Sono-Tek Corporation (SOTK) Earnings Call Transcript & Summary

Thank you. Good day everyone and welcome to the Sono-Tek Corporation Fiscal Year 2027 Mid-Year Results Conference Call. The call is being recorded. [Operator Instructions] At this time, I'd like to turn the floor over to Kirin Smith with PCG Advisory. Please go ahead.

Thank you, Jamie, and thank you, everyone, for joining us today. Sono-Tek released their second quarter and first half fiscal 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. Christopher L. Coccio, Executive Chairman, R. Stephen Harshbarger, CEO and President, and Stephen J. Bagley, Chief Financial Officer. Good morning. 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. Actual results 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. No obligation to update the information contained in this conference call. As a reminder, this is our second quarter and first half call for the period ended August 31, 2026. Our next call will be our full year fiscal 2027 update for the period ended February 28, 2027 and will be held in May, 2027. I would now like to thank and now let's turn the call over to Christopher L. Coccio, Executive Chairman of Sono-Tek.

Thank you, Kirin, and good morning, everyone. Thank you for joining us today to review Sono-Tek's fiscal second quarter and the first half 2027 results. R. Stephen Harshbarger will review the operational performance and business trends, and then Stephen J. Bagley will provide more detail on the financial results. The first half 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. Our results also reflect an important shift in the composition of our business, with particularly strong growth in the medical market and increasing demand for higher value production systems. Now for the first half, revenue increased 6% to approximately 10.9 million. Gross margin expanded to 55% compared to 51% in the prior year period. Our operating income increased 41% to approximately 1.28 million, net income increased 22% to a fraction. 1.1 million. The medical market sales increased 289,000% 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 install base and our relationships with customers as their production requirements grow. I also want to highlight the significance of the recent orders we announced from an existing alternative energy customer. We recently announced 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. The customer has successfully deployed our technology in an alternative energy manufacturing process and is now expanding its use of Sono-Tek's 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. Together with the more than 3.6 million medical diagnostic production line order announced in August, these programs alone now represent more than 10.79 million of backlog, with the majority currently expected to be delivered in fiscal year 2028. Importantly, these opportunities involve different customers into 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 technologies and our customer relationships. With that overview, I'll turn the call over to R. Stephen Harshbarger, our CEO and President. Stephen?

Thank you, Chris, and good morning, everybody. As Chris highlighted, we had a solid first half with continued progress across several important areas of the business. Our results reflected strong medical sector demand, a higher volume production systems, improved gross margins, and disciplined execution across the whole organization. For the first half, revenue increased 6% to 10.9 million, while gross profit increased 14% to approximately 6 million. Gross margin expanded to 55%, and operating income increased 41%. Perhaps, and most importantly, we continued 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 first half growth. Medical sales increased 289% to approximately 7.1 million. And demand was driven by continued activity in drug-eluting balloon coating systems, specialty stent applications, and other medical device coating applications. We are seeing increasing adoption of our technologies as customers move from development and qualification into commercial manufacturing. That transition is really important because production applications 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 first half growths, increasing approximately 50%. And that was driven primarily by specialty medical coating systems. OEM systems also increased approximately 67%, and that was supported by demand from our European fluxing OEM partner and a China-based semiconductor OEM customer. Inline coating systems declined 14% for the first half, and that'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. So, while product line results can vary significantly based on the timing of these larger high ASP system shipments, the underlying demand for high-value production platforms remains very encouraging. We also saw continued improvement in our industrial business, which increased approximately 156% during the first half. And that was influenced by an optics related shipment to the defense sector. And this defense sector is going to be an area that we will continue to put increased focus on in the coming years. Alternative energy in the first half reflected reduced demand associated with changes in government policy and spending, and that was related to green hydrogen, electrolysis, and fuel cell applications. However, we continue to view alternative energy as a meaningful long-term opportunity. And our recent 7.19 million order announcement that Dr. Coccio just touched upon earlier is a very good example of why we continue to believe in the long-term potential in this market. These orders are from an existing customer that has successfully deployed Sono-Tek technology in an advanced clean energy manufacturing process. The customer continues to expand that deployment into additional production lines across three geographic locations. The 10 systems are currently expected to ship primarily during fiscal 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 August 31, our backlog was approximately 9.5 million, and that's up 23% from the end of the fiscal quarter. Now since quarter end, the three new clean energy orders totaling 7.19 million have substantially increased our backlog in Q3 FY2027. A significant amount of this backlog is currently expected to ship in fiscal 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. And with approximately five months or so remaining before the beginning of fiscal 2028, we still have additional time to build upon this backlog even further. Now, turning to our outlook, we are reiterating our expectation for flat to modest revenue growth for this current fiscal 2027. And as we've discussed previously, the timing of several large production systems orders can create variability for us from quarter to quarter. At the same time, we continued to see encouraging demand, particularly in medical devices, and by the increasing value and scale of these systems we're 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. The recent record order activity also gives us increased visibility in fiscal 2028, while we continue to pursue additional opportunities across medical, microelectronics, industrial, and alternative energy applications. And lastly, our balance sheet remains pristine, with cash continuing to grow and no outstanding debt, positioning us really nicely for further execution on our growth strategy. With that, I'll now turn the call over to Stephen J. Bagley, our CFO, for a financial review of the results.

Very good. Thank you, Steve, and good morning, everyone. I'll begin with some additional detail on our financial performance for the second quarter and first half of fiscal 2027. When the second quarter ended, August 31, 2026, total revenue was approximately 5.23 million compared with 5.16 million for the prior year period, and that is an increase of $69,000. For the first half, revenue increased 6% to approximately 10.9 million, and that compares with 10.3 million in the first half of fiscal 2026. The first half increase was driven primarily by the significant increase in medical market sales and higher sales of multi-access and OEM systems. The gross profit for the second quarter was approximately 2.8 million, and that's an increase of approximately 7% from the prior year. The gross profit margin was approximately 53% in the second quarter, primarily reflecting an unusually favorable and geographic mix. For the first half, gross profit increased 14% to approximately 6 million, and at a while the gross profit margin expanded to 55%, and that compares with 51% in the prior year period. The improvement in gross profit margin reflects a favorable product and geographic mix, including a higher contribution from medical systems and other higher value production equipment. Now, gross margins can vary significantly from period to period based on a specific customer and geographic mix, distributor involvement, installation requirements, and other factors. Accordingly, the gross margin levels achieved during the first half of fiscal 2027 should not necessarily be viewed as indicative of margins expected in future periods. And now a review of our operating expenses, which remained well controlled, as we continue to invest in the business. Research and product development costs increased in the second quarter of fiscal 2027 due to increases in employee health insurance, R&D materials, and other engineering expenses. For the first half, R&D costs remained steady at approximately 1.3 million compared to the prior year, as the costs I just mentioned, were partially offset by decreases in some salaries and supplies. Marketing and selling expenses increased in both the second quarter and first half of fiscal 2027 due to increases in salary related to our sales application lab, our forward deployed engineering group, employee health insurance, and trade show expenses. Now, our sales and marketing costs are variable, and a large portion of the costs are dependent on trade shows and where geographically our sales are generated. General and administrative expenses increased in both the second quarter and first half of fiscal 2027 due to increases in salaries, employee health insurance, corporate expenses, and stock-based compensation, and legal and accounting fees. Our operating income for the second quarter decreased by 9% or $39,000 to to 382,000 due to an increase in operating expenses. However, first half operating income increased 41% to approximately 1.28 million compared with approximately 905,000 in the prior year. This improvement reflects the combination of higher revenue, improved gross margin, and disciplined expense management. Income for the first half 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 August 31, 2026, cash and marketable securities totaled approximately 17.7 million. And that compares with 14.8 million at the end of fiscal 2026. And we continue to have no debt. The strength of our balance sheet provides us with the flexibility to continue investing in the business so we support working capital requirements associated with larger production system orders and to pursue opportunities to expand our capabilities. Now, as Steve discussed, backlog at August 31 was approximately 9.5 million, representing a 23% increase from the end of the first quarter. The following quarter end, we received three additional orders, totaling approximately 7.19 million. Now those orders, together with the previously announced medical diagnostic production line, of more than 3.6 million significantly increases the backlog heading into fiscal 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. And with that, I'll turn it back over to Steve. Thank you. Thanks, Steve.

To summarize, we believe the first half demonstrated continued progress in the business. We delivered revenue growth, meaningful growth margin expansion, and stronger operating profit. The medical market continued to be a significant growth driver. At the same time, we are seeing increasing evidence of customers moving from development into commercial manufacturing, which can create opportunities for larger and more sophisticated production systems. Now this recent record clean energy order is an excellent example of this progression and together with a medical diagnostic program provides significant early visibility into fiscal 2028. You know our priorities remain super straightforward, you know we execute well for our customers, we continue expanding our install world 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'll open the call for questions.

[Operator Instructions] Our first question today comes from Bill Nicklin from Bill Will Insights. Please go ahead with your question.

Hey, good morning, Bill.

All right. Thanks for taking my questions. All right. 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's 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 new customer, but then you get these continuing orders without getting a new customer. So I wonder if you would comment on that and kind of how it affects your outlook for that.

Next? Sure, sure. You know, it does because it certainly makes a difference of where we're going to be putting our investments. You know, we have a substantial amount of cash, as you know, on hand. And I think there's a couple of areas where we'll continue to invest as our business grows and our financial position strength. First, I should point that you know people are always saying, hey, where are you going to put that money? And on the acquisition side, we continue to have both inbound and outbound activity, and that's really nothing new for Sono-Tek. Given the nature of our business, we've always had companies approaching us, and we're always going to keep an eye on opportunities, you might say, for potential opportunities. opportunities. But I would say that activity certainly has picked up in that area for our business and is certainly gaining momentum there. And I certainly want to emphasize, though, although that we proactively continue looking at acquisition opportunities, we're really focusing only on companies that we really know very, very well. And these are areas where we have a great understanding of the markets and the business. You know, we're not looking to venture into areas too far away from what's our core understanding. But probably the more interestingly is where we're going to look to invest organically. And that kind of goes back more to the core of your question, you know, that the core ultrasonic technology business, you know, that's the foundation of a business. And we'll certainly make unique investments there. But over the last several years, we're 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. And what this team does, and it does it with excellence, it's really to work very closely with customers to take our existing ultrasonic technology and integrate it into much larger, more sophisticated production platforms. And that's been a really important change in our business. Instead of just like selling, say a coating system, we're increasingly providing a much more complete production solutions and of course that translates then into significantly higher ASPs, higher average selling prices and basic. And what's exciting for us, I think, there is now that we've proven this model works finally. We're seeing that these large production platform orders, they're coming our way more frequently. We believe our investments in the integration and capabilities are really a big part of that reason why. And just to give you an idea of our commitment here, you know, two, maybe it was two and a half years ago, I should say, our FDE team consisted of just one person. You know, and now today, we're up to four people on that team. And I would expect us to continue expanding their capabilities over the next year or two. And there's another really important reason why we're putting more resources in that particular area and that return on investment. You know, when we invest in developing the next major innovation, say in our core ultrasonic technology and areas like that, you know, it can take, I don't know, five, maybe six years, before that investment really starts having a really meaningful impact on our business. 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. You know, that's a pretty significant difference in my opinion. And again, don't get me wrong, both types of investments are very important to us. Certainly don't back away from developing in the new ultrasonic coating technology area, but I like the idea of our decades of investment that we've already made in our ultrasonic coating technology with this strategy. You know, leveraging that is super important to us. So we're not necessarily having to invent something new every time we want to grow. You know, we already developed something that's really pretty remarkable technology, and now we're really investing in the engineering capabilities that allow us to take technology into much larger production platforms. And what we're finding is that these investments are showing to generate return much more quickly than, say, a typical traditional R&D investment from us. So we're really getting more commercial value out of the technology that we've already spent, you know, these decades of time developing. And I believe that's going to be one of the most important investment 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.

I like it.

I like it.

You touched on a couple of questions I haven't even asked yet. That's pretty good. So in my mind, if you look at these larger integrated orders, it's really an indication of like 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. So your FDEs are out there getting new orders, but they're also working with customers where as your customer expands they. They pretty much have to come to you. So 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.

That's exactly right. And this last order that we just announced for $7.2 million is really a prime example of that. You know, that's a customer that we walked through in the R&D phase very successfully and in the pilot line phase. And then we developed, you know, a really sophisticated high-volume production system for them. And that sold well, but it doesn't end there. 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. You know, so it really changes our business model significantly when you start having customers like that where you have these integrated partners to you.

Good. Following on that, back to your old 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?

Yes, well, now that we have proven the model is successful, there's 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. And I should say it's four people in total. There's one support technician in there with three actual for deploy engineers. That we've proven that model works, we're getting these significantly large orders, and now we're going to be doubling down on that. You know, that we're going to be continuing to add this more personnel into there and continuing to make that bet because there's still the demand on the demand side that is pulling us there. So as long as we see our customer base pulling in, us into that area and wanting it and desiring it, there's no reason for us not to double down on that. So we haven't really said exactly how many we're going to be hiring there, but I wouldn't be surprised to see that team doubled in another year or two, maybe even quicker. You know, the challenge for us there is mostly that these are really skilled, experienced people with our technology and how to do integration. So finding them is always a little bit of a challenge, but you know, we have some great guys in that area that I think are in the pathway to join that team.

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

Good chatting, Bill. Take care.

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

Hey, morning, Dick. You there?

I was breaking. I had a bad...

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. And our next question does come from Ted Jackson from Northland Securities. Please go ahead with your question.

Thanks. Good morning, guys. Couldn't be better. I love these days, you know, sporting seasons and company.

Hey, how's it going, Ted?

They're 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. Its initial success was really in the coating of stents, and you've kind of done two things within it. 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. I guess I'm curious, do you see, additional opportunity in these balloon, you know, these medical balloons? Do you see, different applications beyond the two that you've had the success with and what those might be at UCM? So I guess I'm asking, is there an opportunity for you to expand the customer account with regards to, you know, this newer balloon opportunity and then maybe some discussion about, you know, other things where you feel you're well positioned? I mean, I think things like implants and such would be logical. So that's my first question, thanks.

Sure. It's a good question because the medical market's really evolving for us quickly these days. You know, what in essence happened is, you know, we gained all this high value production expertise in the clean energy sector. And that was primarily in the electrolysis area for things like fuel cells. And as that market started to shift with government policy and slow down for us in that particular sector, we immediately then shifted resources over to the medical sector. And what that allowed us to do is to take product lines like this developing balloon, drug-eluting balloon product line that we make machines for and could develop a system that was much more extensive and had a lot more capabilities than say like our stent coating systems you know when we first started going into the stent coating market we sold relatively small systems because that was what our capability we had internally at that time so we were selling maybe 75 to a hundred thousand, 1,000 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. All of a sudden, the ASP of these machines took off much higher. So they were more in the $quarter million to $300,000 area. And the customers wanted that really. They would have even liked to have it back in the days for the stent coating market, but we didn't have the capabilities at that time. So 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. 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 everyone, but a good chunk of the major ones use us for that process. And I think there's a lot more road ahead of that, you know, that when we look at their forecast from our customers, things go as they plan, we should be able to continue to support them as they add on additional manufacturing lines. And that is their intent in the future for most of our customers in that particular market. What's probably more exciting for me, though, is that most of these companies make the drug-eluting balloons or make the stents also make other medical devices as you've indicated. You know, they make, whether it's heart valves or internal meshes that go into the body or diabetes devices. That so many of these devices now need thin film coatings onto them to prove some sort of functionality. And Sono-Tek is no longer now being considered, say, a stent coating company. Now we're being considered a medical device implantable company and one that has the capabilities for high volume production. And it's proven. I know they see, our customer base sees these press releases out there and they know we're shipping to the largest medical device companies in the world and they can see that we're a financially stable company. So it brings this huge amount of credibility. So customers that wouldn't 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, improve it in. And that's something we have happening on a weekly basis here where somebody's bringing their next-gen medical device in and proving it. And as those get proven in, they'll prove their R&D sector, and then they'll go through FDA, and then they'll be in the production line. And that's where we start to really see the benefit of selling multiple machines at high ASPs. Well, that's pretty exciting. Yes, it's definitely super exciting to see what you hope for actually happening. It's super exciting to see that actually go through successfully.

And then it ties into this, I think, somewhat, but you talked a bit in your prepared remarks about a lot of excitement in developing markets and new things that were coming. Is that excitement that's driving that commentary from you greater than these newer opportunities in the medical market? Maybe some discussion on other areas where you're, you know, where you have some enthusiasm. I know in the past you've kind of bounced around some of the next gen display stuff, but maybe some color with regards to what you're excited about for new markets that Sono-Tek really hasn't tapped yet.

Yes, there is most definitely a plethora of new applications that are outside of what we've announced. As an example, 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. And then there's a lot of them that are, what I would describe a little bit more in the infancy, but have huge upside potential like we've spoken before, like the micro LED markets, or the insulation market for conductive coatings. These are all areas that companies, not just Sono-Tek, but other associated companies are putting many millions of investment into this. You know, so if you're making, say, a large, cell phone company or a display company, you know they all have these very active and expensive R&D programs which Sono-Tek is now very often part of and they all won't be home runs but the ones that are successful we are more than likely to be the chosen technology because we're the one that's proven on the R&D and pilot line level. And when they pull the trigger to go to high volume, it's sometimes difficult for us to predict because it's 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. And now we're 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 they it's got their approvals, they've gotten some, whether it's a large phone manufacturer or a TV manufacturer said, Hey, yes, we're going to make the switch to this. Technology and Sono-Tek will be the standard. So it's spread over a large breadth of industries. But the concept of us getting in on the R&D level, proving it, making it work well, building a relationship where the customer were attached at the hip, and then transitioning to high volume production is the real strategy. And it's almost always focused on the high tech industry sectors primarily. Really where we're putting our focus in.

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

Yes, we are intending to start a major what we consider a major expansion at the end of this current calendar year, be like December, maybe January, we'll start actually making things happen there. I actually have a meeting tomorrow on this because it's with these latest orders it's kind of accelerated things to get things going quicker. And that 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're in today and it entails pretty much building a mezzanine structure and also doing some optimization, I should point out, of our manufacturing flow. We're in several buildings, so optimizing the flow of our manufacturing will really bring us some efficiencies. And 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 May. manufacturing capability. And that's 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, well, where do we go from 45 to get up to 85? We're going to have to start that process coming up here. planning phase. We won't 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 could require us to make a significant structural move for more space. So we've got to at least have it on paper, a plan in place to be able to take it to that next phase. But that will be something that I'm looking forward to. Having that prepared for us. You know, it's not like the old days where if you got two or three more orders, it didn't 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.

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

Hey, good catching up, Ted.

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

Hey Dan. Hey guys, it's Sam. questions on... Oh, Sam. How you doing, Sam?

Good. How are you guys? Doing good, thanks. Yes, congrats on the quarter. I guess my question, I'll kind of... I'm going to leapfrog off of Ted's question on the capacity side. You know, you mentioned the 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?

Yes, 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, oh, 150 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 that will also be somewhere in the area of about a $600,000 CapEx investment. So it's not huge dollars, but it's significant enough that we want to do it at the right timing for us here. And, of course, the ones 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.

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

I would hope they would. I mean that, you know, as we grow an infrastructure, 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. And we've also already been looking and talking to places like South Carolina. There's a lot of very attractive incentives there to manufacture outside of New York State as at least an expansion, so maybe we would have two locations. And so with those incentives, I would hope New York would give us -- at least close to equally attractive incentives to encourage us not to leave, and set up manufacturing in a less expensive area. But we have to do the responsible thing and look at both options. And then from there, we'll make a final decision. So I think that we'll continue to see. State sponsorship or contributions, I should say, whether it's in New York or alternative states, I think we will see contributions to help our expansion.

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

Yeah, it's a little bit of both, but I think the most significant impacts we see there is we're. We're finding on these high ASP production machines that we the value we bring is very significant and that's in the applications expertise and all these additional things we're able to add on for the capabilities of our machines. And the customers are willing to pay for that increased value. So they definitely drive higher ASPs and better gross margins, but where it really starts to impact the gross margin is not on machine number one. It's 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. And it just happens to be that a lot of those, at least initial customer-wise, are ending and landing in the U.S. marketplace. A lot of our customers have been on shoring recently, especially these high-tech accounts. And that certainly is not a bad thing for Sono-Tek because our costs become better from a standpoint of eliminating distributor discounts. accounts that take place when they go overseas that very often happen. So it's definitely a promising thing for us and that's going to be nice for us heading forward. You know that these last orders announced that are going to be shipping in FY2028, 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. So forth.

Yes, that was going to be my follow-up question, you know, given the order, you know, with the following orders in the, you know, green energy side. So can you maybe allude to or provide some commentary on margins going forward, whether it's 2028 or kind of if the current levels are sustainable or there's room for growth going forward? Sure.

Yeah, you know, you notice probably in our commentary where you cautiously worded our margin expansion over the last two quarters. Um, and that was intentional because we knew we had some high ASP margin systems that were shipping to U.S. and we had some really excellent gross margins that came out in Q1 and Q2 as a result of that. But what is exciting is what's flowing into our backlog is, again, more of these high ASP, high volume production systems. So what is we're describing as unusually favorable right now, I'm optimistically hoping that we take that unusual away as things go forward and we start to get more and more of orders that look like those orders where it won't become unusual anymore. And we'll 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're able to optimize the costs, reaching us more commonly so it doesn't become the unusual, it becomes the norm hopefully, but we'll have to see how that all plays out. Hey, thanks, Sam. Good talking to you.

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