Sono-Tek Corp. Stock

Good day, everyone, and welcome to the Sono-Tek Corporation Fiscal Year 2027 Midyear Results Conference Call. [Operator Instructions] 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.

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. Chris Coccio, Executive Chairman; Steve Harshbarger, CEO and President; and Steve Bagley, Chief Financial Officer.

Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this conference call about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call.

As a reminder, this is our second quarter and first half call for the period ended 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 turn the call over to Chris Coccio, Executive Chairman of Sono-Tek. Chris, please go ahead.

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. Steve Harshbarger will review the operational performance and business trends, and then Steve Bagley will provide more detail on the financial results.

The first half of fiscal 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. Operating income increased 41% to approximately $1.28 million and net income increased 22% to approximately $1.1 million. The medical market sales increased 289% to approximately $7.1 million. The medical market continues to be an important growth driver for the company. We are seeing customers increasingly move from process development and qualification toward commercial manufacturing, where Sono-Tek's precision ultrasonic coating technology can play a critical role. At the same time, we continue to see opportunities to expand our installed base and our relationships with customers as their production requirements grow.

I also want to highlight the significance of the recent orders we announced from an existing alternative energy customer. We recently announced 3 orders, totaling approximately $7.2 million, which 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 production systems across 3 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 in 2 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.

With that overview, I'll turn the call over to Steve Harshbarger, our CEO and President. Steve?

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, higher-value production systems, improved gross margins and disciplined execution across the whole organization.

For the first half, revenue increased 6% to $10.9 million, while gross profit increased 14% to approximately $6 million. Gross margin expanded to 55%, and operating income increased 41%. Perhaps, 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 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 growth, 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. In-line coating systems declined 14% for the first half, and that's primarily reflecting the difficult comparison with the prior year when we had 6 high ASP systems that were totaling about $4.4 million that were shipped. So while product line results can vary significantly based on the timing of these larger, high ASP system shipments, the underlying demand for high-value production platforms remains very encouraging. We also saw continued improvement in our industrial business, which increased approximately 156% during the first half, and that was influenced by an optics-related shipment to the defense sector. And this defense sector is going to be an area that we will continue to put increased focus on in the coming years.

Alternative energy in the first half reflected reduced demand associated with changes in government policy and spending, and that was related to green hydrogen, electrolysis and fuel-cell 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 3 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 3 new clean energy orders, totaling $7.19 million, have substantially increased our backlog in Q3 FY '27. A significant amount of this backlog is currently expected to ship in fiscal 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 2 different customers in 2 distinct markets. And with approximately 5 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 continue 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 installed 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 Steve 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. For 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 a significant increase in medical market sales and higher sales of multi-axis and OEM systems.

Gross profit for the second quarter was approximately $2.8 million, and that's an increase of approximately 7% from the prior year. 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, while the gross profit margin expanded to 55%, and that compares with 51% in the prior year period. The improvement in gross profit margin reflects a favorable product and geographic mix, including a higher contribution from medical systems and other higher-value production equipment.

Now gross margins can vary significantly from period to period based on a specific system shipped, customer and geographic mix, distributor involvement, installation requirements and other factors. Accordingly, the gross margin levels achieved during the first half of fiscal 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, stock-based compensation and legal and accounting fees. Our operating income for the second quarter decreased by 9% or $39,000 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. And this improvement reflects the combination of higher revenue, improved gross margin and disciplined expense management.

Net income for the first half increased 22% to approximately $1.11 million compared with approximately $909,000 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, support working capital requirements associated with larger production system orders and pursue opportunities to expand our capabilities.

Now as Steve discussed, backlog at August 31 was approximately $9.5 million, representing a 23% increase from the end of the first quarter. Following quarter end, we received 3 additional orders totaling approximately $7.19 million. Now those orders, together with the previously announced medical diagnostic production line order of more than $3.6 million, significantly increases the backlog heading into fiscal 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 gross margin expansion and stronger operating profit, while the medical market continued to be a significant growth driver. At the same time, we are seeing increasing evidence of customers moving from development into commercial manufacturing, which can create opportunities for larger and more sophisticated production systems.

Now this recent record clean energy order is an excellent example of this progression and together with the medical diagnostic program provides significant early visibility into fiscal 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'll open the call for questions.

[Operator Instructions] Our first question today comes from Bill Nicklin from Bill Will Insights.

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 customer, but then you get these continuing orders without getting a new customer? So I wonder if you could comment on that and kind of how it affects your outlook for the next months and years.

Sure, sure. It does because it certainly makes a difference of where we're going to be putting our investments. 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 strengthens. First, I should point that 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, I might say, for potential opportunities.

But I would say that activity certainly has picked up in that area for our businesses 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. We're not looking to venture into areas too far away from what's our core understanding. But probably 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, the core ultrasonic technology business, that's the foundation of the 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 in 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. And we believe our investments in the integration and capabilities are really a big part of that reason why.

And just to give you an idea of our commitment here, 2 -- or maybe it was 2.5 years ago, I should say, our FDE team consisted of just one person. And now today, we're up to 4 people on that team. And I would expect us to continue expanding their capabilities over the next year or 2. And there's another really important reason why we're putting more resources in that particular area and that return on investment. When we invest in developing the next major innovation, say, in our core ultrasonic technology and areas like that, it can take, I don't know, 5, maybe 6 years before that investment really starts having a really meaningful impact on our business.

But when we invest in our integration capabilities that what we find is we can start seeing meaningful return in as little as maybe just 1 or 2 years. That's a pretty significant difference in my opinion. So -- and again, don't get me wrong, both types of investments are very important to us. We certainly not -- 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.

We're leveraging that is super important to us. So we're not necessarily having to invent something new every time we want to grow. 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 a 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 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 liked it. You touched on a couple of questions I haven't even asked yet. So 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 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. 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 a really sophisticated high-volume production system for them. And that sold well. They loved it. 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. 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 whole forward deployed engineering strategy. I think you said you had 4 full-time forward deployed engineers now. What might you have a year to 18 months from now? And what does that indicate about the momentum you see in your business?

Yes. Well, now that we have proven the model is successful, it's -- there's no doubt about it now. We put the first guy in there. It worked really well. Then we doubled it to 2, and then we doubled it to 4. And I should say it's 4 people in total. There's 1 support technician in there with 3 actual forward deployed 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. 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 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 2, maybe even quicker. The challenge for us there is mostly that these are really skilled, experienced people with our technology and how to do integration. So finding them is always a little bit of a challenge, but we have some great guys in that area that I think are in the pathway to join that team.

And our next question today comes from Dick Ryan from Oak Ridge Financial.

I was breaking. I had a bad [Technical Difficulty]

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.

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 2 things within it as 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.

And I guess I'm curious, do you see additional opportunity in these balloon -- these medical balloons? Do you see different applications beyond the 2 that you've had the success with? And what those might be that you see? So I guess I'm asking, is there an opportunity for you to expand the customer count with regards to this newer balloon opportunity? And then maybe some discussion about 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.

Sure. It's a good question because the medical market is 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. 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've 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 to develop a system that was much more extensive and had a lot more capabilities than, say, like our stent coating systems.

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. All of a sudden, the ASP of these machines took up much higher. So they were more in the $0.25 million to $0.30 million 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 that capabilities at that time.

So as we enter into DEB, which is, I have to say, somewhat -- it's -- 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 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. 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 that make the drug-eluting balloons or make the stents also make other medical devices, as you've indicated. They make whether it's heart valves or meshes, internal meshes that go into the body or diabetes devices. So many of these devices now need thin film coatings on to them that 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. 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 see that we're a financially stable company.

And so it brings us a 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 and prove it. And that's something we have happening on a weekly basis here where somebody is bringing their next-gen medical device and prove it in. 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 full 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 -- it's super exciting. I mean, to see what you hope for actually happening is super exciting, to see that actually go through successfully.

And then it ties into this, I think, in somewhat, but you talked a bit in your prepared remarks about a lot of excitement in developing markets and new things that were coming. Is that excitement that you're -- 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 -- where you had some enthusiasm. I know in the past, you kind of bounced around some of the next-gen display stuff, but maybe some color with regards to what you're excited about for new markets that Sono-Tek really hasn't tapped yet.

Yes. I mean there is most definitely a plethora of new applications that are outside of what we've 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 microelectronics 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 dollars of investment into this. So if you're making, say, a large cell phone company or a display company, they all have these very active and expensive R&D programs, which Sono-Tek is now very often part of. And they all 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 2, 3, 4 years ago, all of a sudden, it's got their approvals. They've got -- 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, we're 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. That's really where we're putting our focus in.

Okay. And then my final question, just a refresher 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. It would 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 million to $36 million peak within our existing buildings that we're in today. And that 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 million to $45 million in 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 million to get up to $85 million. So we have -- we're going to have to start that process coming up here in that 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 3 or 4 orders that are significant size that could require us to make a significant structural move for more space.

So we've got to at least have it on paper 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. It's not like the old days where if you got 2 or 3 more orders, it didn't make any significant difference. Now if we get 2, 3, 4 more orders of these multimillion dollar systems, it all of a sudden makes a big shift in our outlook.

And our next question comes from Sam Dufault from Oak Ridge Financial.

Hey guys, it's Sam. I'm going to field some question on -- yes, congrats on the quarter. I guess my question, I'll kind of leapfrog off of Ted's question on the capacity side. 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 $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. 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 2 at all or mostly just on the Phase 1 for now?

I would hope they would. I mean that 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, it's a little bit of both, but I think the most significant impacts we see there is 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, but we're -- and better gross margins, but where it really starts to impact the gross margin is not on machine #1. It's on machine #2 through 15. They -- We by then, we start to optimize the costs after machine #1, 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 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. 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.

Yes, that was going to be my follow-up question, given the order -- with the follow-on orders in the 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.

Yes. You notice probably in our commentary, we cautiously worded our margin expansion over the last two quarters, 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. And that probably the coming quarter may be not quite as attractive because we don't have those same high ASP systems in them. 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.

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

Thanks, Sam. Good talking to you.

And our next question comes from Greg Weaver from Invicta Capital.

You touched on this a bit with your answer to Ted's question, but maybe I'll 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?

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

Excellent. All right. Yes, you've filled that giant hole from the alternative energy there nicely, but it doesn't 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're on the spot $4 million-ish run rate right now, but I guess with the transition of these larger production systems, you think there'll be a pickup in that business, especially if some of these medical systems come off warranty?

Yes. We just actually had this conversation yesterday. And that's part of what's exciting about these high volume multi-system orders going out there in the field. I think we'll see two significant things happen. One is high volume production orders first. These machines can't be down ever. It's 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's a higher level of criticality to make sure everything is running perfect. And even through government agencies like the FDA, there's a higher level of scrutiny to make sure that to make sure that you have things like your machines calibrated, which comes at a cost. So we would anticipate as these machines fall out of warranty, these newer high volume production machines, that we will start to see a reoccurring revenue stream start to fold into our process. And that's been one of the things that we've been spending a lot of time on is trying to get a real steady significant services-related to reoccurring revenue stream. And we're 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. And there should be also associated a fairly nice spare parts business there also, both spare parts being kept on the shelf because they're critical lines that can't be down as well as just normal consumables that will wear over time. And because most, again, these lines in general, many of them run 3 shifts a day, 24 hours, 7 days a week. So the wear on them is significant, and over periods of time, they should start to need replacement parts and support as well. So the larger the fleet we have out there in the field, the larger potential revenue stream we should see from services coming from that as well.

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

Yeah. I got to believe we're going to see -- and again, we'll see how it flows up, but I've got to believe we're 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's got to happen. I mean, we certainly don't need to be increasing costs for a lot of things here. Other than direct personnel building these machines. We've 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're bringing.

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

Yes, 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 there's -- they're all over it, and they all need sensors and different type of optics related things that have to happen on them. And we see that there'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. It's not an area that we presently, like, say, go to defense sector trade shows or market very heavily to it. Even if you look at our website, you don't see, like, a defense sector chunk of our website, which I suspect there probably should be something that we're more focused to that sector. It's kind of one of those ideal candidates for us. We're always looking for markets that are high tech, that are not so price sensitive that can spend -- 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, but they're not -- they're all areas that after a little bit of investment we could comply. So we're looking at that as well. So 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. And we'll start advertising and focusing on areas that we know we've had some proven successes in.

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

Hey, good talking.

Our next question comes from [ Karen Nyawira ] from Encore Holdings Group.

Hi, Karen. You with us still?

Karen, is it possible your phone is on mute?

And we'll move on to Jason Ursaner from Bumbershoot Holdings.

I appreciate the call, it's getting long, so I'll try to keep it quick. 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. I don't really -- in defense, I 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. So just wondering if maybe you could talk about that opportunity kind of specifically in SEMI. Is it entirely spray coating of photoresist? Or is it mostly the alternative substrates, kind of 200 millimeter-below? Or you're also moving up to 300-millimeter wafer stuff. [ It's just that ] there's a lot of interest in optical components in SEMI as well as the [ MEMS ]? So just any kind of color there.

Yes, sure. There's -- It's a very broad area for us and broader than I actually recognize myself even when we first started jumping into it because in the beginning I thought it was all photoresist. But what we are recognizing as we start to introduce products that are high volume manufacturing capable, all of a sudden we are starting to receive inquiries in areas that are outside of photoresist. And I can't go into, unfortunately, to 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 in the kind of AI world. So they really tight-lipped us on very much what we do there. 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. And that's going to be our focus at SEMICON Europe. 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 Europe. But I firmly believe there will be more applications outside of photoresist as well that may actually even pull us there into the larger 300-millimeter area, maybe even faster than the planned photoresist area. There's a lot of unique thin film processes that take place in that whole semiconductor manufacturing area. And all we need is to find 2 or 3 of them that are like, oh, that's a perfect fit for Sono-Tek. And now -- and 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. 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. And so I think, although that's -- 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.

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? And 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.

That's probably right. I mean, they're to the point where they are saying, hey, let us come to your lab, prove this works. And then Sono-Tek designed the machine for us to meet high volume production. I 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. And 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. And Sono-Tek is showing them, oh, we can solve the headaches that you may have, and let us prove that to you.

And just in terms of timing, though, I guess my question a little bit is with kind of the technology edge of AI chips, stuff that's 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 hasn't. Is it, I guess, how do you evaluate kind of the speed at which some of these could potentially turn into real opportunities, kind of quicker or kind of not so fast?

I think speed for the next gen, like 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 things that have been only lab proven or pilot line proven. So I suspect for a really significant impact, we may be out, 1, 2 years, maybe even 3 years for really significant impact for the point where they're saying, hey, I want to buy 10 of these machines to go into this fab. I think we could be looking a few years out. But I think we'll 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'll be able to, I think, get under our belt relatively quickly, meaning within, say, like a year or something along those lines.

Okay. And then just following up on the question you got on operating leverage, obviously, in the quarter and I guess the outlook for the second half of the fiscal year, you're kind of getting through this gap of tougher order period before you start to have this bigger resumption of growth in fiscal year '28. Obviously had stepped up the marketing spend. I guess it's around a million a quarter, leveraged that pretty nicely in Q1, kind of less so in this quarter, and maybe the outlook, presumably for the second half, is that's going to be -- you have to carry that cost because you're seeing pretty significant benefits, but aren't going to have the revenue at least for a quarter or two. Is that kind of the right way to be thinking about it?

I think so. We are now starting to say, hey, let's -- in order to really accelerate things, we have to start making some more significant investments prior to that. And we've got the money and we're profitable enough that we could say, hey, double down on this bet, like, do you really want to only hire 1 or 2 guys in this area when you could hire 4 and get a much more significant benefit in a year from now? So although the short-term Q3, Q4, it may not be as attractive a margin as, say, the earlier first half, but right behind that is going to be orders that we're anticipating will be higher revenue, and it should, based upon our existing backlogs, looking like maybe better margin orders as well. And I'm hoping that we'll 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'm hoping that we'll see this. If 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's, that's our strategy that we need to get to that point.

And when you talk about the ASP progression and kind of the high ASP orders, I guess, in the past you 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 like 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've much bigger orders than let's say $150,000. So it's a bit hard to tell from that progression chart.

Yes, you're right. And 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 $1 million machines, but they're significantly large machines and there's quantity 10 of them. And that's because it's a mature customer shipping a lot of machines. 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. And 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. So in an ideal world, when that customer says, I want 3 or 5 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 3 or 5 $700,000 or $800,000 machines. We'll be selling 3 or 5 $3.6 million machines. So continuing to drive that ASP higher and higher is super vital for our strategy. And right now, what we're seeing is the high ASP orders are 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 $1 million-plus, maybe even $2 million-plus order machines. So that's going to be a super important part of our strategy to make those machines, give that -- offer this customer so much capabilities and so much incentive to want to buy the whole existing platform with as much as we can provide will be very important to drive the company's growth.

And when you talk about the capacity kind of going from that, I guess, mid-20s to mid-30s to maybe using the last day, mid-40s, and then you kind of have that next phase where you sort of talk about like 40 to 80. But when you think about the capacity versus the orders, when you're going from, let's say, a $700,000 ASP machine to a $3 million because you're adding on various capabilities. I'm assuming a lot of those capabilities are things that your forward deployed engineering team is kind of aggregating together, but things you're not necessarily making in-house. I guess, how do you kind of square some of that with what you're talking about with capacity?

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

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

I'm not on mute.

Oh, I hear you now. I hear you, Karen. How you doing?

So 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, where, a, I think I want to understand anything with the forward deployed engineers, we said we have 4 available. I'm curious if they are assigned by industry or industry agnostic? And then maybe a second quick follow-up to that is like maybe how many accounts or how many clients is each forward deployed engineer associated with?

Sure. And I should specify, there's actually 3 forward-deployed engineers, but 4 in the group. There's also a project manager that works with that forward-deployed engineering team that helps to coordinate everything coming in. And that's the area where we're considering bringing in more of the forward-deployed engineers. And these are guys that have in-depth experience in both ultrasonic coating but also equipment integration and the processes. 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. And then they say, listen, this group is now ready to scale. And we are going to then shift that customer over to the FDE team for them to show them how we can scale into production for their requirements. And it would be typical for them to work on maybe 2 to 3 major accounts, that are -- and possibly that are orders in-house to some level. While also feeding in every month, maybe 1 to 2 other proposals that they would be putting together for new potential customers. 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, 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 in the area of now $14 million of orders, something in that area. And we anticipate and hope for more orders from that customer also. So he will probably actually always be into that account 25% of his time, as long as the customer is still moving forward with us. It's not a huge group and that's why it's critical that as we start to see and get pulled in by enough customers where we say, oh, we could really use two more forward deployed engineers. It's really very easy bets to make. I mean, they're low risk bets for us to say big return. And so far that strategy seems to be working nicely.

Okay. Then a quick last question. So you have 4 deployed engineers that are reporting to the project manager, and who is the project manager reporting to?

Yes, so the project manager is more coordination for the forward deploy engineering team, but it's kind of a support role, I would describe it, for the forward deploy 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're going to be deploying what the forward deployed engineers has already decided. And one more time, what was the question there? I apologize, Karen.

So here, I just wanted to understand the reporting structure, right? Because I think that at least what was missing for me in one of the discussions that I've had is that it seems as if maybe there might be an information flow gap between the deployed engineering team and maybe like sales in terms of being able to predict or understand when the orders come next. I'm trying to understand that [indiscernible].

Yes, yes, sure. So the forward-deployed engineers, they report to our application engineering manager, who actually manages 2 teams. He manages the application engineering team, which is, again, those are the guys that are taking orders into the lab, proving it primarily on the R&D level, and feeding it back to the customers for R&D machines. And then he, and with consulting with the sales team will make a decision and say, hey, this is a significant opportunity that is ready to shift from R&D to production. And then they feed it off to the forward-deployed engineering team. And then once it's reached 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, this is going to be a significant production system going through our processes. So we have to then get the quality system in and everybody else from a manufacturing standpoint of how we're going to build the machines and how we're going to do it at an economical cost, of course.

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

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

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

Good day, and welcome to the Sono-Tek Corporation Fiscal Year and 2026 Results Conference Call. [Operator Instructions]. Please note today's event is being recorded.

I'd now like to turn the conference over to Kirin Smith with Investor Relations. Please go ahead.

Thank you, Rocco, and thank you, everyone, for joining us today. Senate released their fourth quarter and full year fiscal 2026 results this morning. If you don't have a copy of the release, please visit the company's website at www. sano-tech.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. 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. 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 full year fiscal 2026 call for the period ended February 28, 2026. Our next call will be our midyear fiscal 2027 update for the second quarter and first half ended August 31, 2026, and will be held in October.

I would now like to turn the call over to Chris Coccio, Executive Chairman of Sono-Tek. Chris, please go ahead.

Thank you, Kirin, and good morning, everyone. I will start with some opening remarks, and then Steve Harshbarger, our CEO and President, will go through a deeper business and operational review. This will be followed by Steve Bagley, our Chief Financial Officer, and he will provide the financial review. Following their comments, we'll open the call for questions, as Kirin mentioned.

Fiscal 2026 was a year of strong execution and very meaningful progress for Sono-Tek, we delivered our second consecutive year of revenue above $20 million, and we reached million while maintaining consistent quarterly performance with 8 consecutive quarters above $5 million each.

We're also proud to report that fiscal year 2026 marks our third consecutive year of annual revenue growth and 16th year in a row of profitability. Most importantly, we achieved significant profitability expansion. The gross margin increased to 51%. The operating income grew 81% and we delivered strong bottom line performance, which was supported by operating leverage and favorable product mix.

Our results reflect the continued success of our strategic shift towards higher value, high ASP production systems. These are driving both revenue quality and margin expansion. From a market perspective, Medical was a standout performer. It increased 54% year-over-year and was driven by strong demand for balloon catheter coating systems, stent applications and other advanced medical technologies.

We also saw continued growth in electronics, particularly in electrically active coatings, which support diagnostic-related applications. So clean energy remains a key long-term opportunity. We are now experiencing a decline in electrolysis related demand during the year due to policy shifts at the government level. However, this was partially offset by solely related system shipments earlier in the fiscal year.

Geographically, we saw strong performance in the U.S. market, which grew 12% and represented approximately 67% of total revenue. that benefits both revenue growth and margins due to reduced international related costs. We ended the year with a solid backlog and a strong balance sheet, providing a stable foundation for our future growth.

Now looking ahead, we anticipate continued revenue growth and profitability in the first half of fiscal 2027, and that would be driven by momentum in the medical sector and sustained demand for high ASP systems. For the full year of fiscal 2027, we're currently expecting relatively flat to modestly higher revenue compared to fiscal 2026.

Visibility beyond the first half, however, remains limited due to continued uncertainty in certain clean energy sectors and the timing of these high ASP the customer orders, which can create significant shifts in quarterly revenues -- this is particularly true as we continue to see a higher frequency of larger, more complex system orders that typically involve longer lead times and have less predictable shipment timing.

And with that, I'll turn it over to Steve Harshberger, our CEO and President. Steve?

Thanks, Dr. Coccio, and good morning, everybody. We are very encouraged by our fiscal 2026 performance, which reflects both consistency in revenue and meaningful improvement in profitability. For the fourth quarter, revenue increased 10% to $5.6 million. Gross profit increased 15% to $2.79 million. Gross margin reached 50%, and net income increased 70% to approximately $557,000. This performance reflects strong execution and continued demand for our high-value systems.

For the full fiscal year, revenue increased to $20.9 million. Gross profit increased 8% to $10.56 million. Gross margin expanded to 51% and driven, of course, by product mix and increased percentage of U.S. sales and operating income increased 81% to $1.82 million. These results clearly demonstrate the operating leverage in our business as we scale with these high ASP systems.

Now I'll provide a few other key highlights of the year in regards to our end markets for FY 2026. Medical increased 54%, and that was driven by production scale systems and the growing adoption across multiple medical device coating applications. The electronics market increased by 16%, and that was supported by electronically active layers being deposited on diagnostic-related devices.

The clean energy market declined 19%, reflecting reduced electrolysis demand. And the industrial basket declined, which commonly would show variability in demand on our large glass coating orders. As for our products category for FY 2026, integrated coating systems, which we have renamed in-line coating systems increased 91%, and that was driven by our solar-related systems. Multi-access systems declined due to our lower clean energy demand and flexing systems increased 53%, and that was supported by strong Asia demand.

Regarding our geographic trends for FY 2026, the U.S. and Canada increased 12%, and that was driven by shipments of 5 high ASP that's at high average selling price systems totaling $3.85 million. The international markets were mixed with some softness in Asia and Latin America. We closed fiscal 2026 with a solid backlog which showcases the strength of our overall business and order activity.

We contributed to increased sales and a strong backlog as a direct result of our investments in R&D with a strong focus on product expansion and our balance sheet remains strong with still no outstanding debt. So overall, our results highlight the strength of our diversification strategy and the continued shift towards high margin and higher ASP, high-volume production system sales.

We remain confident in our long-term growth prospects and we're looking ahead. And as Chris mentioned, we expect continued revenue growth and profitability for the first half of FY 2027, driven by the medical and microelectronics market and expanding adoption of our product production scale systems. And now I'll turn it over to our CFO, Steve Bagley for a deeper financial review, and then we'll open it up after that for questions.

Over to you, Steve.

Very good. Thank you, Steve, and good morning, everyone. And now a review of our full fiscal year 2026 year-over-year results. Net sales were $20.9 million, and that's up 2% from $20.5 million in the prior year. Gross profit increased 8% and to $10.56 million with margin expanding to 51% from 48%, and that was driven by favorable product mix and increased U.S.-based system sales.

Operating income increased 81% to $1.2 million, with operating margins improving to 9% from 5%. I Total operating expenses were $8.7 million, relatively flat year-over-year. Our research and development costs decreased 6% to $2.55 million, and that's primarily due to lower personnel and material costs.

Sales and marketing decreased 4% to $3.5 million and that reflects lower commission and personnel costs. Our G&A costs increased 14% to $2.66 million, and that's driven by higher salaries, insurance and stock-based compensation expense. Our interest and dividend income totaled approximately $443,000, that's slightly lower than last year, and that's due to reduced interest rates.

Our tax expense increased, and that's due to the current year's increase in income before income taxes and net income for the year was approximately $1.8 million, and that's up 42% on from $1.27 million in the prior year, and that is reflecting strong operating performance and margin expansion.

Regarding our balance sheet, cash, cash equivalents and marketable securities totaled $14.8 million, and that's an increase from $11.9 million in the prior year. We continue to have 0 outstanding debt and our working capital increased to $16.2 million. I'm also pleased to state that our cash flows from operating activities generated $3.2 million and that is a significant increase when compared to $525,000 in the prior fiscal year.

The current year's cash flow was supported by profitability and favorable working capital dynamics including higher customer deposits and inventory management. We ended fiscal year 2026 with a backlog of approximately $9.12 million, and that's remaining pretty close to historically high levels, and that is supporting our visibility into fiscal 2027. Overall, we are very pleased with our financial performance for the year and believe we are well positioned moving forward.

And now we will open the call for any questions from the audience and Racco, please go ahead.

[Operator Instructions]. It looks like our first question today comes from Dick Ryan at Colliers.

Solid end to the year. We're 1 quarter into fiscal '27. Can you talk on the the order activity, what you're seeing kind of the segments? I mean you -- I think you indicated in the past that the backlog had had shipped all the alternative energy or clean energy. So the backlog was pretty much medical and other. Can you kind of give us a sense of your order pipeline to date here with the like I said, with first quarter already in the bag essentially?

Yes, yes, for sure, good question, Dick. As you indicated, our backlog historically for the last few years, has been very heavily clean energy related. I can tell you this current fiscal year, it's very light clean energy related. It's really transitioned and shifted drastically over towards the medical sectors and the microelectronic sectors.

So that's most definitely where we're seeing our fastest growth coming from -- but I should note that it's really a result of a lot of the machine integration development we did for the clean energy sector prior that was directly transferable those capabilities over to these other marketplaces. So our diversification really worked to our advantage here. But that's where it's really coming from.

And that also goes is how it's looking going forward. If I look at our quotes and for cash going out, it continues to be the high ASP, high average selling price, larger production systems that are being quoted presented. So it's customers that maybe were buying machines that were $400,000, $500,000, $600,000 a piece, but now they are making these transitions over to machines that are maybe $1 million, $2 million or $3 million as part of the transition to our capabilities to provide these high ASP complex platforms.

Okay. Okay. Then the last call, midyear, you talked about coming out of the major semiconductor show, showing a lot of interest and kind of renewed confidence in entering that market longer term as they move from 200 to 300 fab photoresist business. Can you give us an update on the progress you've seen over the last 6 months, Steve?

Sure. That's been a very serious focus for us over the last year. As we've talked about in prior discussions, we had what I would describe a very solid and product that was well received for the 200-millimeter lab market. Well, we've put a lot of effort into the development of 300-millimeter wafers with the goal of ultimately directly goes more towards the fab marketplace. And that's coming along quite nicely.

But I said maybe a little bit longer than we expected it to be, but it is coming along nicely. We're going to be participating and bringing that $300 million, so of machine is planned for the end of this calendar year to be doing a semiconductor show Semicon in Europe, which is actually the first time we've ever participated in that show for Sono-Tek.

We think it's a significant enough introduction that we want to make the world aware of this availability and capability at these upcoming shows. So I think we'll start to see that begin to contribute to the revenue stream more so in the coming fiscal year. Maybe we'll find in FY 2027, maybe we'll see some orders, but actual deliveries will likely be more likely to fall in the following fiscal year in FY 2028, I should say, would be in FY 2028 would be actual deliveries of machines that are focused on that.

But we're anxious to get it out there for that market to see it and to really gauge the acceptance of it. But I think it will go fairly well. It's a product that we feel like we're being pulled into versus us trying to push our way into the marketplace. I believe we have customers that see need for us with that product.

Okay. Then one last one for me. You have a nice buildup of cash. I don't think you've done any stock repurchases down here. What's the status of the repurchase program? And I think your investments have been kind of for organic growth. What's your thoughts on potential M&A.

Yes. You're correct in the fact that we do have a stock repurchase program, which we've exercised some, but it's been very minimal amount that we've purchased back so far, maybe several hundred thousand dollars or something along those lines. So it's not a significant amount at this time.

We certainly do continue to have active, both inbound and outbound discussions as part of our normal daily routine in practice at Sono-Tek. We -- like everybody, we're out there looking for the correct valuations and the correct synergies. And we most certainly -- we're highly selective. There's no doubt about that, that we're very highly selective.

But I think we're fortunate that we have the ability to be highly selective because if something doesn't happen immediately for us, we feel like we have a long runway of growth for organically within the company, but we continue to be relatively active considering both inbound and outbound activity.

Okay. Great. Congratulations on another strong performance here.

Our next question today comes from Ted Jackson at Northland Securities.

So Steve, I'll start with, I mean, a little bit on backlog and bookings and things like that. So the backlog at 9.1%. I mean, it's down sequentially, but up year-over-year. It's a solid number. But if I kind of back through it, the book-to-bill is 0.44, and your bookings number is around $2.5 million. Correct me if I'm wrong on that. My data only goes back through 2022, but that's actually the lowest kind of bookings number, I have in terms of the step I've been following and tracking and I guess the question with that is, has there been like beyond like the halt energy, has there been somewhat of a a slowdown in terms of business coming in the door? And then could you -- or is there just opportunity out there that hasn't manifested itself and any kind of bookings growth and if there is maybe a discussion about what are the opportunities that are out there that would -- that could come into play to strengthen up your view with regards to the second half, I mean it's a whole bunch of stuff around there, but you get kind of were on for -- that's my first question.

Yes. Yes, yes, 100%. And it's been a common question over the past 1 year, 1.5 years now since the new administration has come into play. I think because we participate in that clean energy sector, I think our investor base may have thought, "Oh, Sono-Tek is going to get punished for that." And there is no doubt in the electrolyzer area, our business did slow down, but I think what a lot of our investors did recognize is our ability to switch to other marketplaces very quickly with the same technology, but just refocus our front end of the organization to other markets that we're thriving.

And right now, it is more lumpy our backlog than what it's been historically and that's just because of these high ASP platforms that come in. We get more frequently these $3 million, $4 million, $5 million orders that come and drop in and it makes our backlog go up and then it works through it and disappears. We certainly have to work towards making sure those are coming in not just once a quarter, but our goal here is to make sure those sort of orders will be coming in once a month and ultimately, a couple of times a month going forward, in addition to our normal flow business.

So although we'll see it's lumpy as I think right now, year-over-year, I think we're either flat or just slightly up maybe backlog. And I think it's right near our year-end high backlog number that we've ever had. But when you compare to the prior quarter, it did dip back down. But I think, again, you're going to start to see it go back up again and continue to see that kind of lumpiness going through it.

Most definitely, though, the big shift, which is going to drive the backlog moving forward, is the ability to drive higher ASP, more complex platforms into the portfolio. And I should say that every time we get an order, we almost kind of think, "Oh, wow, it couldn't get any bigger than this." And then all of a sudden, you go back and ask just 2 simple -- 2 simple words to your customer base. We typically now will just say, what next? What else do you need from us? What would make your process, your life, your manufacturing realm easier if Sono-Tek provided for you.

And that's much different than saying, here's what we have to offer. Here's what we have to offer is just the beginning of the conversation that we have with our customers now. The bigger question is -- all right, here's what you have to offer, but what else would you like us to provide you. And that's really driving our growth significantly.

And I look at some of these more recent quoting activity, product projects that we have. It's not uncommon for us to quote a customer, say, a $1 million machine, but by the end of the discussion 6 months later, that $1 million machine might be $6 million or $5 million or $4 million, but several times larger than what it started out.

And that's all because of our ability both to provide and ask the question of what else -- what next would you like us to provide to you. And the customer now they have the confidence to give us those sort of additional add-ons because they worked with us for so long.

And they know that the quality of the products we're delivering to them are good. So it's worked out really well for us with that strategy, and that's something we're going to be continuing to doing. And to be honest, I don't really know how high it could go. -- that every time we hit another milestone, where we'll say, wow, that's a $3 million, $4 million or $5 million order it seems like the next order becomes an larger.

So we're just going to keep on pushing that as far as the [indiscernible] will let us take it and drive these high ASP production systems larger and larger.

Do you have a pipeline of opportunity that will enable you to feel more confident in the second half of the year. And if so, at what point does where is kind of like the cliff to where you need to have that those opportunities become orders and then maybe some discussion about the markets that they're in.

Yes. Yes. We most definitely have a pipeline, and that's driven by the forecast and we keep track, although we don't give guidance or publicly announce it, but we had forecast and marketplaces where they're coming from that most of the most recent activity is microelectronics in the medical sector. Then as far as guidance.

I think the biggest challenge for us now is that with these high ASP complex production systems, it's the lead time because if we say, for example, get an order in the next month and keep in mind, we're just finishing our fiscal year Q1 and in another couple of days from now.

So we've got very good guidance on Q1 and pretty good guidance on Q2. But if we get any significantly high ASP orders, probably in the next month, there's a very good chance they'll ship within this fiscal year. If by chance those same orders come in, in 2 months from now, that will very likely push them into the next fiscal year, which is still good, but it just kind of is pushing on the current fiscal year. So that's why you'll see us be a little bit more cautious on second half numbers, and we should be able to give much clearer guidance in our next conference call. and that will be dependent upon did we get orders over this next month or that allow us to ship these big production platforms in the current fiscal year? Or will they be pushing into next fiscal year?

And again, it makes a visibility, a little bit tough longer term because of that. But either way, there's definitely a nice upward trend in the activity and these quotes that are going out in the level of seriousness with these quotes.

And then on taking up too much time. But my next question is just if you look at your geographic mix and you kind of look at it for the past few years, you have had exceptionally solid growth out of North America. I mean you had $4.5 million of revenue in 2020. You did almost $14 million of revenue for Vestm26. It's been up every year over that time frame. And what dragged down the aggregate growth has been. Is there a case to be made just ignoring kind of the end markets that the decline in APAC has become such a small portion of revenue for Sono-Tek that the growth metrics on the top line might improve just because you don't have that drag.

Most definitely. I mean there's a lot of areas where things could -- because we're, in my opinion, just at the beginning phases. I mean opinion, we're still small. And there's so much potential upside here. And with our high ASP platforms, it only takes 1 or 2 significant orders to make a big impact on the revenue upside.

And of course, we're never going to say, oh, we're anticipating to get this $10 million order until it's really locked in there. But orders like that are the kind of thing where all of a sudden, you could be up by 50%, 80% on 1 significant order. And that's a big change in the company's overall trajectory.

And we always plan kind of conservatively because we like to stay profitable. We like to make money. Well, don't get me wrong. We continue to invest very heavily in our R&D to grow the company, but when we give guidance, we like to give relatively conservative guidance to make sure we achieve what we're saying we're going to do and leave some upside potential.

And our next question comes from Bill Nicklin at Bill Will Insights.

Nice margins, like margin improvement. Good job. Thanks I got a couple here. And you kind of touched on some of it. And basically, over the last 4 or 5 years or so, you've consistently delivered strong growth margins, and it looks like they're getting stronger and headed higher from here.

With that -- but yet, your bottom line has not been stellar. Was that a specific strategy? And what do you think you've accomplished from that? And where do we -- are we a going forward based on what it looks like is the money that you spent building out the business.

Yes, good question. I was to a significant extent it was deliberate. We very intentionally reinvested heavily in application engineering, things like process development and maybe broader integrated system capabilities, all with the goal is to position Sono-Tek for large, more sophisticated production opportunities.

And I have to also say that importantly, our net margins certainly could have been higher during that period. And that's how we've chosen to prioritize near-term profitability over some of these growth initiatives in strategic investments.

And at the same time, I would say that some of the market acceptance and pricing and resilience we've seen with these newer integrated system solutions definitely exceeded our original expectations. As we've evolved towards more complex and higher ASP production platforms, which commonly involved outsourcing subsystems and our integration partners.

I for sure initially expected some downward pressure on margins. But in practicality, that really hasn't happened. We've been able to maintain consistently strong gross margins through that transition. And they stayed within -- and really, I would describe as an unusually tight range. They're generally in that upper 40s to low 50% area.

And I think it's because our customers understand that they're not simply buying sophisticated coating equipment for Sono-Tek anymore. They're buying our process expertise our application knowledge and highly specialized integrated capabilities tailored to their specific manufacturing needs and processes. So while we're certainly a manufacturing company, our customers, they're increasingly viewing Sono-Tek as much more of a technology solutions and maybe a process expertise provider, I would say, rather than, say, a traditional equipment supplier, where margins typically fluctuate much more significantly.

And the good news is our customers are willing to pay for integration expertise and the ability to work with a single source for a broader turnkey solution, which has again allowed us to maintain these healthy margins.

Great. A couple of years ago, there was some discussion about building out what we call Building 6 on your campus -- and that appeared that we get put on hold probably because of the clean energy slowdown. I understand that's back under consideration and -- now -- and that would take your overall capacity up from somewhere $25 million to $29 million now up to the $40 million to $44 million range. Is that correct? And what is in your pipeline as you look out that could get the revenues up to that $40 million to $44 million range.

Sure. Sorry, yes, good observation A couple of years ago, as you mentioned, we did discuss larger expansion initiatives but primarily anticipated with green energy growth sector -- and when portions of that market slowed, we took a more measured approach, I would describe it as rather than expanding too aggressively ahead of demand. However, more recently, we've been increasingly proactive with the next phase of our manufacturing expansion.

And going along with that is some flow optimization strategy. And this first phase that we're looking at right now takes advantage of currently underutilized vertical space. And that's within our existing facility. And it's really by constructing a mezzanine structure in reconfiguring portions of our manufacturing store for improved workflow efficiency and space utilization. We expect to begin implementing that phase during the current calendar year.

And the investment will likely be in the area and this is early, but $500,000 to $600,000 a and should increase our practical annual revenue capacities to roughly $35 million at this point, it's our latest guess, while also to very importantly, improving our operational efficiency throughout the facility.

Now we're also actively working with New York State economic development programs, and we're hopeful that they'll participate in supporting this project. We believe internally here that our investment is very well aligned with the state's goals around advanced manufacturing and high-value domestic production jobs.

So our goal is to continue expanding these capabilities here in New York rather than elsewhere. And we believe state partition can play an important role in helping support those objectives. So we're hopeful that confirmation of state participation will allow us to formally kick off this phase the project during the current calendar year.

Beyond that, we do have an additional expansion phase under consideration that would involve taking over our adjacent space that we have that's currently in a least building on a short-term lease. And assuming that moves forward, we believe it could expand our overall capacity to approximately that $45 million area of revenue, as you mentioned.

And I think what's really important is what's driving this renewed interest in the expansion is not just one end market, but it's the broader evolution of the business towards larger, more sophisticated production platforms, mostly across the medical devices and microelectronics and some very selected clean energy opportunities we're seeing these large system opportunities, these higher ASP programs and a pipeline that increasingly supports the need for additional scalable manufacturing capacity over time.

Great. Let's say you get up to the $35 million, the $40 million to $45 million revenue run rate. what is your headcount going to look like?

I think -- as Steve be exact, but I think we're currently operating with around 90 employees. And SP-5 Is that right, Steve?

Yes. That is about right right now, yes.

Okay. And while we would certainly expect headcount to increases, revenues scale, we certainly wouldn't expect it to increase proportionately in revenue, of course. The majority of hiring of personnel would likely incur within probably the manufacturing operations as we expand production capability and throughput. But at the same time, we would expect continued growth in particular of our FTE group, which, as a reminder, is our Footfield deployed engineering team. that team works very closely with customers on application development, the process optimization and helping ensure successful implementation of our technology with the customer in their manufacturing environment.

So we're also quite aggressive on increasing deployment, as I mentioned, AI and automation tools across their organization to help improve scalability over the time. And we are seeing opportunities to do more with less across many areas of the business, and that includes areas like programming, marketing, sales support contractor used purchasing and several other operational type of functions, I would describe. And I guess I really believe Sono-Tek that we're ahead of the curve organizationally in our adoption of AI tools -- but frankly, we're still in the relatively early stages of appointment with that said.

So I think there's still some meaningful additional leverage potential over time as those systems mature internally. So overall, for as your question for a scenario where revenue output, let's say, approximately double from our current levels. I would estimate headcount to grow in the range roughly of maybe 30% to 40% which should reflect both operating leverage and scalability built into our general business model.

And our next question comes from David McGinnis of Private Investor.

Yes. It's great that every quarter, there's more terrific news on Sono-Tek. I am disappointed in the lack -- the Pinel use of the stock buyback program. that stocks go up on earnings per share beat. And when you're just trying to get $0.01 above expectations, 1 way to do that is reduce the number of shares. And for many months, the stock was down a value to it in the low $4 -- so this would have been a great investment. What are your thoughts?

Yes, it's a reasonable question, Dave, and it is something that we bring about the DoD level quite often about what is the right timing to do stock buybacks. I know we do have a relatively significant amount of cash on hand. And we bought back a relatively small amount of stock to date. It continues to be something we look at closely.

Most of the potential acquisition opportunities we're looking at are not cheap. So we have had the ability to look at them quite aggressively and to make short-term moves if we needed to. And I can tell you having that cash on hand also gives us a lot of flexibility to make strategic moves aggressively when we see the right opportunity to arise. And the opportunities are more plentiful now and but higher cost, I should note than what they've been historically for us.

And that's just because our overall model is becoming larger by scale. So we most certainly will continue to look at that. I wouldn't be surprised if that number for the buyback starts to change what the BOD is guidance for. But it's something we're going to continue to be looking at and evaluating what's great timing there for sure.

Okay. Interesting. And I'll throw in a different point is the world has had quite a few oil price stocks in the past. And my point is this 1 is different. We have the Ukraine war. We've now got countries with the Iran War problems that are seeing, they need energy independence. It's not just a matter of our alternative energy sources, good value, financially prudent. It's how do I make sure that I can still keep the electricity on. So -- it's interesting that in Sono-Tek business, that's prop, I'm very hopeful in that area as well.

Yes. I appreciate that commenting because I also agree that long term, energy independence is going to ultimately have to be a major factor and criteria for almost all governments. So I've got to believe that this will, at some point here, become back to the prior level of activity it was, if not significantly higher in the future. But timing certainly will be an impact with the administrations and how they're being handled from that standpoint.

Thank you. And that does conclude our question-and-answer session for today. I'd like to turn the conference back over to Steve Harshbarger for any closing remarks.

Excellent Well, thank you, and in closing, for fiscal 2026. I believe this was a strong year for SonoTek marked by consistent revenue, significant margin expansion and continued strategic execution. We believe our focus on high ASP production systems market diversification and operational discipline is driving sustained long-term value.

We remain confident in our outlook for FY 2027, supported by strong momentum in the medical and microelectronic sectors, and this is supported with our strong backlog. And I thank you all for joining us this morning, and we look forward to updating you on our progress in the coming months. So thanks very much, everybody. Enjoy your rest of your day.

Thank you, sir. That concludes today's conference call, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Thank you. Thank you all.

Good day, and welcome to the Sono-Tek Second Quarter and First Half Fiscal Year 2026 Results Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Kirin Smith with PCG Advisory. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us today. Sono-Tek released their second quarter and first half fiscal 2026 results this morning. If you don't have a copy of the release, please go to the company's website at sono-tek.com and click the Press Release/News tab in 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, Sono-Tek's Executive Chairman; Steve Harshbarger, CEO and President; and Steve Bagley, Chief Financial Officer.

Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this conference call about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call.

As a reminder, Sono-Tek currently holds 2 earnings calls for fiscal year. This is our midyear fiscal 2026 call for the second quarter and first half ended August 31, 2025. Our next earnings call will be our full year call for the 12 months ended February 28, 2026, and will be held next May. I would now like to turn the call over to Chris Coccio, Executive Chairman of Sono-Tek. Chris, please go ahead.

Good morning, and thank you, Kirin, and thank you, everyone, for joining us today. We're going to discuss our second quarter and first half fiscal 2026 results that were released this morning before the market opened. I'll begin with some opening remarks and then Steve Harshbarger, CEO and President, we'll go through a deeper business and operational review. This will be followed by Steve Bagley, our Chief Financial Officer, who will provide the financial review. Following their comments, we'll open the call to your questions.

This past August, we held our Annual Shareholder Meeting at our company headquarters and manufacturing facility in Milton, New York. I'd like to thank all the shareholders who attended and were able to see firsthand the core technology, the key advantages and how it's being utilized by our customers in various industries. They were also able to see how bustling our facility is as we continue to grow. For those newer investors in our company, we welcome the opportunity to showcase our products and technology with an open invitation. As a refresher for the newer and prospective investors on the call today, Sono-Tek developed a revolutionary method of applying precision thin film coatings several decades ago.

The proprietary technology involves the use of our advanced high-frequency ultrasonic nozzles incorporated into specialty motion control systems. They are able to achieve uniform micron and nano thin coatings onto our customers' products. Our unique value proposition and key differentiator is that our thin film coating machines provide dramatic savings at the expense of liquids being applied and are environmentally friendly by minimizing material usage and reducing overspray. Importantly, this often helps companies comply with increasingly stringent government regulations aimed at reducing hazardous waste entering the environment. But the real key advantage of our ultrasonic coating systems is the ability to apply precision thin films, which are vitally important in today's world, with thousands of products and micro components now requiring a functional or protective coating to be added to them.

A major strategic shift that we made several years ago to offer more complex and complete solutions has meaningfully broadened our addressable market and resulted in significant growth in our average unit selling price. Our larger machines now commonly sell for over $300,000 and system prices can reach $1 million or more. This can significantly impact our quarterly revenue. Additionally, our move into the clean energy sector has found excellent results in the next-generation solar cell fuel cells, green hydrogen generation and carbon capture applications, as we help shape a sustainable future. This is what we saw last fiscal year, where we saw the largest customer order in our history, followed by an additional order of the same size 2 weeks later.

More recently, and in line with our diversification strategy, we announced a very large order of over $5 million through a company in the medical device industry. And just yesterday, we announced another large order of over $2.8 million from another major U.S. medical device manufacturer. The beauty of our technology is the immense value it brings across many industries, including the electronics market, life Sciences and clean energy to name a few. The new year has presented some changes and uncertainties for most businesses, such as changes taking place in relationships with trading partners and the redirection of climate policy and related government spending. On the trade issues, Sono-Tek builds our key ultrasonic hardware at our factory in Milton, New York, and a large portion of our other materials use our U.S. space. So we see minimal concern there.

On the export side, more than half of our current sales are to the U.S. market, and we have been exposed to tariffs in certain other countries for many, many years. So we could be effective for better or worse depending on the outcome of negotiations taking place. Clean energy continues to represent a significant portion of our sales. Fortunately, a large share of these sales come from commercial customers such as U.S.-based solar panel manufacturers and carbon capture and conversion companies. The solar customers are supported by commercial users and the carbon capture customers by airlines and other corporations focused on reducing their carbon footprint. This includes efforts to develop sustainable aviation fuel and other carbon-based products.

While we do anticipate a decline in clean energy orders this year, our diversification strategy helps us to mitigate and offset potential declines. This is being driven by ongoing enhancements to our equipment across all sectors, including new expanded features and functionalities that are supporting sales in the medical and semiconductor markets. I'm pleased to report that we're seeing strong momentum in the medical device industry, particularly in growing interest for our high-volume production systems and increased demand for our balloon catheter coating machines. It's important to note that we have used a form of forward deployed engineering with a number of customers now to help them in their subsequent system purchases from us.

For the first half of our fiscal year, we experienced modest annual revenue growth and the second quarter marked the sixth consecutive quarter in a row of revenue over $5 million. On top of that, our first half revenue made a new record high at $10.3 million and net income came in at $917,000, which is up about 36% from the previous year. We remain encouraged by the path ahead, supported by a solid backlog of $11.2 million and strong balance sheet with $10.6 million in cash and no debt.

For the full fiscal year, we are increasing our prior guidance to reflect modest revenue growth. This outlook balances continued caution as the market adjusted the recent shifts in government, clean energy and tariff policies, which we expect will be positively offset by growing demand from the medical device industry. We will continue to refine our guidance as we gain more clarity through the remainder of the year.

In closing my part, we are excited that our investments have begun to pay off, and our strategies have positioned us well for continued success and long-term value creation. Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger, more complex systems and platforms for production applications. There are multiple and repeat orders as well as our focus on opening new markets for our unique thin film coating technology.

Thank you. I'll now turn the call over to Steve Harshbarger, our CEO and President. Steve please go ahead.

Thanks, Chris, and good morning, everybody. Appreciate you all joining us here today. Let me start by saying that we are very pleased with our overall performance and the strategies we have put in place to help shield us from these macro factors with a unique value proposition and clear product offering that solves critical problems for many diverse industries. It's extremely gratifying to see our investments hitting their stride. Our sales for the second quarter and first half met our guidance with flat to slight revenue growth. That's even with an unplanned customer requested shipment delay that moved 1 system into the third quarter.

This comes on the back of a strong fiscal 2025, which benefited from growth in the clean energy sector. The strength and resilience of our business continues to grow, and it's exciting to see our diversification strategy paying off with momentum now building in the medical device industry. Our second quarter medical market sales increased by 150% year-over-year or $602,000 to $1 million, and that was led by balloon coating systems shipped to the U.S., Europe and China.

Regarding the second quarter, revenue was up slightly to $5.16 million and increased sequentially compared to $5.13 million in the first quarter of fiscal 2026. And that's marking the sixth consecutive quarter of revenue over $5 million. Gross profit for the quarter increased 3% year-over-year to $2.6 million compared with $2.5 million last year. And that's mainly due to a favorable product mix of mature high ASP systems with reduced costs and some favorable warranty expenses in the current period. Net income for the quarter increased 27% to $431,000 and that's compared to $340,000 last year, and that's reflecting a combination of higher gross profit and lower operating expenses.

Now I'll provide a few other key highlights in the quarter. By geography, U.S. Canada sales decreased 22% year-over-year or $775,000 and that's driven by slowing momentum in the U.S. clean energy industry. However, this was positively offset by sales in Asia, which increased by 153% year-over-year or $562,000 with major growth in China and other parts of Asia. Additionally, we saw EMEA sales increased 25% or $288,000, while Latin America sales were down by $74,000.

By product category, integrated coatings system sales, which we're now referring to as in-line coating systems decreased by $493,000 or 24% to $1.53 million, and that was primarily driven by that same customer requested delivery delay that I just mentioned, which came from the clean energy sector and has since now shipped in our Q3 FY 2026. Here as well, we saw a positive offset with multi-access coating systems increasing by $99,000 or 5% to $2.03 million. Fluxing sales increased by $46,000 or 39% to $165,000, and that's reflecting our increased demand for our fluxers from Asia. Additionally, OEM sales increased by $188,000 or 92% to $394,000 and that's driven by strong shipments to our fluxer OEMs and new optics-related OEM wins. And the spare parts, services and other sales category increased by $161,000 or 18% to $1.04 million.

By end market, as I highlighted earlier, the medical market increased by 150% year-over-year or $602,000 to $1 million and that was again led by balloon coating system sales shipped to both the U.S., Europe and China. Alternative clean energy decreased slightly by 3% year-over-year, or $65,000 to $2.43 million supported by strong clean energy backlog going into FY 2026. The electronics markets declined by 1% year-over-year down $22,000 to $1.46 million. The industrial market declined 68% or $517,000 down to $288,000. And that's influenced by a large FY 2025 European glass coating order that didn't repeat.

Regarding our first half of fiscal 2026 results, we reported record revenues of $10.3 million compared to $10.19 million in the year ago period. Gross profit increased 6% year-over-year to $5.3 million compared with $5 million and net income increased 36% year-over-year to $917,000 or $0.06 per share compared with $672,000 or $0.04 per share. The increase in revenue for the first half of fiscal year 2026 was driven by a 65% or $1.82 million increase in sales from in-line coating systems sales reflecting shipments of 6 high ASP systems to a major solar customer totaling $4.42 million. While we're not projecting further near-term orders from this customer in FY 2026, we do remain optimistic about potential future demand depending on the customers' execution of expansion plans.

The increase in in-line coating systems we experienced was somewhat offset by our product division, which can fluctuate from time to time. U.S. Canada sales decreased 5% year-over-year or $324,000, driven by slowing momentum in the clean energy industry, but was positively offset by increased sales in Asia with 74% growth year-over-year or $647,000, led by strong medical sales in China and strong alternative energy sales in Japan and South Korea. EMEA sales were relatively flat, declining $60,000 and Latin America sales down $160,000 due to slowing flexing sales in Mexico.

By product category, as I mentioned before, in-line coating system sales increased by $1.82 million or 65% to $4.58 million driven by shipment of 6 high ASP systems to a major solar customer totaling $4.42 million. Fluxing sales increased by $64,000 or 25%, driven by strength in Asia. Multi-access coating systems declined by $1.89 million or 41% to $2.71 million following a strong FY 2025 for semiconductor systems that didn't repeat and slower clean energy activity in FY 2026. OEM sales were slightly down by $13,000 or 2% and spare parts and services and others were up by $126,000 or 6%.

By end market, the medical market rose by 44% or $553,000 driven by strong balloon coating systems shipped to the U.S., Europe and China and increased stent coating activity in Europe and China. Alternative energy rose 90% year-over-year to $901,000 by the shipment of the 6 high ASP solar coating systems I mentioned earlier. The electronics market declined by 21% year-over-year or $646,000 following strong FY 2025 semiconductor sales and FY 2026 timing for similar machines. The industrial market declined 67% or $711,000, influenced by a large FY 2025 European glass coating order that didn't repeat.

We closed the first half of fiscal 2026 with a solid equipment and service-related backlog of $11.2 million, which was near record levels. The backlog clearly represents the strength of our overall business and reflects encouraging order activity. We attribute the increase in sales and the strong backlog as a direct result of our investment in R&D with a strong focus on product expansion. For the first half, we have invested $1.3 million in R&D compared to $1.4 million in the year ago period. And our balance sheet remains strong, whereas of August 31, our cash, cash equivalents and marketable securities totaled $10.6 million, still again with no outstanding debt.

In closing, we're updating our prior guidance to reflect modest growth for revenue. And this balance continues caution as the market digests recent shifts in the U.S. government clean energy and tariff policy which we will -- which we expect will be positively offset by our growing demand from the medical device industry. And most importantly, we remain very confident in our long-term growth prospects. Our momentum stems from our deliberate strategy and shift to large customized systems with accelerating ASP and our proprietary ultrasonic nozzles technology, which remains at the core of our systems for all this diversified industries. And we've been able to achieve this significant shift organically through our own development efforts.

With that, I will hand the call over to Mr. Steve Bagley, our CFO, to review our financials in more detail. Steve, please proceed.

Very good. Thank you, Steve, and good morning, everyone. I will first walk you through the fiscal 2026 second quarter results, followed by our first half results. Net sales for the quarter increased slightly to $5.16 million compared to the second quarter of fiscal 2025 and also increased sequentially compared to the first quarter sales of fiscal 2026 of $5.13 million. Gross profit increased 3% year-over-year or $74,000 to $2.6 million and the gross profit percentage increased to 50% due to a favorable mix of -- product mix of mature high ASP systems with reduced costs and favorable warranty expenses in the current period.

Operating expenses decreased to $2.17 million when compared to $2.23 million in the prior year's second quarter. The decrease is primarily due to reduced marketing and selling expenses. Research and product development costs decreased to $627,000 versus $696,000 in the prior year. And the decrease is primarily due to decreases in research and development materials and supplies and salary expense.

Marketing and selling expenses decreased to $871,000 for the quarter versus $988,000 in the prior year. The decrease is due to a decrease in salary expense related to the departure of a salesperson and a decrease in trade show expenses and travel expenses. These decreases were partially offset by an increase in salaries related to our sales application lab. General and administrative expenses increased to $670,000 for the quarter compared with $546,000 in the prior year. The increase is primarily due to an increase in salaries, corporate expenses and stock-based compensation expense. These increases were partially offset by decreases in legal and accounting fees.

Operating income increased $135,000 a or 47% to $421,000 compared with $286,000 in the prior year. In the second quarter of fiscal 2026, an increase in gross profit, combined with a decrease in operating expenses were key factors in the increase of operating income. Interest and dividend income remained steady at $82,000 in the second quarter that compares with $85,000 in the prior year's quarter. Our present investment policy is to invest excess cash in highly liquid low-risk U.S. treasury securities. At August 31, 2025, the majority of our holdings were rated at or above investment grade.

In the second quarter, we recorded a tax provision of $103,000 compared to $74,000 in the prior year. Net income for the quarter was $424,000 or $0.03 per share, and that compares with $341,000 or $0.02 per share in the prior year period. The increase in net income is primarily due to the current period's increase in gross profit and decrease in operating expenses.

Now for the financial results for the first 6 months of fiscal 2026. Total sales for the first half of fiscal 2026 increased year-over-year by $103,000 to a record $10.3 million. Gross profit increased $283,000 or 6% to $5.3 million, and that's primarily due to product mix and favorable warranty expenses in the current period. The gross profit percentage increased to 51% from 49% in the prior year period. Operating expenses decreased slightly to $4.35 million when compared to $4.45 million in the prior year's first half.

Research and product development costs decreased to $1.3 million versus $1.4 million in the prior year first half, and that's primarily due to decreases in research and development, materials and supplies and salary expense. Marketing and selling expenses decreased to $1.7 million for the first half, and that compares to $1.9 million in the prior year. The decrease was due to a decrease in salary expense related to the departure of the salesperson and decreases in commission expense, trade show expenses and travel expenses. These decreases were partially offset by an increase in salaries related to our sales application lab. General and administrative expenses increased slightly to $1.3 million compared with $1.1 million in the prior year. The increase is primarily due to increases in salaries corporate expenses and stock-based compensation expense, and these increases were partially offset by decreases in legal and accounting fees.

Operating income increased considerably by 72% to $381,000 to $905,000 and that compares with $524,000 in the prior year period, and this underscores the operating leverage from our stronger gross profit and a decrease in operating expenses. Operating margin for the first half of fiscal 2026 was 9% compared to 5% in the prior year. In the first half of fiscal 2026, interest and dividend income decreased by $4,000 to $224,000 and that compares with $228,000 in the first half of fiscal 2025. Additionally, unrealized gains decreased $52,000 to $2,000 as compared with $54,000 in the first half of fiscal 2026 -- 2025.

Net income increased $35,000 (sic) to $909,000 or $0.06 per share for the first half of fiscal 2026 compared with $672,000 or $0.04 per share for the first half of fiscal 2025. Diluted weighted average shares outstanding decreased slightly to approximately 15.7 million shares. We continue to maintain a strong cash position with cash, cash equivalents and marketable securities totaling $10.6 million at August 31, 2025, and we continue to carry no debt on our balance sheet.

CapEx for the 6 months was $113,000. And all of that is directed to ongoing upgrades of our manufacturing and development labs facilities, and we expect to invest approximately $300,000 in new equipment for the full fiscal year. And now we'll open the call for any questions from the audience. Operator, please go ahead.

[Operator Instructions] And your first question today will come from Ted Jackson with Northland Securities.

Congratulations on the quarter. So my first question, Steve, is I want to maybe auger in a little bit on the medical device strength and the Chinese exposure that's from it. In the past, I know that China has been a bit of a difficult market for you because there's been sort of copycat ultrasonic coating vendors there and we've been trying to overcut you in price. And so I'm a little curious in terms of how the business came about and kind of the competitive dynamics for the win. And this mean that we're going to see you have a better profile in China going forward and maybe some discussion with regards to tariffs around China and any kind of concerns you might have there. That's kind of a mouthful, but that's my first question.

Sure, sure. Yes. Well, China's certainly still low, is on our mind. And I should start by saying that even when we send our advanced coating systems over to China, they actually are not getting our most advanced coating systems that we actually keep those pretty close to home, so they're actually usually getting like one generation behind us, just from a proprietary standpoint. But we were fortunate that in the medical device industry, in particular, that we've been able to capture some significant orders where these customers evaluated these Chinese copycat companies, and they just found out that the quality just did not meet the bare minimum requirements to compete with Sono-Tek.

So they actually made decisions to pay, it's about maybe 3 or 4 times per machine, if they could buy that same machine from a Chinese manufacturer to get it through Sono-Tek here in the U.S. And that's even with the significant tariff simplifications that are happening. So it's a real complement, I guess, to us from the standpoint of the quality of our systems and it's the one industry that defects are much more critical than, say, like on a printed circuit board, a defect is a life in those industries. So there is some level of paying a premium in those sort of particular niches for us right now.

And in the balloon are, in particular, that's an area that we believe that we're going to dominate similar to the stent manufacturing area that we've had in the past. So I think China is jumping on that, knowing that they need Sono-Tek if they want to be heading into that market from medical devices.

And then -- so then are these customers -- are these actually Chinese entities. They're not Western companies manufacturing in chinese.

Yes. These particular ones happen to be Chinese manufacturers, which is unusual also, just as you're pointing out, it would be much more common for us to say have a Western entity manufacturing in China that is buying Sono-Tek, that would be a much more common scenario. But in these particular cases, it's actually surprisingly. Chinese manufacturers that are saying, hey, the quality is so low of our domestically made stuff that we're going to buy Sono-Tek anyway. And that's certainly without encouragement by the Chinese government, the Chinese government has a big push right now to buy made in China. But there are certain technologies that they just are not able to perfect enough that they have to be buying from the U.S. even at these very premium prices over domestic manufacturing equipment.

And then is there a similar industry in -- like in terms of balloon catheters within the Western world? And do you have exposure to there? Or is this driving interest for you outside of China?

Yes, it is. It's kind of similar to the standard industry, which we're very familiar with, and that's one of those areas that we dominate the marketplace that if you capture the 2 or 3 major manufacturers of that particular application, you'll tend to get the second tier manufacturers following them. And although it's all proprietary and confidential and there's nothing that we're supposed to get out, personnel travel from companies to companies. And so it does tend to snowball upon itself.

And I believe right now, we're in a position that we're capturing the major leaders in this particular niche. And I think it's snowballing across the globe. Geographically, it's snowballing, whether it's to Japan or to China or to Europe or in our home base in the U.S., they are -- we are becoming the industry standard in this niche? And this is a niche that's just starting to. So what's great is that this is in the beginning basis. So there's a lot of growth ahead of us here for this area.

And then -- so I've got 2 more questions on medical and then maybe one more. I have others behind it, but I'll get out of line because I can always come back in. So using stent as kind of -- like, let's call it, a guidepost to how the balloon catheter market might turn out. Can you walk us through like when you got your first order in that market and how it evolved? And then like how many systems have you sold and over what period of time, and just kind of so we can get a sense to that. And then the question behind that is you've had tremendous success within stents. It looks like you're positioned well for balloon. What other stuff is out there for you in the medical market. And then actually, I will step aside, and I'll come back in the queue after some. I'm sure there's a couple others...

Sure. I appreciate that. For sure, we are definitely trying to emulate the success that we had in stent. I guess one of the big differences between the stent market and our newest markets like balloon catheter, coating the drug-eluting balloons, is that our product offering at the time of stent was very limited and it was smaller ASP machines that we're selling for maybe $50,000 to $80,000. Now those machines probably could have sold for $150,000 to $200,000, if we had the capabilities to add more offerings more capabilities onto those machines. But we didn't at the time.

But fortunately, for us now, due to all these investments we've made over the last several years, we are now able to offer a much more sophisticated platform for balloon coating than we would have ever been able to offer for stent coding at the time. And that has driven the ASP up higher on the machines. But even more importantly, it's resulted in a much more satisfied customer that's really able to see our capabilities beyond just the coating coding part of it. It's the capabilities of manipulating the product.

It's the capabilities of curing or cleaning and having this fully integrated systems which drives our ASP up, and we're now finding is starting to help improve gross margins as well is really significant for us, and it opens us up where that customer now recognizes, oh, Sono-Tek, they're not just a stent coating company anymore. They have manufacturing capabilities for coating just about any one of your medical devices. And although balloons is the one that's kind of taking off for us right now, there's a lot of other things in the hopper that we are also involved with, which we want to repeat and emulate that same process for as well.

Your next question today will come from Bill Nicklin with Bill Will Insights.

Steve, I'm on a cell phone and not a great area. So can you hear me?

I got you, Bill.

Looking at the recent orders you have and kind of what's been taking place over the last few years, there's strong indications that Sono-Tek is intentionally and strategically taking a path of building out your applied engineering model. And I think it's pretty evident through customer accessibility to your lab and involvement in your lab, testing infrastructure, new hires you've made, leadership promotions and so forth. And it appears to me this is -- this strategy is the functional equivalent of what some popular -- been known as FDA (sic) [ FDE ] or forward deployed engineers. So in line with that, could you walk me through how the application engineering build-out fits into your broader growth strategy and what specific capabilities or customer outcomes are you building toward?

Sure, sure. That's a great question. And it really -- I would say it gets at the heart of why we continue down a path of what we're now actually starting to refer just as you referenced as forward deployed engineering. That actually came out of the software term, but it's changed and it's grown over time. The definition of it, it's really a key part of our growth strategy, and it touches on everything from customer adoption to sales efficiency and competitive pricing. And I'll do my best to walk through those areas that you just mentioned. Our forward deployed engineering model builds around what we originally called our custom engineered solutions team and really is core to scaling our growth.

This team creates -- created -- it just was created a couple of years ago now, and it was actually an expansion of our application engineering group and has already grown from 1 senior engineer now to 3 individuals, showing the strong demand for what we see in this capability area. And it enables our most experienced engineers to work directly within the customer production environments to deploy and optimize customized and production scale coating systems. And this hands-on approach really accelerates system adoption. It maximizes the real-world coating performance and it very much strengthens our long-term partnerships.

And all of these ultimately are key drivers in expanding our high ASP production platforms. And by embedding our FD engineers directly with customers, we're hoping to expect to see shortened sales cycles and improve our win rates because the solutions are already proven in production where they're not just proven in our labs. So over time, this should allow a lower customer acquisition cost. Since those same embedded engineers, they should often uncover new opportunities within our existing accounts. So I think that might kind of explain where they're coming from. So the really big thing for this model just sets us -- gets us closer to our customers. We move faster and turn that collaboration into bigger business for both sides.

All right. Maybe following on a little. What are the key performance indicators you're tracking internally to measure whether the FDE group is delivering a return on investment? And what's the expected time line for margin expansion or growth acceleration because of that?

Yes. We've long tracked the percentage of revenue tied to like laboratory testing and application development, and that's which I think is right around -- currently around 60% to 70% of our shipments are tracked to that right now. And we also certainly measure the revenue tied to the high ASP systems, which now represents roughly 2/3 of our total sales. And almost all of these big complex systems pass through that FDE group, that forward deployed engineering team. And while ROI and things are a little bit difficult to quantify directly, we certainly see positive results as more R&D and pilot line systems transition into these large multisystem production lines.

And I would strongly expect margin benefits to build gradually over the next 1 to 2 years as more and more of these large accounts move into full-scale production. And that's similar to the multisystem orders for these high ASP systems that we delivered earlier this year for the solar industry, which ended up coming through with really strong margins. So I would expect that to continue with this model.

All right. And one more quick one. How does the application engineering investment affects your competitive position, if you can give me some specifics? And are customers selecting you over competitors, specifically because of this capacity or capability? And how does that translate into pricing power and margin expansion?

So FDE, it's absolutely a clear differentiator. Customers increasingly are going to be choosing Sono-Tek because we bring process engineering expertise directly right into their production floor. So it elevates our role from equipment supplier to really become a technology partner. And that supports strong pricing and a really strong pricing power when you think about it, it's going to give us much deeper account penetration and more possibilities for recurring revenue from product expansions as well as those same returning customers considering us for new projects, which they may not have otherwise.

So I think we're going to see that roll over into margin expansion fairly quickly for us because as they become higher and higher developed and going through our process, we've seen here historically that the margins will start to expand on those high ASP machines once the first round of them have gone through our manufacturing process.

Thanks, Steve. It's good to see all this hard work and money spent come to fruition and good luck the rest of the year.

I appreciate that, Bill. It's been a significant investment for us, and we're happy to see it taking off for us. So it should be an exciting time.

And your next question today will come from Dick Ryan with Oak Ridge Financial.

Congrats on the success of the diversification kicking in. Just most things have been asked, but just a couple of questions specific. You mentioned 2 new optics-related OEMs. Can you give a little detail? Is that -- are these significant wins, I mean, obviously, any win is worthy, but can you provide a little more detail on those 2 new OEMs?

Yes. They are in the optics area, the lens area. What's -- what I would describe as significant for them is that right now, they are not in a wheelhouse for Sono-Tek, I would say, has a great depth of knowledge. But these guys do have significant depth of knowledge and that if we can get embedded with them, we will start to learn a lot more about that industry in that field. And that's very valuable for us. Often, we need a partner to accelerate our entrance into these newer type of applications because otherwise, it could take us -- with a partner, we might be able to get in, in 1 to 2 years, but without a partner, it might take us 4 or 5 years to really understand the area effectively. So I think it's going to be significant. It's probably not going to be significant from a revenue standpoint short term, but it could be significant from a new market entrants long term.

Okay. That sounds good. What's going on in the semi side? That market seems to be holding up well. The front end has got some higher expectations of spending in 2026. What are you seeing on the semi side of the business?

Yes. Well, until this past month, I was thinking more almost flattish, but then we just came out of a trade show, Semicon it's called, in Arizona it was. And it was, by far, the best trade show we've ever had and the best interest of leads and customers talking to us very seriously about equipment. And when I asked about what was the differentiator, although it was a very good year in general for semiconductor at the show, but they said, really, it was our product line expansion this year was significant enough that it was growing our addressable market at the show.

So customers that would have walked by us last year or the year before, now are starting to recognize, oh, these guys have a lot more capabilities then they had over the last several years. And we did make some more significant investments into the show to make sure we showed that and displayed that at the show. You had a larger sized booth with actual machinery there running, but it really paid off for us. And I think that we're going to start to see that become a fairly significant growth area for the organization over the next year or 2 as a result of this. And that's still got a long way from stopping the upper peak on this. We're going to be showing some significant new product additions this year, and I think it will be ongoing like that for the next several years that will continue to grow that product offering.

Okay. Have you been able to quantify what the addressable market opportunity might be for you guys?

We haven't put a dollar figure to it, but I will say this that our next strategic shift is moving from what is mostly a 200-millimeter high-tech lab environment over to 300-millimeter environments which are mostly fab directed. And that's the expansion of our product line offering right now is heading in that direction, and that seems to be where most of the investment is heading and where we could bring the biggest benefit and impact. So I think it's going to be again, higher ASP machines that are more complex. But I think right now, we've got the right strategic partners aligned with us. We've kind of worked out all the details to enter into there this year pretty quickly.

Congrats on that. That's a significant opportunity moving into the 300-millimeter space.

Your next question today is a follow-up from Ted Jackson of Northland Securities.

I just have a couple more left. So one is just a backlog near record, like over what time frame will that revenue be recognized?

Yes. The largest orders that we have just recently announced, which was that $5 million last month and almost $3 million order that came in last week, or this week, I should say, just yesterday. The bulk of those will be shipping in our FY 2027 year or so after March. But there will probably be some level maybe 15 -- 10% to 15% of that be ship out in the current fiscal year, just the beginning orders for those. So that's the bulk of it, though, it's going to be heading into next year. And that's why right now, we're only projecting modest growth for the current fiscal year, and that's just because the build time on these machines is significant.

So although we'll be able to ship some of them, we won't be able to ship anywhere near a significant portion of them in the current fiscal year. But we're in good shape for this year. Like I said, so we'll come in at modest growth. Had the clean energy sector kept on full steam like we anticipated, was we probably would have shown huge growth this year. But we deal with what we got. And fortunately, our team here were able to shift really quickly over to capitalizing on the investment we made into building these highly complex machines and just shifting it over to the medical sector very, very effectively.

And then on the second half of '26, you are projecting modest growth for the year. Given that you had a piece of business slipped from the second quarter to the third quarter, would we expect to see your second half sales to be a little more weighted in the third quarter vis-a-vis the fourth quarter because of that?

Yes, I think they're not going to be way off from each other, but it's probably going to be a little bit heavier in Q3 versus Q4 because of that one system that did get, at their customer request get pushed into Q3. So I would suspect Q3 will probably be slightly higher than Q4, but they both should be pretty solid for us.

Do you think that you can take your streak of $5 million-plus revenue quarters from $6 million to $8 million.

We haven't given any projections there yet, but I think I would be disappointed if we don't do it, but we haven't given any formal projections there, but I would be disappointed if we don't do that.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Steve Harshbarger, for any closing remarks.

Okay. Well, I just want to thank everybody for joining us today and to tell you all that we look forward to having you come back for our next conference call. Sono-Tek's long-term outlook remains strong, supported by the continued success of our newly developed high ASP platforms across advanced technology markets. So we look forward to sharing our full fiscal year 2026 results during our next call in May. In the meantime, we will be presenting at some key upcoming investor conferences. Next week, we're actually at LD Micro in California. And please don't hesitate to reach out to us with any questions. And thank you again, and enjoy the rest of your day, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.