Good day, and welcome to the Sono-Tek Corporation Second Quarter and First Half Fiscal Year 2026 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 Corporation released their second quarter and first half fiscal 2026 results this morning. If you do not have a copy of the release, please go to the company's website at sonatec.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 Corporation's Executive Chairman, Steve Harshbarger, CEO and President, and Steve Bagley, Chief Financial Officer. 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 Corporation currently holds two earnings calls per fiscal year. This is our mid-year 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 twelve months ended February 28, 2026, and will be held next May. I would now like to turn the call over to Dr. Chris Coccio, Executive Chairman of Sono-Tek Corporation. Chris, please go ahead.

Good morning and thank you, Kirin. And thank you, everyone, for joining us today. We are going to discuss our second quarter and first half fiscal 2026 results. They were released this morning before the market opened. I'll begin with some opening remarks and then Steve Harshbarger, CEO and President, will go through a deeper business and operational review. Following their comments, we'll open the call to your questions. We will be followed by Steve Bagley, our Chief Financial Officer, who will provide the financial review. 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 Corporation developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of our advanced high 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 of the expensive 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…

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 one 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 continue 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 $1,000,000. This was led by balloon coating systems shipped to the U.S., Europe, and China. Regarding the second quarter, revenue was up slightly to $5,160,000 and increased sequentially compared to $5,130,000 in the first quarter of 2026, marking the sixth consecutive quarter of revenue over $5,000,000. Gross profit for the quarter increased 3% year over year to $2,600,000 compared with $2,500,000 last year. This is 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 compared to $340,000 last year, reflecting a combination of higher gross profit and lower operating expenses. Now I'll provide a few other key highlights of the quarter. By geography, U.S./Canada sales decreased 22% year over…

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 $5,160,000 compared to the 2025, and also increased sequentially compared to the first quarter sales of fiscal 2026 of $5,130,000. Gross profit increased 3% year over year, or $74,000, to $2,600,000, 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 $2,170,000 when compared to $2,230,000 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 the 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, which related to our sales application land. 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, or 47%, to $421,000 compared with $286,000 in the prior year. In 2026, an increase in gross profit combined with a decrease in operating expenses were key factors in the increase of operating income.…

Thank you. We will now begin the question and answer session. And your first question today will come from Ted Jackson with Northland Securities. Please go ahead.

Thanks. Good morning. Congratulations on the quarter.

Hey, good morning, Ted.

So my first question, Steve, is I want to maybe augur 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, you know, ultrasonic, you know, coding vendors there when try to cut 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 does 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, it is certainly still always on our mind. 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. We actually keep those pretty close to home. They're usually getting like one generation behind us, just from a proprietary standpoint. But we were fortunate that in the medical device industry in particular, 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 Corporation. So they actually made decisions to pay what's about maybe three or four times per machine if they could buy that same machine from a Chinese manufacturer to get it through Sono-Tek Corporation here in the U.S. And that's even with the significant tariff implications that are happening. So it's a real compliment, 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 area in particular, that's an area that we believe that we are going to dominate similar to the stent manufacturing area that we've had in the past. So I think China's jumping on that knowing that they need Sono-Tek Corporation if they want to be heading into that market for medical devices.

And then, so then are these customers or these are these actually Chinese? They're not Western companies manufacturing in China?

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 Corporation. 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 Corporation 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, you know, 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 stent industry, which we're very familiar with, and it's that's one of those areas that we dominate the marketplace that if you capture the two or three 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 nothing is ever 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're becoming the industry standard in this niche. And this is thankfully, this is a niche that's just starting to grow. So what's great is that this is in the beginning phases. So there's a lot of growth ahead of us here for this area.

And then, so got two more questions on medical and then maybe one to arrive at. Behind it, but I'll get out of line so I can always come back in. So using stent as kind of a 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 and in that market and how it evolved, you know, and then, like, how many systems have you sold that over what period of and you see what I'm saying, just kind so we can get a sense to that. Then the question behind that is, you've had tremendous success within The States It looks like you're positioned well for Balloon. What other stuff is out there for you in the medical market? And And then actually I will step aside and I'll come back in to queue know, for some I'm sure there's a couple of

Sure. I appreciate that Ted. For sure, we are definitely trying to emulate the success that we had in Stend. 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 stents was very limited and it was smaller ASP machines that were 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 and more capabilities onto those machines. But we didn't at the time. But fortunately for us now, 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 coating 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 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 it's 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 Corporation 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.

Sounds exciting. I'll I'll I'll I'll come back in queue. I know I have no questions. Thanks, Ted. Good talking to you. And your next question today will come from Bill Nicklin with Bill Will Insights. Please go ahead.

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

I got you, Bill. Good morning.

Good morning. 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 Corporation has intentionally and strategically taken 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 the strategy is the functional equivalent of what some popular known as FDA 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 it really is core to scaling our growth. This team was created a couple of years ago now. And it was actually an expansion of our application engineering group and has already grown from one senior engineer now to three 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 quoting systems. And this hands-on approach really accelerates system adoption. It maximizes the real-world coding performance and it's 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 FTE 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 per 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 may 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.

Alright. Thanks. Maybe following on a little, what are the key performance indicators you're tracking internally to measure whether the FDA group is delivering a return on investment and what's the expected timeline for margin expansion or growth acceleration because of that?

Yes. We've long tracked the percentage of revenue to like laboratory testing and application development. 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 with revenue tied to the highest ASP systems, which now represents roughly two-thirds of our total sales. And almost all of these big complex systems pass through that FTE 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 multi-system production lines. And I would strongly expect margin benefits to build gradually over the next one to two years as more and more of these large accounts move into full-scale production. And that's similar to the multi-system orders for these high ASP that we delivered earlier this year for the solar industry. Which can end up coming through with really strong margins. So I would expect that to continue with this model.

Alright. And one more quick one. How does the application engineering investment affect 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, FDA, it's absolutely a clear differentiator. Customers increasingly are going to choosing Sono-Tek Corporation 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 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 rollover into margin expansion fairly quickly for us, as they become higher and higher developed and gone 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 big 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. Please go ahead.

Morning, Dick. Hey, morning, Steve. Thanks for taking the question. And also congrats on the success of the diversification kick in.

Appreciate that. Thank you.

Just most things have been asked, but just a couple of questions specific. You mentioned two new related OEMs. Can you give a little detail? Is that are these significant wins? I mean, any win is worthy. But can you provide a little more detail on those two new OEMs?

Yes. They are in the optics area, the lens area. What I would describe as significant for them is that right now they are not in a wheelhouse for Sono-Tek Corporation 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 new newer type of applications. Because otherwise, it could take us you know? But we with the partner, we might be able to get in in one to two years, but without a partner it might take us four or five years to really understand the area effectively. So I think it's going to be significant. Probably not going to be significant from a revenue standpoint short term, but it could be significant from a new market entrance 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, 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 than 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 two, 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 we'll 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 is 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 have got the right strategic partners aligned with us. We've kind of worked out all details to enter into there this year pretty quickly.

Fred, Well, congrats on that. That's a significant opportunity. Moving into the 300 millimeter space. I think that's it for me. Good job. Appreciate it. Thanks, Steve.

Always good talking, Dick. Thanks.

And your next question today is a follow-up from Ted Jackson of Northland Securities. Please go ahead. Welcome back, Ted.

Hey, 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, was that $5,000,000 last month and almost $3,000,000 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, so after March. But there will probably be some level, maybe 10% to 15% of that may ship out in the current fiscal year, just the beginning orders for those So that's the bulk of it, those 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 hey, 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 2026, you are projecting modest growth for the year. Given that you had a piece of business slip from the second quarter to the third quarter, would we expect to see your second half sales be a little more weighted in the third quarter vis a vis the fourth quarter because of that?

Yes. I think they're going be way off from each other, but it's probably going to be a little bit heavier in Q3 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 $5,000,000 plus revenue quarters from 6 to 8. 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 form projections there, but I would be disappointed if we don't do that.

Okay. Alright. Well, that's it for me. Everything else got asked by other people. Thanks.

You're welcome. See you, Ted.

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. Sorry about that. Dropped all my papers here. 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 Corporation'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 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.