Sono-Tek Corporation

Good morning and welcome to the Sonotek fiscal year end 2023 earnings conference call. All participants will be in a listen only mode for the duration of the call. And should you need any assistance today, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw your question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Stephanie Prince of PCG Advisory. Please go ahead.

Thank you, Joe, and thank you to everyone joining us today. Sonotech released their fourth quarter and year-end fiscal 2023 results earlier this morning. If you don't have a copy of the release, please go to the company's website at sonotech.com and click on the Press Release News tab in the Investor 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, Sonotex Chairman and CEO, Steve Harshbarger, President and COO, 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. I would now like to turn the call over to Chris Coccio, Chairman and CEO of Sonitech. Chris?

Good morning, and thank you, Stephanie, and thank you for everyone for joining us. Today we're going to discuss our fourth quarter and year-end fiscal 2023 results that were released this morning before the market opened. I will begin with some opening remarks and then Steve Bagley, our Chief Financial Officer, will provide a financial review. Steve Harshberger, President and COO, will then go through the business and operational results. Following his comments, we'll be happy to open the call for your questions. As a reminder, Sonotech currently holds two earning calls per fiscal year. This is our fiscal year end call, which ended on February 28th, 2023. Our next earnings call for the first half of fiscal year 2024 will be in October of 2023. Now briefly, for those who are new to us, Sonitech developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of patented high-frequency ultrasonic nozzles incorporated into motion control systems that are able to achieve uniform micron thick coatings for our customers. Our solutions offer dramatic savings in raw material, water, and energy usage, and is environmentally friendly among other advantages. The principal advantage is the ability to apply precision thin films, which is very important in today's world. The strategic shift that we made several years ago to offer more complex complete solutions versus component sales has broadened our addressable market and has resulted in significant growth in our average unit selling prices. Our larger machines now commonly sell for over $300,000, and systems prices can reach $1 million, which can meaningfully impact quarterly revenue. Most recently, we remain focused on opening new markets for our technology. This includes three main areas with very strong global growth, microelectronics and semiconductors, clean energy, including fuel cells and carbon capture, and medical devices. All three of these sectors are experiencing strong demand from long-term societal needs, and they all benefit from Sonotech's unique thin-film coating technology and systems. Now, as our capabilities continue to advance, more and more of the over $8 billion global coating market opens to our advanced solutions. Our investments in these areas have begun to pay off. With the receipt of our first million-dollar order in August, the order valued at $1.1 million was also the first from the clean energy sector and also was the largest in Sonotec's corporate history at the time, all important milestones. Since then, we received another $1.1 million order from the same customer as well as two other initial orders that are expected to total several million dollars each when the respective production lines are complete. Revenue for the fiscal year declined by 12% to 15.1 million. And like many high-tech equipment manufacturers, we encountered a fair number of supply changes that impacted our growth. As a result, and in an effort to avoid this issue again, we've aggressively taken several actions. First, we resolved the large chunk of the supply chain issues by significantly increasing inventory levels and creating very early reorder points, even with simple items that you would never expect to have problems with availability. Some of this is reflected in the $870,000 year over year increase in inventories that we just reported. After implementing this inventory change, we next isolated the remaining key supply chain issue which we're addressing by increasing our in-house capabilities to make similar products for our own needs. We actually started this process prior to COVID and today we internally produce about 25% of the components that we need in that area. By year end, we hope to produce about 40% with a long-term goal to manufacture about 60% of the components we need in-house. We hope that these actions will mitigate any future supply chain issues that may arise. The delay in receiving critical components we need can be seen in our backlog, which increased 60% during the year end and totaled $8.5 million at fiscal year end. This is where you can see that several of our largest orders have been held up. We expect this bubble of shipments to work their way through to delivery in fiscal year 2024. beginning in our second fiscal quarter that starts on June 1st. However, due to supply chain delays that lingered into the first quarter of fiscal 2024, which is ending next week on May 31st, Q1 net sales are expected to be slightly below net sales of 3.7 million in Q4 fiscal 2023. However, expectations for our net sales for both the first half and 12 months of fiscal 2024 is to show positive year-over-year growth as any remaining supply chain issues ease. Before I turn the call over to Steve Bagley, our Chief Financial Officer, I want to mention that Steve Harshberger and I will be presenting at the LD Micro Conference in Los Angeles on Wednesday, June 7th at 11 a.m. Pacific Time or 2 p.m. Eastern Time. It's our first time attending, and we look forward to meeting some of you there. Now, Steve Bagley will provide additional details on our financial results.

Steve? Thank you, Chris, and good morning, everyone. For fiscal 2023, total sales decreased 12% to $15.1 million, and this was due to delayed shipments resulting from supply chain challenges. And Steve Harsperger will go more into detail concerning this. During the year, approximately 55% of sales originated outside of the United States and Canada compared with 68% in fiscal 2022. Our gross profit decreased 11% to $7.7 million when compared with fiscal 2022. The gross profit margin was 51% compared with 50% for the prior year. The increase in the gross profit margin was due to less than anticipated warranty costs and a favorable product mix when compared to the prior year. For fiscal 2023, our total operating expenses increased 4% to $7 million, compared with $6.7 million in the prior year period. Our research and product development costs increased 24% to $2.1 million for the year, and that is primarily due to increased salaries and the higher costs of research and development materials and supplies, which are for use in the development of new products for new and existing markets. Marketing and selling expenses decreased 6 percent to $3.2 million for the year. The decline was primarily due to decreases in commissions, salaries, and related costs, and these decreases were partially offset by increased travel and trade show expenses. General and administrative expenses increased 2 percent to $1.7 million, primarily due to an increase in stock-based compensation expense, which was partially offset by decreases in corporate expenses and bad debt expense. Operating income decreased to $683,000 for the year, primarily due to the decrease in gross profit, combined with the increases in operating expenses. Operating margin for the year was 5% compared with 11% the prior year. For fiscal 2023, net income was $636,000, or $0.04 per share, compared with $2.5 million, or $0.16 per share, for the prior fiscal year. The decrease in net income is due to the current period's decrease in operating income and income tax expense, combined with the $1 million Paycheck Protection Program loan forgiveness that was recorded in fiscal 2022. Diluted weighted average shares outstanding increased slightly to approximately 15.8 million shares. Cash equivalents and marketable securities at February 28th, 2023 were 11.4 million, an increase of approximately 700,000 when compared to February 28th, 2022. At February 28th, 2023, there continues to be no debt on our balance sheet. Capital expenditures for the year, approximately $600,000, all of which is directed to ongoing upgrades of our manufacturing and product development lab facilities. And now I'll turn the call over to Steve Forshberger, President and COO for an operational review of the year. Steve.

Thanks, Steve. And good morning, everybody. Thanks for joining us today. I want to dive a bit deeper into our record high backlog and supply chain going into FY 2024. Let me first explain that Sonotech records full revenue recognition at the time of shipment. We only hold back some very small financial allocation for installation activities, so our revenue stream can look lumpy, in particular as we sell more and more of these $1 million plus platforms. Now, turning to our results, I wanted to remind you that Sonotech breaks down our sales in three ways, by market, by product, and by geography. And that's how I'm going to address my comments. And you can refer to the short tables on the last page of the earnings press release for all of these details. For FY 2023, total sales decreased by 12% compared to last year to 15.1 million. This decline was primarily due to delayed shipments that resulted from supply chain challenges, some of which Dr. Cochio talked about. All of these delayed orders rolled over into the new fiscal year that began on March 1st. By product, revenue from multi-axis coating systems declined 32% to 6.8 million due to the lingering supply chain issues that we've already mentioned. Fluxing sales increased 71% to 1.2 million. This is due to the continued adoption of our recently updated spray fluxing platform called the Sonoflux X2. We have several large PCB contract manufacturers that are upgrading their systems to this latest model machine. Sales in the other product category continued to grow and increase by 29% to 3.8 million during the year. And this was primarily increased sales of high-value spare parts packages that support our large platform multi-access coating machines that are already in the field. Importantly, we've begun to see that these follow-on sales of spare parts could reach that 10% to 20% of the total order value. By market, Key this year, of course, is the impact of supply chain issues, which we clearly can be seen in the revenue declines from these three markets. The alternative energy, electronics, and medical market sales each decreased by 17 percent, 23 percent, and 15 percent, respectively. This is because large portions of all of these markets use our multi-access coding systems, which have been particularly impacted by the delayed deliveries that resulted from these challenges. As I mentioned, all shipments have shifted into the current fiscal year and we have not received a single cancellation. The industrial market grew by 131% due to the shipment of 71% of a large multi-system order in fiscal 2023. The remaining 29% of that order is scheduled for shipment in the current fiscal quarter. The 62% decline in the emerging R&D and other category reflects the shift into other market basket sectors for new applications that have become successfully established. By geography, approximately 45% of sales originated in the US and Canada in fiscal 2023 compared to 32% in fiscal 2022. This shift was positively impacted by several US government initiatives to invest in the green energy sector and other research markets. For the year, APAC revenue decreased by 39%, impacted, we believe, by reduced sales to China as a result of several China-based manufacturing sites moving operations back to the U.S. and Mexico. In addition, the strong U.S. dollar temporarily made our products more expensive in Japan and South Korea, where we have good customer relationships, but this resulted in several delayed purchases. Backlog on February 28th, 2023 was 8.5 million, which is 60% higher than as it was last year end and reflecting the delayed shipments of several large orders as we've talked about. Customer deposits more than doubled to 2.8 million from 1.2 million, a 143% year over year increase. And this increase reflects the new orders we've been receiving during this fiscal 2023. In closing, and as Chris mentioned earlier, our expectations is for our first quarter that ends May 31st, the supply chain challenges will still impact our deliveries in the current quarter, resulting in lower revenue compared to Q4 FY2013. We expect higher revenue in subsequent quarters over the balance of the year as we ship new orders, as well as the large number of orders that are presently in our backlog. I'll now turn back to the operator to open this up for a Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Bill Nicklin with Circle and Advisors. Please go ahead with your question.

Good morning.

Hey, Bill. Thanks for joining us.

Right. Thanks for taking my questions. I have three questions all focused on revenue expansion visibility. The first is kind of the nature of the order that you're getting now. I noticed that in your most recent announcements, we see the terminology multi-phase program for additional systems and multi-systems. What appears to be taking place is quite different than the size and cadence of Sonitech's orders in the past, or at least as long as I've been following the company. The announcements also indicate that individual systems within the order are each priced higher than most orders in the past. And my guess is this is likely because they're from production equipment. So my question is, can you get a little more granular on what is taking place and what this means for the visibility of revenues and revenue growth out over the next few quarters and even years?

Yeah, you're correct. The wording of multi-phase is significant. For most of these large platform machines would have the very high ASPs that we're now starting to sell more often. The manufacturing cycle is much longer than our smaller $100,000 machines that we have traditionally been selling. So when our customers need the fastest possible deliveries to meet urgent requirements, They need to share this with Sonotech, and they start to coordinate their schedules for production requirements. Really, it can be a good year in advance of when they actually need our machines to reach the manufacturing floor. This does create a situation where we start to get much better visibility of what's likely to come down the pipeline for future orders. And this is what we're seeing, in particular from the clean energy sector, I would say. You know, customers are placing their first orders for high-volume manufacturing systems and presenting their plan configurations for the follow-on machines to meet the ultimate production needs, say, that they would have. We don't share these current forecast requirements until their production plans, of course, transitions into a PO for us. But I can tell you that most of our customers buying these large platform systems in the clean energy sector, they aren't just looking to buy one or two machines. They often have the need to buy five to ten systems to meet their production requirements over the next one to two years. The urgency of these green energy customers in particular, going from R&D to pilot lines to multiple high-volume production lines, it's really like nothing that I've ever seen. And it's certainly, of course, driven by these massive amount of money that's being put into this particular industry sector. Does that answer your question?

Yes, okay. I heard a beep kind of covered you up. Getting even more specific, given what you're looking at now, what's the largest number of production machines you expect from a single customer? And then on other customer orders, are there similar situations that would maybe somewhat smaller number of systems?

Yeah, you know, for sure, again, the larger customers out of the green energy sector, again, in particular, that are transitioning from R&D over to high-volume pilot lines, they're all looking at multiple lines. You know, they're all looking at, you know, 5 to 10 to even up to 15 lines that should be happening. And, again, these are the machines with the high ASPs that are over a million dollars typically. And we are continuing still to get a regular flow of R&D machines on top of that that are coming in for R&D and pilot line machines. That's still the kind of flow business, I would describe it as, of 1Z, 2Z machines that is coming from the R&D sector that will continually fill in the backlog as well. But the ones that are going to make the big impact for our backlog is going to be these big platform, high-volume production machines.

All right, so if I understand correctly, on the announcement that you've made where there are $600,000 machines and million-dollar machines, the orders that you just referenced will be multiples of that $600,000 or multiples of the million-dollar number.

Yeah, they all have the high potential of being multiples of that. None of these customers are buying those first production machines for the intent of that being it, that this is the beginning phase for them. If they only bought one machine, there would have been something that went terribly wrong. You know, they all intend to buy multiple machines. You know, the demand for these green energy products right now, it's just skyrocketed so quickly that in order to hit what their volume needs are for their products, they have to buy multiple lines. You know, again, in the area of like typically five to ten systems.

All right. Not to belabor it, but just to be clear. On the announcements that you've already made where you said a machine with $600,000, that's for one machine, and you expect multiple. Right, that's for one. So if a customer is going to buy 10 machines over time, then that's $6 million. Right.

You're 100% correct. Yes. So when you see an announcement where there's ones for $1.1 million, that's for one machine, and if that customer needs 10, it would be 10 machines, 10 times 1.1 or 10 times $660,000, correct?

All right. That's great. Now, second question. Several industrial companies that I follow have been impeded by supply chain problems, and they now in their conference call say they're coming out of this period and and they're having bubbles in shipments. But then they say they're heading back toward what most of them are describing as a broad-based normalization, where normal is lower shipments than in the past few quarters. So the bubble moves through the system. It sounds like you're experiencing the same thing, but given the orders you're getting, it's kind of a new normal. with expectations of significantly higher growth for an extended period of time. Am I correct on that?

Yeah. You know, supply chain, like you mentioned, it impacted us for FY2023 revenue. And, you know, we most certainly will see a revenue bubble working its way through into our FY2024, you know, due to these delayed shipments. And although we are definitely predicting our revenue to be more lumpy from quarter to quarter due to the increased frequency of these large ASP platform machines, we're still feeling very good about continued revenue growth for FY 2024 during the supply chain surge and after the supply chain surge because of these high ASP production systems that are starting to flow more regularly into our backlog. You know, when you're only a $15 to $20 million revenue company like we are now, it starts to make a huge impact when we start adding a flow of million-dollar machines on top of what is our historically normal business already. So I think that's going to be the real big difference as we get a flow of these million-dollar machines coming in more regularly, and that's what we should be seeing happening.

All right. Thanks. Now, just again to get quite granular on this, from what you're saying is starting in June, the quarter that's coming up, you will see some improvement in the supply chain issues, and then that will continue to improve through the year. But from the orders you're booking, it looks like that that – bubble or a jump in shipments because of normal shipments plus the catch up from the supply chain problems that even with that moving through, you'll be able to replenish your backlog at a higher rate than the shipments are going out.

Yeah, you hit the nail on the head. I think if you start tracking our backlog, will become the strongest future indicator of where we're heading because we're anticipating our order intake to exceed the shipments going out as our demand for our products increases. So, yes, we anticipate a strong enough bookings to replenish our backlog.

Great. And last question, if you will. It appears as you're going from R&D orders to to pilot project orders and production line orders. At least my visualization of a production line is that your equipment will probably be sitting alongside of your customer's equipment or equipment that your customer is buying from another vendor for a different purpose, to have a complete production line. How does this, and number one, am I correct, but number two, how does this affect the nature of the orders you're receiving? And also, does it open orders for arrangements between Sonitech and other equipment suppliers or OEMs that might accelerate your growth down the road where in the past you were selling single units that were kind of standalone and with nothing else driving the business other than a single new order coming in over the transom.

Yeah, it's true what you're saying is that there's, of course, many machines that make up the complete manufacturing line in these coating processes. And we recognize the machine sitting before and after the ultrasonic coating systems are often really critical to the end results of the product that we're coating. And many of our customers would really prefer for Sonotech to also supply the equipment standing alongside our coating systems and to take full responsibility for large parts of the manufacturing process. So we've been rapidly increasing the number of strategic outsourcing partners we work with. They're from a variety of several different disciplines. And this allows us to supply an increasingly larger end customer solution, which continues then to drive a higher and higher ASP for us. And some of these strategic partners also create some additional potential opportunities for even closer relationships in the future, actually.

That's great. Thank you. It looks like you've got the ball teed up here, and I appreciate all your efforts, and let's see what happens. It sounds pretty positive. Thank you.

Appreciate it, Bill. Thanks.

And our next question will come from Ted Jackson with Northland. Please go ahead with your question. Hey, good morning.

Hey, morning, Ted. So I'm going to sort of At a more higher level, follow up on some of Bill's line of thought. So looking at your backlog, which by the way is impressive, if I kind of look at the historical backlog, if you look back, say, two years and go forward, you used to kind of see your backlog and it would be, call it 25% of the four 12-month revenue. You know, clearly with all the supply chain issues, you know, it's been, you know, kind of 35 to 40% range, you know, in the last part of the fiscal year. You know, if I was to look at that $8.5 million of backlog and the understanding that that's going to go out in fiscal 24 and say that, hey, that's 40% of fiscal 24 revenue, which would be kind of like the high end, higher than the high end of, you know, what we've seen the last couple of quarters, you know, you'd be pushing north of $20 million of revenue. Is that a fair way to look at your business, or is that a little maybe too aggressive for you?

Well, having given projections stating what our full fiscal year revenue will be, but everything that's in that backlog right now, $8.5 million, will be shipping out this year, or we're anticipating, I should say, to shipping out this year. And I don't think there's anything in that backlog right now that's on the edge, for example, of not being able to ship. The order intake is still going really strong. I think that there is no reason for us to anticipate it not to continue to go really strong. And without saying exactly where we think we're going to come in for the year other than we're going to definitely be showing growth, I think it's looking really positive. Now, whether those really large orders that we're anticipating, because there are some some really large orders that we're anticipating getting here from multiple systems. Whether the majority of those will be able to ship out in FY 2024 or not is a question, because I wouldn't be shocked if we see our backlog just start to accelerate, even with healthy revenue going out. But I wouldn't be surprised if our backlog really starts to beef up and look very, very good for FY 2025. with still a healthy revenue stream going out in FY 2024 because the production lead time on a lot of these machines is longer than typical for us. So a lot of these million dollar plus machines can have build times of six to 12 months, depending on what the configuration is. So it is something we need to just keep in mind that the long build times on these large platform machines Our smaller platform machines, which now I consider our flow business, still have relatively short lead times on them, you know, if you're talking about $100,000 or $200,000 machines.

Yeah, if I might interject here for a moment, Steve. Over the years, Sonifex had a business that's grown at a, you know, we liked it, 10% growth, whatever, but things have really changed in the last year or so. Moving into, I think, Bill's questions pointed out, we're moving into the production phase of our business. So instead of selling one unit that felt good, half a million dollars or something, we're now in a position to sell multiple units. So that's a change in our business structure. And the other area that was highlighted in the previous questions, is this a bubble that will come and go? And we don't really see it that way because of the large amount of money that the government's putting into this clean energy sector in particular, which is coming through to us now and over the future. So I think there are two changes that have taken place in our business really within the past year or two. And that's moving into production and the large amount of federal funding in the clean energy area. And then Steve Harshberg just mentioned a third strategic change, which we're doing, which is pre and post-processing. wherever we see an opportunity to add on to our basic structure, we do it. So I think without forecasting numbers, what I've seen in my tenure is a change in the business structure, and I'm very optimistic about it personally from this comparison with the past.

Well, I'm optimistic. I just want you to don't let me get too optimistic, that's all. It sounds like you guys are on the cusp of really having some good stuff happen. Let's keep going on the revenue stuff. Just thinking about what's going to drive FY24 revenue. When we look at your line items, the multi-access systems, clearly that's where you've had some hangups. Those are where your larger systems are. They were down. you know, quite a bit from 22. Can we, I mean, you know, given what you're seeing in backlog and given that we're expecting to say half a million dollars to the revenue to flow through with some, you know, large multi-systems, multi-access systems in there, is there, is it realistic that we could see 24 that you come back to, you know, that you would at least meet what you did in 22 on that particular line item and perhaps succeed it?

Most certainly for the multi-axis coating systems, we should be on track to exceeding it this year. And that's partially driven by these delayed shipments that didn't go out for us in FY2023 that are in our backlog now. So there's a lot of multi-axis coating systems that you'll see, especially coming from the clean energy sector and the electronics sector in particular, that will be shipping out in FY2024. The other good news is where we've had our most significant supply chain challenges is in the multi-access coating area. But Sonotech, we've done a pretty good job of accelerating our in-house capabilities in this area, which should allow us to achieve shipments at a more expedient manner than what we have encountered this past year. So, that should allow us to get ourselves back closer to a norm without supply chain challenges, at least during the second half of this fiscal year, which will help again for the multi-access coating systems. Because that is, the orders intake on multi-access coating systems has not slowed. It's actually grown. It's just our ability to ship the machines, which makes it appear like it was a slow year in FY 2023.

Then just on the fluxing systems, you talked about how you're going through an upgrade process, if you would. You put up the strongest numbers that you've seen in that area since fiscal 19. Is that something that is sustainable? Is that the strength you've seen in that business as you go through this upgrade and the movement of a lot of this manufacturing industry? You know, out of China towards, you know, Mexico, U.S. Is that something that we should continue to see in 24? Or is it, you know, the kind of thing that will fade and we'll go back towards kind of those numbers that we've seen, you know, like say from 20 through 22?

Yeah, I would predict the fluxing area to remain stable for us. I don't think it's going to go down, but it's not going to show huge, massive increases. It's not where government sectors are really investing or anything like that. But what has been significant for us there is these customers that are moving from China back to Mexico in particular, even more so than the U.S., they may already have systems in China, but they don't send those machines back to the U.S. are only valued between $25,000 to $50,000, and it's not really worth them to send back a used machine to Mexico. So they buy new machines. And the great thing about our latest platform system in the fluxing area, the Sonoflux X2, it's about 40% higher priced than our traditional spray fluxers. So part of what you're seeing there with increased fluxing revenue is the increased ASP of our fluxing platforms as well. There's a good reason why they have an increased ASP, because they reduce your flux by a lot more compared to our old systems, and they have a lot more functionality. So customers that have tried them said, oh, wow, this is really worth upgrading our old fluxing system that we have from Sonotech already to our new Sonotech machine.

Shifting over to the income statement and just on the Outback side. We've got all this wind in your sails. How should we think about your operating expenditures in 24? Are there any serious investments that need to be made in your sales and marketing or your R&D efforts? Or is that something that's going to be more steady state, moderate growth?

We did.

I guess I'm asking as well, we see some operating leverage. I guess that's where I'm going with it.

Gotcha. You know, we started to see some operating leverage the prior year that, you know, I suspect, you know, going into FY 2025 is when we'll probably see the most leverage start to occur, that we've already invested quite a bit into, it's all just been finished recently, into expanding our manufacturing facility and invested those finances into that right now. So we've taken over one more building that we had been renting and all the expenditures and things to renovate to be able to do production in those areas of which now we're starting to do is now happened. So a lot of the expenses have been completed in that area. Did you have anything else to add on that one, Eric?

When you look at the operating expenses, the R&D, that's always pretty much for product development. So we should see some of that come down the line, hopefully in revenue. The marketing and selling, the decrease what you see there is primarily in commissions due to the decrease in sales. But overall, one major variable, of course, is always our advertising, our trade show. And that started to pick back up last year due to COVID. So you should see something there. The G&A, if you look at it, it was flat. And I don't expect anything to really come through on that next year, but that's my expectation right now.

I should also add to that. Just to answer what Steve was saying, you know, we do put a lot of emphasis on what's called research and development or product development. But the other issue, of course, as you all know, is inflation is occurring in salaried people as well, and particularly in the top level engineering talent. So we're doing what we have to do to maintain a quality workforce there as opposed to starting you know, losing people to some other company and then having to retrain. So there's two things going on there, our continued emphasis on R&D and the inflation of salaries that's taking place.

Yeah, I mean, that's one of the major... That just as an offshoot, as Chris mentioned on the salaries, that's where you would see leverage in a number of different ways because it takes... people a little bit of time to get up to speed, but we've had to maintain our current level of our engineers here, so that will pay off.

Jessica, you brought up the investment with regards to the new building and the productivity. I actually think about CapEx in 24. I mean, should we think of it kind of flat? Should it maybe taper off a little bit now that you've kind of moved through that?

You know, although we did finish our expansion needs here, I think we can anticipate it to be flat, though, because I think we're going to have to be continuing to expand based on our projections looking forward. Where I thought it might go down a little bit this year, I'm no longer anticipating it to go down. As long as we see this really strong order intake happening, we'll have to just be continuing our expansion plans, which would give us similar CapEx expenditures.

Okay. And then my last question, and I'm hogging the mic, but, you know, you built up this inventory, you know, you kind of went through it being part of it being, you know, you're respond to the supply chain issues. Will we see these inventory numbers ever trend down, or should we expect this to be kind of the new norm going forward?

I would hope that they will trend down, but I don't see it happening this fiscal year. Right now, we're still just so cautious with supply chain issues. And until we see that supply chain, these issues resolved 100%, it's just forcing us to make the inventory very high at this moment. Now, it's very safe inventory. You know, we're having a nice flow of orders, but it's just forcing us to keep it high at this point. But hopefully at some point when the world returns back to normal with supply chain that we won't have to worry about that.

Yeah, I think we all learned a lesson, too. I mean, we've managed our inventory levels very aggressively in the past. And, you know, we saw this coming to some extent, so we started to build up inventory. not enough though to to uh to forestall any problems as as seen in their numbers i i think what steve said is true though as we find out that the supplies are now available we can back off a bit but i don't think we'll ever go down to the level that we were before okay

Well, that's it for me, and I just want to finish and just say I'm looking forward to, you know, 24 and 25. It seems like, you know, you guys are on the cusp of some really exciting stuff, and I'm looking forward to watching it play out.

Thanks.

Thanks, Ted.

Thank you. As a reminder, if you have a question, you may press star then 1 to join the queue. Our next question here will come from Avi Fisher with Longcast Advisors. Please go ahead.

Hi, good morning. Just two or three quick questions. What products are delayed because of supply chain issues?

Yeah, the primary product line is our multi-access coating machines. That's where we really got clobbered. And those multi-access coating machines are are very heavily used in our larger platform systems directed at both the electronic sector and the green energy sector and a little bit in the medical sector as well. But they're not very commonly used in the industrial sector, for example.

Okay, so presumably, I mean, what we're really talking about is a robot, right? The robot arm that comes from a supplier, right? That you get from a supplier.

Yeah, I would describe it as motion platforms and product handling platforms. But they're not, for example, like simple XYZ vanilla robot systems that you might see from some manufacturers. Most of our systems are highly custom and engineered for the application. But you are correct in saying that it's a robot.

And are those coming from, I mean, presumably I think those are coming from like ABD or from somewhere in Japan?

While we do have one robot that we purchased from, it's a very inexpensive robot from Japan, which is kind of like a vanilla machine that just stamps out the same thing. It's for a very, very low entry point for small universities. The majority of our robots are all custom engineered solutions and they're manufactured in the U.S. either by Somotech or in combination with our partners. And the product that we're looking at there, unfortunately, our partner, there is no equivalent vendor to them in the U.S. or Europe that has similar sort of products or capabilities, I should say, even more so than products. It's the capabilities. There are some out of China. that we've identified, but they have their own supply chain and shipment problems coming out of China as well. That's why we were really heading down the path of bringing a lot of this expertise in-house and increasing our own internal capabilities. Even though this industry partner, other than the delayed shipments, they're a really good quality, really good price, but we need to get a little more control ourselves of the supply chain, so that's why we brought some of those talents internally within Sonotech.

I'm just going to say something. Presumably, whoever this partner, you're a fairly small partner to them currently, but as your addressable market grows, as your R&D clients move into production, Is there an opportunity for you actually to get, instead of doing this on your own, to get closer to your partner and say, hey, let's work together. We think we can sell multiples of the units we're selling now. That will move us up the priority chain. We'll be a little more important to them. And now you may have a co-branded product that can address an even larger market. Is that something you've thought about at all?

The partner is someone – do you want to answer that, Dr. Cochio? Are you speaking up?

Yeah, you know, you're on the right track, and we are doing what you say without necessarily going so far as co-branding. But, you know, we've had multiple conversations with that vendor who's more than a vendor in our eyes because we work so closely together. And we've brought customers in to show them, you know, how capable they are to serve us, and therefore we deserve the customer. So, yeah, we're – The alternative, as Steve pointed out, is, yeah, you can go to China, but we're not going to go to China to look for that type of thing, not just for the supply chain issues, but also for the potential loss of some of the business technology and some of our proprietary information. So I think we're on the right track in terms of both helping our partner do better with us And also, as Steve has pointed out, we're on a track to be able to produce a substantial amount of these particular specialty robotic, if you want to use that word, we call them multi-axis systems in-house.

I'm sorry if you said this. Have you elaborated on how much you expect to spend on this pursuit to bring more in-house robots?

We've already made the bulk of the investment up front already. And it actually started prior to COVID is when we started this process because we recognized our high dependence on this vendor. And it's mostly been in R&D and engineering talent that we had to bring in. And so the machines that we are now shipping that we've taken on through internally made products, are shipping out now from Sonotech. As Dr. Kochi mentioned, there's about 25% of them are coming out internally made right now. But the bulk of the investment is already done at this point. Now it's just continuing to upgrade and improve it to the next level. But again, our industry partners are actually very good as a partner, so we appreciate them for their capabilities as well. But I think it's a smart move for us to have both of these avenues going at the same time. But we don't see any other big significant investment coming down the pipeline for that.

Got it. And just to clarify what you just said, it sounds like you're having this parallel track of you're continuing to work with your partner and also doing some more in-house.

Yeah, that's correct.

That's correct. Okay, one last question. You've talked in the past about kind of role to role. And I see on your website you have this wide track system. but I didn't hear you, maybe I missed it, but I didn't hear you talk too much about the roll-to-roll systems. Can you just sort of talk about how that's progressing, perhaps how many units you're selling or how that pipeline looks? Thank you.

Yeah, sure. We are still progressing with the project. It's still an active program. We still have customers that come in, and we've sold a few roll-to-roll machines at this point. The primary target market for us for roll-to-roll, you might recall it was going towards the green energy sector for coating of membranes used for fuel cells or carbon capture or green hydrogen generation. And that customer base very much is expressing that they plan to go to roll-to-roll, but we still have not seen them make the transition. We actually thought they would have done it this year. But right now it seems like they're primarily just focused on single pieces and not going to roll to roll yet. But they still are talking about short-term making the transition to roll to roll. So we have got ourselves to a point where we're ready to transition with the market when they're prepared to make that move. But we're kind of waiting for the market to go there. And we still believe it will go there. And we'll be ready when it does happen.

And has this customer sort of deferred because they're looking at other technologies? Are they looking at CBD instead, or are they just looking to raise funding so they can move ahead at scale?

Yeah, it's actually broadly for the whole industry is looking to go towards, not one particular customer, the whole industry for these coating of membranes is looking to go towards roll-to-roll ultimately, although they are not doing it today, right now at this very moment. And that it's not a replacement for this particular application of coating membranes. They can't do this application by CBD. So for our competition in this particular area is slot dye coating. But thankfully, we have some performance advantages about our coatings compared to slot dye, which makes most customers choose our technology over slot dye technology.

So the roll-to-roll opportunity Broadly speaking, it's not even in the backlog right now.

Broadly speaking, it's not. We'll get an occasional machine here and there. We are still making advances behind the scenes in our laboratories with it, and we are bringing customers in to see it. They can understand the technology, and they can prepare for us for when they want to make the transition. They've got a partner in Sonotech that is prepared for them when they want to do that.

And when or if your clients are ready to move up to a production scale, how long would it take you to produce the first unit?

I don't think it would take us long at all because we have the machines in house right now. We've actually made the bulk of the investment there, which allows us to show the systems to the customers. So we're close. Now, again, these are almost always to some level customized machines, so it's going to be long lead time products. But when they say they're ready, I think we're prepared to take the orders.

Awesome. All right. Thanks very much. Appreciate your time. Thank you. Good chatting, Abby.

And this concludes our question and answer session. I'd like to turn the conference back over to Dr. Chris Coccio for any closing remarks.

Yes, thank you. And thank you, everyone, for joining us today. Sanotech has a strong outlook for growth based on the high utility of our products in many high-tech and emerging markets. We look forward to our next call in October that will review the mid-year 2024 results. So please contact us directly if you have any questions before that. Be well, stay safe, and I would just remind you once again that we will be at LD Micro in Los Angeles Wednesday, June 7th. Thank you all.

The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.