margin was approximately 53% in the Q2, primarily reflecting an unusually favorable and geographic mix.
Steve Bagley: For the H1, gross profit increased 14% to approximately $6 million, while the gross profit margin expanded to 55%, and that compares with 51% in the prior year period. The improvement in gross profit margin reflects a favorable product and geographic mix, including a higher contribution from medical systems and other higher-value production equipment. Gross margins can vary significantly from period to period based on a specific system shipped, customer and geographic mix, distributor involvement, installation requirements, and other factors.
Steve Bagley: Accordingly, the gross margin levels achieved during the H1 of fiscal 2027 should not necessarily be viewed as indicative of margins expected in future periods. Now a review of our operating expenses, which remained well controlled as we continue to invest in the business.
Steve Bagley: Research and product development costs increased in the Q2 of fiscal 2027 due to increases in employee health insurance, R&D materials, and other engineering expenses. For the H1, R&D costs remained steady at approximately $1.3 million compared to the prior year, as the costs I just mentioned were partially offset by decreases in some salaries and supplies.
Steve Bagley: Marketing and selling expenses increased in both the Q2 and H1 of fiscal 2027 due to increases in salary related to our sales application lab, our forward deployed engineering group, employee health insurance, and trade show expenses. Our sales and marketing costs are variable, and a large portion of the costs are dependent on trade shows and where geographically our sales are generated.
Steve Bagley: General and administrative expenses increased in both the Q2 and H1 of fiscal 2027 due to increases in salaries, employee health insurance, corporate expenses, stock-based compensation, and legal and accounting fees. Our operating income for the Q2 decreased by 9%, or $39,000 to $382,000 due to an increase in operating expenses. However, H1 operating income increased 41% to approximately $1.28 million, compared with approximately $905,000 in the prior year.
Steve Bagley: This improvement reflects the combination of higher revenue, improved gross margin, and disciplined expense management. Net income for the H1 increased 22% to approximately $1.11 million, compared with approximately $909,000 in the prior year. Our balance sheet remains very strong, and as of 31 August 2026, cash and marketable securities totaled approximately $17.7 million, and that compares with $14.8 million at the end of fiscal 2026. We continue to have no debt.
Steve Bagley: The strength of our balance sheet provides us with the flexibility to continue investing in the business, support working capital requirements associated with larger production system orders, and pursue opportunities to expand our capabilities. As Steve discussed, backlog at 31 August was approximately $9.5 million, representing a 23% increase from the end of Q1. Following quarter end, we received three additional orders totaling approximately $7.19 million.
Steve Bagley: Those orders, together with the previously announced medical diagnostic production line order of more than $3.6 million, significantly increases the backlog heading into FY 2028. Overall, we believe that our balance sheet and backlog position the company very well as we move through the remainder of fiscal 2027 and prepare for our next fiscal year. With that, I will turn it back over to Steve. Thank you.
Steve Harshbarger: Thanks, Steve. To summarize, we believe the H1 demonstrated continued progress in the business. We delivered revenue growth, meaningful gross margin expansion, and stronger operating profit, while the medical market continued to be a significant growth driver. At the same time, we are seeing increasing evidence of customers moving from development into commercial manufacturing, which can create opportunities for larger and more sophisticated production systems.
Steve Harshbarger: This recent record clean energy order is an excellent example of this progression, and together with the medical diagnostic program, provides significant early visibility into FY 2028. Our priorities remain super straightforward. We execute well for our customers. We continue expanding our installed base and invest selectively in our technology and commercial capabilities and capitalize on opportunities in microelectronics, medical, industrial, and alternative energy applications. With that, we will open the call for questions.
Operator: At this time, we will begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phones. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and 2. Once again, that is star and then 1 to join the question queue. We will pause momentarily to assemble the roster. Once again, that is star and then 1 to ask a question. Our first question today comes from Bill Nicklin from Bill Will Insights. Please go ahead with your question.
Bill Nicklin: Hey, good morning.
Steve Harshbarger: Good morning, Bill.
Bill Nicklin: All right. Thanks for taking my questions. It looks as though the majority of your high ASP orders are coming from opportunities where you become fully integrated into your customers' production lines. You think that is a fair assessment, and maybe there should be some kind of a breakout going forward to show that these are integrated orders? Because it appears to me that the integrated orders create kind of a flywheel effect where you can get a new customer, but then you get these continuing orders without getting a new customer.
Bill Nicklin: I wonder if you would comment on that and how it affects your outlook for the next months and years.
Steve Harshbarger: Sure. It does, because it certainly makes a difference of where we are going to be putting our investments. We have a substantial amount of cash, as you know, on hand. I think there is a couple of areas where we will continue to invest as our business grows and our financial position strengths. First, I should point that, people are always saying, "Hey, where are you going to put that money?" On the acquisition side, we continue to have both inbound and outbound activity, and that is really nothing new for Sono-Tek.
Steve Harshbarger: Given the nature of our business, we have always had companies approaching us, and we are always going to keep an eye on opportunities, I might say, for potential opportunities. I would say that activity certainly has picked up in that area for our business, and is certainly gaining momentum there.
Steve Harshbarger: I certainly want to emphasize, though, although that we proactively continue looking at acquisition opportunities, we are really focusing only on companies that we really know very well. These are areas where we have a great understanding of the markets and the business. We are not looking to venture into areas too far away from what is our core understanding. Probably the more interestingly is where we are going to look to invest organically.
Steve Harshbarger: That kind of goes back more to the core of your question, that the core ultrasonic technology business, that is the foundation of a business, and we will certainly make unique investments there. Over the last several years, we are really starting to put a much greater emphasis on expanding our systems integration capabilities, which is what you were just talking about there. Particularly through our forward deployed engineering team, or that FDE team, as we call it.
Steve Harshbarger: What this team does, and it does it with excellence, it is really to work very closely with customers to take our existing ultrasonic technology and integrate it into much larger, more sophisticated production platforms. That has been a really important change in our business. Instead of just selling, say, a coating system, we are increasingly providing a much more complete production solutions.
Steve Harshbarger: Of course, that translates then into significantly higher ASPs, higher average selling prices in basic. What is exciting for us, I think there, is now that we have proven this model works finally. We are seeing that these large production platform orders, they are coming our way more frequently. We believe our investments in the integration and capabilities are really a big part of that reason why.
Steve Harshbarger: Just to give you an idea of our commitment here, two, maybe it was 2.5 years ago, I should say, our FDE team consisted of just one person. Now today, we are up to four people on that team. I would expect us to continue expanding their capabilities over the next year or two. There is another really important reason why we are putting more resources in that particular area and that return on investment.
Steve Harshbarger: When we invest in developing the next major innovation, say, in our core ultrasonic technology and areas like that, it can take, I do not know, five, maybe six years before that investment really starts having a really meaningful impact on our business. When we invest in our integration capabilities, that what we find is we can start seeing meaningful return in as little as maybe just one or two years.
Steve Harshbarger: That is a pretty significant difference in my opinion. Again, do not get me wrong, both types of investments are very important to us, and we certainly do not back away from developing in the new ultrasonic coating technology area. But I like the idea of our decades of investment that we have already made in our ultrasonic coating technology with this strategy. Leveraging that is super important to us. We are not necessarily having to invent something new every time we want to grow.
Steve Harshbarger: We already developed something that is really pretty remarkable technology, and now we are really investing in the engineering capabilities that allow us to take technology into much larger production platforms. What we are finding is that these investments are showing to generate a return much more quickly than, say, a typical traditional R&D investment from us.
Steve Harshbarger: We are really getting more commercial value out of the technology that we have already spent these decades of time developing. I believe that is going to be one of the most important investments areas for Sono-Tek over the next few years for us. I know that was kind of long-winded, Bill, but hopefully, that gave you a little bit of an overview.
Bill Nicklin: I like it. You touched on a couple questions I haven't even asked yet. That's pretty good.
Steve Harshbarger: Yeah.
Bill Nicklin: In my mind, if you look at these larger integrated orders, it's really an indication of a flywheel effect where it's not like you have to go out and get a new customer each time you want to get an order. Your FDEs are out there getting new orders, but they're also working with customers where as your customer expands, they pretty much have to come to you.
Steve Harshbarger: Yeah.
Bill Nicklin: You're getting a double effect. You're getting a new customer, but then you're getting this follow-on business, because if you're integrated with their manufacturing, the odds are, if their manufacturing grows, your orders are going to grow.
Steve Harshbarger: That's exactly right. This last order that we just announced for $7.2 million is really a prime example of that. That's a customer that we walked through in the R&D phase very successfully and in the pilot line phase. Then we developed a really sophisticated high-volume production system for them. That sold well. They loved it, but it doesn't end there.
Steve Harshbarger: As that customer has success, the orders keep coming because every production line that they build, we are attached at the hip with them, because we are their coating expert. It really changes our business model significantly when you start having customers like that, where you have these integrated partners to you.
Bill Nicklin: Good. Following on that, back to your whole forward deployed engineering strategy, I think you said you had four full-time forward deployed engineers now. What might you have a year to 18 months from now, and what does that indicate about the momentum you see in your business?
Steve Harshbarger: Well, now that we have proven the model is successful, there is no doubt about it now. We put the first guy in there, it worked really well. Then we doubled it to two, and then we doubled it to four. I should say it is four people in total. There is one support technician in there with three actual forward deploy engineers. We have proven that model works. We are getting these significantly large orders, and now we are going to be doubling down on that.
Steve Harshbarger: We are going to be continuing to add this more personnel into there and continuing to make that bet, because there is still the demand on the demand side that is pulling us there. As long as we see our customer base pulling us into that area and wanting it and desiring it, there is no reason for us not to double down on that.
Steve Harshbarger: We have not really said exactly how many we are going to be hiring there, but I would not be surprised to see that team doubled in another year or two, maybe even quicker. The challenge for us there is mostly that these are really skilled, experienced people with our technology and how to do integration. Finding them is always a little bit of a challenge. But, we have some great guys in that area that I think are in the pathway to join that team.
Bill Nicklin: Great. That sounds promising. I appreciate it. Thank you.
Steve Harshbarger: Good chatting, Bill. Take care.
Operator: Our next question today comes from Dick Ryan from Oak Ridge Financial. Please go ahead with your question.
Steve Harshbarger: Hey, morning, Dick. You there?
Dick Ryan: I was break. I had a bad.
Operator: Mr. Ryan, it seems that your line is breaking up. If you could give us a call back, disconnect and rejoin, we can get you back in the question queue. Our next question does come from Ted Jackson from Northland Securities. Please go ahead with your question.
Ted Jackson: Thanks. Good morning, guys.
Steve Harshbarger: Hey, how's it going, Ted?
Ted Jackson: Oh, couldn't be better. I love these days, reporting seasons for companies that are doing well. I got a few questions. I wanted to start out just with the medical market. You've had a lot of success there. The company, its initial success was really in the coating of stents, and you've kind of done two things with it, is you've upped the game in terms of the kind of systems you sell and the ASP to them, and then you've expanded into the balloon market.
Ted Jackson: I guess I'm curious, do you see additional opportunity in these medical balloons? Do you see different applications beyond the two that you've had the success with and what those might be? So I guess I'm asking, is there an opportunity for you to expand the customer count with regards to this newer balloon opportunity?
Ted Jackson: And then maybe some discussion about other things where you feel you're well-positioned. I think things like implants and such would be logical. So that's my first question. Thanks.
Steve Harshbarger: Sure. It's a good question because the medical market's really evolving for us quickly these days. What in basic happened is, we gained all this high volume production expertise in the clean energy sector. That was primarily in the electrolysis area for things like fuel cells. As that market started to shift with government policy and slow down for us in that particular sector, we immediately then shifted resources over to the medical sector.
Steve Harshbarger: What that allowed us to do is to take product lines like this developing drug-eluting balloon product line that we make machines for, and could develop a system that was much more extensive and had a lot more capabilities than say, like our stent coating systems.
Steve Harshbarger: When we first started going into the stent coating market, we sold relatively small systems because that was what our capabilities we had internally at that time. So we were selling maybe $75,000 to $100,000 systems. Entering into the balloon market, where we now had a lot more capabilities internally, to offer the customer a much larger package that had a lot more offerings to it.
Steve Harshbarger: All of a sudden, the ASP of these machines took off much higher, so they were more in the quarter million dollar to $300,000 area. The customers wanted that really. They would've even liked to have it back in the days for the stent coating market, but we didn't have that capabilities at that time. As we enter into DEB, which is, I have to say, somewhat, I wouldn't call it its infancy, but it's coming out of its infancy.
Steve Harshbarger: This is a market that's really maturing right now, that we are, what I would consider, the industry leader for coating drug-eluting balloons. The largest companies in that area pretty much use Sono-Tek machines for that process. Not every one, but a good chunk of the major ones use us for that process. I think there's a lot of more road ahead of that when we look at their forecast from our customers, if things go as they plan, we should be able to continue to support them as they add on additional manufacturing lines.
Steve Harshbarger: That is their intent in the future for most of our customers in that particular market. What's probably more exciting for me, though, is that most of these companies that make the drug-eluting balloons or make the stents also make other medical devices, as you've indicated.
Steve Harshbarger: They make, whether it is heart valves or meshes, internal meshes that go into the body, or diabetes devices, that so many of these devices now need thin film coatings onto them that prove some sort of functionality. Sono-Tek is no longer now being considered, say, a stent coating company. Now we are being considered a medical device implantable company, and one that has the capabilities for high volume production.
Steve Harshbarger: It is proven. I know our customer base sees these press releases out there, and they know we are shipping to the largest medical device companies in the world, and they can see that we are a financially stable company. It brings this huge amount of credibility.
Steve Harshbarger: Customers that would not have necessarily come to us in the past now have a very high level of confidence coming to us with their next gen medical device to bring it into our lab and prove it in. That is something we have happening on a weekly basis here, where somebody is bringing their next gen medical device in and proving it in. As those get proven in, they will prove their R&D sector, and then they will go through FDA, and then they will be in the production line, and that is where we start to really see the benefit of selling multiple machines at high ASPs.
Ted Jackson: Well, that is pretty exciting.
Steve Harshbarger: Yeah. It is definitely super exciting. To see what you hope for actually happening, is super exciting to see that actually go through successfully.
Ted Jackson: And then, it ties into this, I think, somewhat, but you talked a bit in your prepared remarks about a lot of excitement in developing markets and new things that were coming. Is that excitement that is driving that commentary from you greater than these newer opportunities in the medical market? Maybe some discussion on other areas where you have some enthusiasm. I know in the past you have kind of bounced around some of the next gen display stuff, but maybe some color with regards to what you are excited about for new markets that Sono-Tek really has not tapped yet.
Steve Harshbarger: Yeah. There is most definitely a plethora of new applications that are outside of what we have announced. As an example, like the defense sector has a lot of applications that are out there that we can have a nice fit into. The microelectronic sector, including semiconductor, has a lot of nice applications. Then there is a lot of them that are, what I would describe, a little bit more in the infancy, but have huge upside potential, like we have spoken before, like the micro LED markets or the insulation market for conductive coatings.
Steve Harshbarger: These are all areas that companies, not just Sono-Tek, but other associated companies, are putting many millions of dollars of investment into this. So if you are making, say, a large cell phone company or a display company, they all have these very active and expensive R&D programs, which Sono-Tek is now very often part of.
Steve Harshbarger: They all will not be home runs, but the ones that are successful, we are more than likely to be the chosen technology because we are the one that is proven on the R&D and pilot line level. When they pull the trigger to go to high volume, it is sometimes difficult for us to predict because it is not within our control. This is the transition of them developing the whole product and bringing it to market. But when they do it, we see the benefit. Now we are starting to see that happen with many of our customers. Things that we were working on two, three, four years ago, all of a sudden, it has got their approvals.
Steve Harshbarger: They have got, whether it is a large phone manufacturer or a TV manufacturer, has said, "Hey, yes, we are going to make the switch to this technology, and Sono-Tek will be the standard." So it is spread over a large breadth of industries. But the concept of us getting in on the R&D level, proving it, making it work well, building a relationship where the customer, we are attached at the hip, and then them transitioning to high volume production is the real strategy. It is almost always focused on the high tech industry sectors primarily. That is really where we are putting our focus in.
Ted Jackson: Okay. My final question, just to refresh on the capacity in your current facility. I know you have gone through a number of expansions and sort of restructurings to bring it up. Where do you stand with regards to what you can produce out of your current footprint, and how long do you think that will last?
Steve Harshbarger: Yeah. We are intending to start what we consider a major expansion at the end of this current calendar year. It will be December, maybe January, where we will start actually making things happen there. I actually have a meeting tomorrow on this, because with these latest orders, it is kind of accelerated things to get things going quicker. That will allow us to take our existing manufacturing footprint from approximately what we believe is around $27 million, capped up to around $33 to $36 million peak within our existing buildings that we are in today.
Steve Harshbarger: That entails pretty much building a mezzanine structure, and also doing some optimization, I should point out, of our manufacturing flow. We are in several buildings, so optimizing the flow of our manufacturing will really bring us some efficiencies.
Steve Harshbarger: Following that, we still have one building here on our campus that we do not occupy, and we have a very short-term lease on it, of which that will be the last phase, and that would take us up to around $44 to $45 million in manufacturing capability. That is on the radar. We have a plan in place for that. We have not started or implemented that, but we have a plan in place for that retrofit as well. Now, due to this increased frequency of these larger, higher ASP orders now coming in, we do have to start thinking about, where do we go from 45 to get up to 85? So we are going to have to start that process coming up here, in that planning phase.
Steve Harshbarger: We will not start the building phase or anything like that, but we will have to start that planning phase, in particular because some of the orders coming in now, it only takes three or four orders that are significant size that could require us to make a significant structural move for more space. So we have got to at least have it on paper, a plan in place to be able to take it to that next phase. That will be something that I am looking forward to, having that prepared for us.
Steve Harshbarger: It is not like the old days where if you got two or three more orders, it did not make any significant difference. Now, if we get two, three, four more orders of these multimillion-dollar systems, it all of a sudden makes a big shift in our outlook.
Ted Jackson: Okay. All right. Well, thanks for taking the time to answer my questions.
Steve Harshbarger: Hey, good catching up, Ted.
Operator: Our next question comes from [Dan Dufault] from Oak Ridge Financial. Please go ahead with your question.
Steve Harshbarger: Hey, [Dan].
Sam Dufault: Hey, guys, it's Sam. Going to field some questions on.
Steve Harshbarger: Oh, Sam. How you doing, Sam?
Sam Dufault: Good. How are you guys?
Steve Harshbarger: Doing good, thanks.
Sam Dufault: Yeah, congrats on the quarter. I guess my question, I'll kind of leapfrog off of Ted's question on the capacity side. You mentioned a mezzanine structure, kind of building out some of that capacity. What's some of the capital requirement you guys anticipate spending to get this expansion underway?
Steve Harshbarger: Yeah. The initial CapEx we had estimated at around $700,000, of which we are optimistically thinking that we are probably going to get New York State to be able to participate maybe with $150,000 to $200,000 as part of that. That's just for that initial mezzanine phase, Sam. Then for retrofitting the next building, which is the building we don't occupy, that will also be somewhere in the area of about a $600,000 CapEx investment. It's not huge dollars, but it's significant enough that we want to do it at the right timing for us here. Of course, the first phase is going to be underway no matter what. That's kind of a decision that we've already said we have to do it. There's no choice.
Sam Dufault: Got it. Do you think or anticipate the state helping out with that phase 2 at all, or mostly just on the phase 1 for now?
Steve Harshbarger: I would hope they would. As we grow, and in particular as we start thinking getting from the 30 to 40 and then 40 to 80 type of model, that we have to at least consider other options outside of New York State. We've also already been looking and talking to places like South Carolina. There's a lot of very attractive incentives to manufacture outside of New York State as at least an expansion, so maybe we would have two locations.
Steve Harshbarger: With those incentives, I would hope New York would give us at least close to equally attractive incentives to encourage us not to leave and set up manufacturing in a less expensive area. But we have to do the responsible thing and look at both options, and then from there we'll make a final decision.
Steve Harshbarger: So I think that we will continue to see state sponsorship or contributions, I should say, whether it is in New York or alternative states, I think we will see contributions to help our expansion.
Sam Dufault: Got it. On the margin side, you guys have seen some elevated gross margins over the last few quarters. How much of that can you attribute to whether it is selling mix versus some structural advantages now with the higher ASP machines?
Steve Harshbarger: Yeah, it is a little bit of both, but I think the most significant impacts we see there is we are finding on these high ASP production machines that the value we bring is very significant, and that is in the applications expertise and all these additional things we are able to add on for the capabilities of our machines. The customers are willing to pay for that increased value.
Steve Harshbarger: So they definitely drive higher ASPs and better gross margins, but where it really starts to impact the gross margin is not on machine number one, it is on machine number two through 15. By then, we start to optimize the costs after machine number one, and we can really start to drive margins higher. So repeat high ASP machine orders are kind of the best case scenario for us.
Steve Harshbarger: It just happens to be that a lot of those, at least initial customer-wise, are ending and landing in the US marketplace. A lot of our customers have been onshoring of recently, especially these high-tech accounts, and that certainly is not a bad thing for Sono-Tek because our costs become better from a standpoint of eliminating distributor discounts that take place when they go overseas, that very often happen.
Steve Harshbarger: So it is definitely a promising thing for us, and that is going to be nice for us heading forward, that these last orders announced that are going to be shipping in FY 2028, that $7.2 million, as already disclosed, that is repeat orders. So they should come in at nice margins for us with relatively low install costs and so forth.
Sam Dufault: Yeah, that was going to be my follow-up question, given the order, with the follow-on orders in the green energy side. Can you maybe allude to or provide some commentary on margins going forward, whether it is 2028 or kind of if the current levels are sustainable or there is room for growth going forward?
Steve Harshbarger: Yeah. You noticed probably in our commentary, we cautiously worded our margin expansion over the last two quarters. That was intentional because we knew we had some high ASP margin systems that were shipping to US, and we had some really excellent gross margins that came out in Q1 and Q2 as a result of that. That probably the coming quarter, maybe not quite as attractive because we do not have those same high ASP systems in them. What is exciting is what is flowing into our backlog is, again, more of these high ASP, high volume production systems. So what we are describing as unusually favorable right now, optimistically hoping that we take that unusual away as things go forward and we start to get more and more orders that look like those orders where it will not become unusual anymore.
Steve Harshbarger: We will have to see how that all plays out, but that would be what I would hope to anticipate is more of that type of orders reaching us, high ASP, repeat orders where we are able to optimize the costs, reaching us more commonly so it does not become the unusual, it becomes the norm, hopefully. But we will have to see how that all plays out.
Sam Dufault: Got it. Well, appreciate the commentary, and again, congrats on the quarter.
Steve Harshbarger: Okay. Thanks, Sam. Good talking to you.
Operator: Our next question comes from Greg Weaver from Invicta Capital. Please go ahead with your question.
Greg Weaver: Good morning. Thanks for doing the call, taking the questions here.
Steve Harshbarger: Morning, Greg.
Greg Weaver: Hey, Steve. You touched on this a bit with your answer to Ted's question, but maybe I will put a finer point on it. Could you characterize your visibility on your medical business continuing at these nice levels, given the noted commercial manufacturing transition?
Steve Harshbarger: Yeah. I can say that the level of activity in our labs and the level of activity with our FDE team, the forward deployed engineering team, is very high. That is both for existing successes that we are actually out there implementing, to expand upon those with more production lines, as well as new products that are coming into the mix, which then would have the potential to mature into something where it becomes significant, with multiple lines, high volume manufacturing.
Steve Harshbarger: So the medical side is continuing to be one that is really progressing very nicely for us. It has been exciting to see that we had this success with alt energy, making that transition very cleanly. Now we are making it happen very successfully in the medical side. But I would like to see that continue next on to the microelectronics side.
Steve Harshbarger: We have some pretty large systems in the microelectronics side, but I think they can become significantly larger also. So it is kind of taking one chunk off at a time, for where we have the most expertise in those areas, but we are gaining that expertise very quickly because of that new forward deployed engineering team, that we got some really smart guys in that area that know their business.
Greg Weaver: Excellent. All right. Yeah, you filled that giant hole from the alternative energy there nicely, but it does not show on the top line, but you can see it in the segments for sure. How about, kind of related to that, on the spares and repairs side of things, you are on this about $4 million-ish run rate right now, but I guess with the transition to these larger production systems, you think there will be a pickup in that business, especially some of these medical systems come off warranty?
Steve Harshbarger: Yeah. We just actually had this conversation yesterday, and that is part of what is exciting about these high volume, multi-system orders going out there in the field. I think we will see two significant things happen. One is high volume production orders first. These machines cannot be down ever. It is not like an R&D machine. So having things like calibration contracts and service contracts in place are much more likely to be welcomed because there is a higher level of criticality to make sure everything is running perfect.
Steve Harshbarger: Even through government agencies like the FDA, there is a higher level of scrutiny to make sure that you have things like your machines calibrated, which comes at a cost. So we would anticipate as these machines fall out of warranty, these newer high volume production machines, that we will start to see a reoccurring revenue stream start to fold into our process.
Steve Harshbarger: That has been one of the things that we have been spending a lot of time on, is trying to get a real steady, significant services related reoccurring revenue stream. We are optimistic thinking that that will be the start of something significant for us in the coming year as these machines start to fall out of warranty for us.
Steve Harshbarger: There should be also associated a fairly nice spare parts business there also, both spare parts being kept on the shelf because they are critical lines that cannot be down, as well as just normal consumables that will wear over time. Because most, again, these lines in general, many of them run three shifts a day, 24 hours, seven days a week, so the wear on them is significant, and over periods of time, they should start to need replacement parts and support as well.
Steve Harshbarger: So the larger the fleet we have out there in the field, the larger potential revenue stream we should see from services coming from that as well.
Greg Weaver: Excellent. Yeah. It is good to see a nice revenue base build up here. I guess on that note, you have made a lot of investments over the past few years as you have kind of readied the business to do this rinse and repeat, production orders, larger systems. Could we talk a little bit maybe about what you foresee as operating leverage from this $22 million run rate? What should we think about as flow through for incremental dollars of sales? How much should we see go down to the bottom line?
Steve Harshbarger: Yeah. I got to believe we are going to see, and again, we will see how it flows up, but I have got to believe we are going to see some significant leverage here, at least from this next phase, from that $22 million to, say, $40 million area. There shouldn't be a lot of significant extra costs there, so it's going to flow through, and in all honesty, I don't really know how far it's going to flow through and how much of an impact is going to happen, but it has got to happen. We certainly don't need to be increasing costs for a lot of things here, other than direct personnel building these machines.
Steve Harshbarger: We have got so much accomplished already there, and the one area, though, outside of that, we will continue to really be investing heavily, which will increase our costs, would be in that forward deployed engineering team area, because I just believe that that's really a key aspect to having customers that are very attached to our hip and loyal to us, and they really recognize the benefit that we are bringing.
Greg Weaver: Sure. Yeah. It's definitely shown to be a good investment. Makes sense. Just the last one from me, you highlighted this optics order for defense and then kind of made a comment off the cuff about you were bullish on defense. Can you talk a little bit about what you are seeing there and maybe what's the use case for this particular system you sold?
Steve Harshbarger: Yeah. This particular one, I can't say too much with it being a defense sector area, but there is lots of optics related technologies when it comes to flying objects, that they are all over it, and they all need sensors and a different type of optics related things that have to happen on them, and we see that there's a market there. There's a demand there. It's growing. We see our technology has some really good fits for several of the applications.
Steve Harshbarger: It's not an area that we presently, say, go to defense sector trade shows or market very heavily to it. Even if you look at our website, you don't see a defense sector chunk of our website, which I suspect there probably should be something that we are more focused to that sector. It's kind of one of those ideal candidates for us.
Steve Harshbarger: We're always looking for markets that are high tech, that are not so price sensitive, that we can get the margins that we hope for in them, and the defense sector certainly falls in that category. It may require us to do a little bit of work on some of our internal requirements of how we maintain and keep documents. The defense sector requires some special compliances in that area.
Steve Harshbarger: But they're all areas that after a little bit of investment, we could comply. We're looking at that as well. I wouldn't be surprised in, say, another quarter or so if you're like, "Oh, Sono-Tek now has another tab in addition to clean energy, microelectronics, and medical. Now they have a tab that says defense sector." We'll start advertising and focusing on areas that we know we've had some proven successes in.
Greg Weaver: Great. Appreciate that. Keep up the good work. Thanks.
Steve Harshbarger: Hey, good talking.
Operator: Our next question comes from Karen Nyawera from Encore Holdings Group. Please go ahead with your question.
Steve Harshbarger: Hi, Karen, you with us still?
Operator: Karen, is it possible your phone is on mute? We will move on to Jason Urasner from Bumbershoot Holdings. Please go ahead with your question.
Jason Urasner: Good morning. Thanks for taking the questions. I appreciate the call is getting long, so I will try to keep it quick.
Steve Harshbarger: No problem.
Jason Urasner: Maybe just similarly, focusing for a second on the semiconductor and microelectronics side. I think I saw you guys are currently at SEMICON West, and then also going to SEMICON Europa. Defense said kind of don't participate in the trade shows. I don't really remember you doing much participation in the events in semiconductors either in the past. Just wondering if maybe you could talk about that opportunity kind of specifically in semi.
Jason Urasner: Is it entirely spray coating of photoresist? Or is it mostly the alternative substrates, kind of 200 millimeter below, or you've also moving up to 300 millimeter wafer stuff?
Steve Harshbarger: Sure.
Jason Urasner: Just that there's a lot of interest in optical components in semi as well as defense, so just any kind of color there.
Steve Harshbarger: Yeah, sure. It's a very broad area for us, broader than I actually recognized myself even when we first started jumping into it. Because in the beginning, I thought it was all photoresist. But what we are recognizing as we start to introduce products that are high volume manufacturing capable, all of a sudden, we are starting to receive inquiries, in areas that are outside of photoresist.
Steve Harshbarger: I can't go into, unfortunately, too much detail because they're super tight-lipped with confidentialities and NDAs in this particular industry, because this is usually on most of the next gen chips that are being used, like in the AI world. So they really tight-lipped us on very much what we do there.
Steve Harshbarger: But we think there's both areas for our continued marketplace for photoresist, both in 200 millimeter, which we're already attacking, but also making a shift towards larger 300 millimeter wafers and trying to bring that from the lab and low volume production area to the fab area. That's going to be our focus at SEMICON Europa. SEMICON West that we're at right now, we're not so much focusing on that because it's just a little bit too early, just a few months too early, but we will be focusing on that in SEMICON Europa.
Steve Harshbarger: But I firmly believe there will be more applications outside of photoresist as well, that may actually even pull us there into the larger 300 millimeter area, maybe even faster than the planned photoresist area. There's a lot of unique thin film processes that take place in that whole semiconductor manufacturing area.
Steve Harshbarger: And all we need is to find two or three of them that are like, "Oh, that's a perfect fit for Sono-Tek." These are companies in general that would not have even asked us to be that fit if we didn't now have the capabilities that we have today, because they're not even interested in talking to somebody unless you've proven it, that you can work in super high volume production. But now they see that, all right, this company has made that transition where they can provide us the appropriate equipment if the application is successful.
Steve Harshbarger: So we do have some things happening on the laboratory area to prove for high volume manufacturing, and that's the main thing, that they want proof to transition into high volume manufacturing capabilities.
Steve Harshbarger: I think although it's not as short-term as, say, like medical or alt energy, but I think that's on the horizon as maybe even the potentially largest sector for us to come in the future. It's just the one that we've kind of approached third in line here for our focus, but it's now rising up to the surface for us here in this coming year.
Jason Urasner: And is it sort of process steps that are finally needing higher technology thin film kind of precision requirements, or is it process steps that sort of never existed before? I guess it sounds like you don't quite have the pilot lines yet where you could see that progression similar with the solar customer, where it could pull you forward into kind of production spending or the fab more quickly. It sounds like it's kind of maybe an inning or two earlier.
Steve Harshbarger: That's probably right. They're to the point where they are saying, "Hey, let us come to your lab, prove this works, and then Sono-Tek design the machine for us to meet high volume production." I don't think we'll have to go to the extent of, say, doing pilot line, because we have, I think, enough credibility now that they would say, "Hey, just make us production machines for these sort of applications." But they do recognize that our technology is unique enough that they're able to do things that they are not able to do with their existing coating technologies.
Steve Harshbarger: That's, I think, the primary driver. So to answer your question, whether it's new or existing processes, it's typically a processes that is not working that well for them. They're getting away with it, trying, but they're like, "We really don't like what we're doing today.
Jason Urasner: Yeah.
Steve Harshbarger: Sono-Tek is showing them, "Oh, we can solve the headaches that you may have, and let us prove that to you.
Jason Urasner: Just in terms of timing, though, I guess my question a little bit is with kind of the highest technology edge of AI chips, stuff that is going into data centers, kind of optical components, all that stuff, things tend to move really quickly when a technology is kind of unique in solving a problem that has not. I guess, how do you evaluate kind of the speed at which some of these could potentially turn into real opportunities quicker or not so fast?
Steve Harshbarger: I think speed for the next gen, the next rev, will be very quick to give us the thumbs up or thumbs down, like that, "Hey, this meets the need." Speed in general for actual implementation, once you have a proven known good processes, does tend to be a little bit slower, believe it or not, in that semiconductor industry, where they tend to move very quickly on proven methodologies and are a little more cautious on things that have been only lab proven or pilot line proven.
Steve Harshbarger: So I suspect, for a really significant impact, we may be out 1, 2 years, maybe even 3 years for a really significant impact for the point where they are saying, "Hey, I want to buy 10 of these machines to go into this fab." I think we could be looking a few years out.
Steve Harshbarger: But I think we will start to see some level of impact relatively quick from the standpoint of, oh, we got our first machine in, or we got the first couple machines in for this new processes. That, we will be able to, I think, get under our belt relatively quickly, meaning within, say, like a year or something along those lines.
Jason Urasner: Okay. Then just following up on the question you got on operating leverage. Obviously in the quarter and I guess the outlook for the H2 of the fiscal year, you are kind of getting through this gap of tougher order period, before you sort of have this bigger resumption of growth in FY 2028. Obviously had stepped up the marketing spend, I guess it is around $1 million a quarter. Leveraged that up pretty nicely in Q1, kind of less so in this quarter, and maybe the outlook presumably for the H2.
Jason Urasner: Is this going to be, you have to carry that cost because you are seeing pretty significant benefits but are not going to have the revenue at least for a quarter or two. Is that kind of the right way to be thinking about it?
Steve Harshbarger: I think so. We are now starting to say, "Hey, in order to really accelerate things, we have to start making some more significant investments prior to that." We have got the money, and we are profitable enough that we could say, "Hey, double down on this bet." Do you really want to only hire one or two guys in this area when you could hire four and get a much more significant benefit in a year from now?
Steve Harshbarger: So although the short term Q1 or Q3, Q4, it may not be as attractive in margins as, say, like the earlier H1, but right behind that is going to be orders that we are anticipating will be higher revenue, and it should, based upon our existing backlogs, looking like maybe better margin orders as well.
Steve Harshbarger: I am hoping that we will see more of that fall into the backlog of these high ASP, high volume orders, which give really good gross margins. We still have a pretty good amount of time left in this current fiscal year to fill up next fiscal year. So I am hoping that we will see this. We need to make these large high ASP orders not happen twice a year. We need to make them be happening every month. So that is
Jason Urasner: Yeah
Steve Harshbarger: our strategy, that we need to get to that point.
Jason Urasner: When you talk about the ASP progression and kind of the high ASP orders, I guess in the past, you've sort of delineated it between orders less than $75,000, kind of have that middle range, $75,000 to $150,000, and then the upper range of over $150,000. Is the $150,000 kind of still a good gauge of a commercial. I guess, how do I square that versus a $7 million order? Is there kind of big R&D orders that kind of get lumped into the high ASP versus, it sounds like what you're really trying to do is kind of move up into this systems aggregator where you're much bigger orders than, let's say, $150,000. So it's a bit hard to tell from that progression chart.
Steve Harshbarger: Yeah, you're right. Perhaps we should break out another segment in there of the $150,000 to, say, $500,000, and then have the $500,000 and over, possibly. Some of these larger orders, like take this last $7.2 million order. That's 10 machines, but they're each around $700,000. So they're not even million-dollar machines, but they're significantly large machines. There's quantity 10 of them. That's because it's a mature customer shipping a lot of machines.
Steve Harshbarger: The order prior to that for $3.6 million was a single manufacturing line, and that's a customer that was buying machines that was around $700,000, $800,000. They probably could have been buying, even back when we sold them $700,000, $800,000 machines, they could have been buying machines that were $3.6 million from us had we had the capabilities at that time.
Steve Harshbarger: So in an ideal world, when that customer says, "I want three or five machines," and I don't know when that will be, that's going to be driven by their manufacturing needs, that we won't be selling three or five $700,000 or $800,000 machines, we'll be selling three or five $3.6 million machines. So continuing to drive that ASP higher and higher is super vital for our strategy.
Steve Harshbarger: Right now what we're seeing is the high ASP orders are more coming in through the mid area, that $500,000, $700,000 single price ASP machine, but they're coming through for lots of them. Ultimately, we certainly would like to see those coming through for a million plus, maybe even two million plus dollar order machines.
Steve Harshbarger: So that's going to be a super important part of our strategy, to make those machines offer this customer so much capabilities and so much incentive to want to buy the whole existing platform with as much as we can provide, will be very important to drive the company's growth.
Jason Urasner: Okay. When you talk about the capacity going from that, I guess mid 20s to mid 30s, to maybe using the last bay, mid 40s, then you have that next phase where you talked about 40 to 80. When you think about the capacity versus the orders, when you are going from, let us say, a $700,000 ASP machine to a $3 million, because you are adding on various capabilities, I am assuming a lot of those capabilities are things that your forward deployed engineering team is aggregating together, but things you are not necessarily making in-house. I guess, how do you square some of that with what you are talking about with capacity?
Steve Harshbarger: Yeah, you hit the nail on the head. It is definitely not equipment that we are making, say, the core components in-house, but we are doing all the systems integration, which is very significant. Even more so, we are doing the application engineering process integration. So understanding, for example, what type of post-cleaning process or after a curing process, and how to do, say, a measurement machine in the process and what type of measurement machine.
Steve Harshbarger: So the FDE team becomes these experts in not just applying a thin film coating, but it is how to measure the coating, how to clean the product prior, how to cure the product after. So it is a very difficult, challenging area unless you have that applications know-how.
Steve Harshbarger: No one really wants to buy those machines from somebody else other than Sono-Tek, because we are the only one that is going to prove to them that what we spec in will work for your particular coating need. They are willing to pay a premium in order to get rid of that risk where they have to try to figure it out themselves. It also then drastically reduces our time to be able to figure out how to make that particular product and become experts in everything.
Steve Harshbarger: For sure, as we sell more and more of a particular expertise, then we certainly would consider bringing it in-house, but we certainly prefer to become experts in understanding it before we consider manufacturing it.
Operator: Our next question, once again, is Karen Nyawera from Encore Holdings Group. Karen, please go ahead with your question. Once again, Karen, is it possible your phone is on mute? We are unable to hear you.
Karen Nyawera: I am not on mute, but I'm-
Steve Harshbarger: Oh, I hear you now.
Karen Nyawera: Okay, Karen.
Steve Harshbarger: I hear you, Karen. How are you doing?
Karen Nyawera: I am good. Thank you so much. I wanted to follow up on the earlier discussions where some of the other people on the call have touched upon the go-to-market motion. I think I would want to understand anything with the forward deployed engineers. We said we have 4 available. I am curious if they are assigned by industry or industry agnostic. Then maybe a second quick follow-up to that is, maybe how many accounts or how many clients is each forward deployed engineer associated with?
Steve Harshbarger: Sure. I should specify, there is actually 3 forward deployed engineers, but 4 in the group. There is also a project manager that works with that forward deployed engineering team that helps to coordinate everything coming in. That is the area where we are considering bringing in more of the forward deployed engineers in. These are guys that have in-depth experience in both ultrasonic coating, but also equipment integration and the processes.
Steve Harshbarger: Most of them have gone through the area for the application engineering area for many, many years. It would be common for a mature, proven application, something that we consider, oh, this has got high priority for it to shift from our existing application engineering team, which has typically already proven things in the lab for the customer.
Steve Harshbarger: Then they say, "Listen, this group is now ready to scale." We are going to then shift that customer over to the FDE team for them to show them how we can scale into production for their requirements. It would be typical for them to work on, oh, maybe 2 to 3 major accounts, and possibly that are orders in-house to some level, while also feeding in, every month, maybe 1 to 2 other proposals that they would be putting together for new potential customers.
Steve Harshbarger: So, they might look at a dozen things or maybe even 2 dozen things potentially per year. Some of them only may be taking a day, but some of them stretching over several months, maybe even a full year for a very big one. So for example, this last $7.2 million order.
Steve Harshbarger: That engineer there, he has been working with that customer on and off probably 25% of his time for 3 years, and that customer has given us, oh, in the area of now $14 million of orders, something in that area. We anticipate and hope for more orders from that customer also. So, he will probably actually always be into that account 25% of his time, as long as the customer is still moving forward with us.
Steve Harshbarger: So it is not a huge group, and that is why it is critical that as we start to see and get pulled in by enough customers where we say, "Oh, we could really use 2 more forward-deployed engineers," it is really very easy bets to make. I mean, they are low-risk bets for us to say big return. So far, that strategy seems to be working nicely.
Karen Nyawera: Okay, then quick last question. So, Tekie, have you forward-deployed engineers that are reporting to the project manager, and who is the project manager reporting to?
Steve Harshbarger: Yeah. The project manager is more coordination for the forward-deployed engineering team. It is kind of a support role, I would describe it, for the forward-deployed engineering team, so they can be spending their time on the really hardcore technical stuff, where the project manager is more likely just to coordinate how we are going to be deploying what the forward-deployed engineers has already decided. One more time with the question there. Apologies, Karen Nyawera.
Karen Nyawera: Here, I just want to understand the reporting structure, right? Because I think that at least what was missing for me in one of the discussions that I have had is that it seems as if maybe there might be an information flow gap between the forward-deployed engineering team and maybe sales in terms of being able to predict or understand when the orders come next. So I am trying to understand that reporting.
Steve Harshbarger: Yeah, sure. The forward-deployed engineers, they report to our application engineering manager, who actually manages two teams. He manages the application engineering team, which is, again, those are the guys that are taking orders into the lab, proving it primarily on the R&D level, and feeding it back to the customers for R&D machines. Then he, consulting with the sales team, will make a decision and say, "Hey, this is a significant opportunity that is ready to shift from R&D to production."
Steve Harshbarger: Then they feed it off to the forward-deployed engineering team. Then once it reaches the forward-deployed engineering team, and if it does turn into an order, we actually then have another team that comes in and says, "All right.
Steve Harshbarger: This is going to be a significant production system going through our processes. We have to then get the quality system in and everybody else from a manufacturing standpoint of how we are going to build the machines and how we are going to do it at an economical cost, of course.
Karen Nyawera: Okay. Thank you so much.
Steve Harshbarger: Nice talking to you, Karen.
Operator: With that, we will be concluding today's question and answer session. I would like to turn the floor back over to management for any closing remarks.
Steve Harshbarger: Sure. Let me just see here. Apologize. Long conversations there. I just want to thank everybody today for joining us. I hope you enjoyed the conference call, and we look forward to updating you again at the end of the fiscal year. Thanks again for everybody that joined the conference call. Take care.
Operator: With that, ladies and gentlemen, we will be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
