Ultralife Corporation

Thank you, Emma, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's conference call for the first quarter of fiscal 2021. With us on today's call are Mike Poplic, Ultralife's President and Chief Executive Officer,

and Phil Fain, Ultralife Chief Financial Officer. The earnings press release was issued earlier this morning, and if anyone has not yet received a copy, I invite you to visit the company's website, www.ultralifecore.com, where you'll find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call will contain forward-looking statements based on current expectations. actual results could differ materially from those projected as a result of various risks and uncertainties. These include potential reductions in revenue from key customers, uncertain global economic conditions, and acceptance of new products on a global basis. The company cautions investors not to place undue reliance on forward-looking statements which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these and other factors that could affect Ultralight's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K and the latest quarterly report on Form 10-Q. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning.

Good morning, Jody, and thank you everyone for joining the call. Today, I'll start by making some brief overall comments about our Q1 2021 operating performance, after which I'll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2021 revenue initiatives before opening it up for questions. For the first quarter of 2021, Our core battery and energy product business hosted its fourth consecutive quarter of solid double-digit year-over-year organic revenue growth. Total B&E first quarter medical sales and B&E government defense sales were once again up strongly, overcoming a year-over-year decline in the oil and gas revenue and leading to a total Q1 B&E sales increase of over 6% year-over-year. Communication Systems Q1 revenues were lower than the previous year with the non-recurrence of the prior year vehicle adapter and modern power amplifier sales under the U.S. Army's network modernization initiatives. For the total company, the strong core B&E revenue growth fully offset both lower oil and gas and communication systems sales to achieve modest Q1 2021 year-over-year revenue growth. Also in Q1, gross margin headwinds impacted earnings, primarily due to mix, new product transition costs, and incremental freight and expediting costs. In a few minutes, I'll give you further updates on our revenue initiatives, but first I'd like to ask Ultralife CFO Phil Fain to take you through additional details of the first quarter 2021 financial performance.

Phil? Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31st, 2021. We also filed our Forum 10Q with the SEC and have updated our investor presentation, which you can find in the investor relations section of our website. I would like to thank all those that helped make this happen. For the first quarter, consolidated revenues totaled $26 million. compared to 25.8 million reported for the first quarter of 2020. Similar to the last three quarters, the year-over-year variance reflects a significant increase in battery sales to our medical and government defense customers, which was offset by lower oil and gas market and communication system sales. We estimate that our Q1 2021 sales were reduced by approximately 2 million due to demand impacts associated with COVID-19, with the increase in sales of medical batteries used in ventilators, respirators, and infusion pumps more than offset by weakness in the oil and gas in international industrial markets, along with some delays with government defense orders. Revenues from our battery and energy product segment were $22.1 million, an increase of 6.5% from last year. attributable to a 32.2% increase in medical battery sales and a 30.3% increase in government defense sales, reflecting higher demand for new products from a large global defense contractor, offset by a 30% decline in oil and gas market sales. The sales split between commercial and government defense was 65-35, compared to 71-29 for the 2020 first quarter, and the domestic to international split was 57.42 compared to 54.46 last year, both reflecting higher U.S. government defense sales. Revenues from our communications systems segment were 3.9 million, a decrease of 23.6% from last year. The decrease reflects 2020 shipments of vehicle amplifier adapter systems to support the U.S. Army's network modernization initiatives under delivery orders announced in October 2018. These orders were completed in the second quarter of 2020. On a consolidated basis, government defense sales increased 5.6%, while commercial sales declined 3.1% from the 2020 period. The commercial to government defense sales split was 55-45 versus 57-43 for the year earlier quarter. Our consolidated gross profit was $7 million compared to $7.3 million for the 2020 period. As a percentage of total revenues, consolidated gross margin was 26.9% versus 28.4% for last year's first quarter. Gross profit for our battery and energy products business was $5.4 million compared to $5.3 million last year. Gross margin was 24.6% a decrease of 100 basis points from 25.6% reported last year, reflecting the product mix impact of lower oil and gas market sales, incremental costs in 2021 associated with the transition of a multitude of new products to higher volume production, and incremental freight and expediting costs. For our communication systems segment, Gross profit was $1.5 million compared to $2 million for the year earlier period. Gross margin was 39.9%, the same for both reporting periods. Operating expenses increased $0.2 million, or 3%, from $5.8 million last year to $6 million. This increase primarily reflects our investment in engineering and sales resources for new product development and market launches, partially offset by lower travel costs. As a percentage of revenues, operating expenses were 23.2% compared to 22.7% for last year's first quarter. Operating income for the first quarter of 2021 was 1 million compared to 1.5 million for the 2020 quarter, reflecting the net financial impact of COVID-19 in lower year-over-year sales for communication systems. in operating margin was 3.7% for the 2021 period versus 5.7% last year, driven primarily by the lower gross margin in our battery and energy products business. Adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, was 2.0 million or 7.8% of sales compared to 2.5 million or 9.8% for the first quarter of 2020. On a trailing 12-month basis, adjusted EBITDA is $9.2 million or 8.5% of sales. Our tax provision for the first quarter was $0.2 million compared to $0.3 million for the 2020 quarter, computed at statutory rates, while excluding the benefits of our net operating losses and tax credit carry-forwards for GAAP reporting purposes. Accordingly, Our reported tax provision for the first quarter is based on an effective rate of 24.2%, while utilization of our deferred tax assets will drive the tax provision down to only 49,000 or 5.5% when we pay our taxes. We expect that the net operating losses and tax credits included in our deferred tax assets will offset all U.S. taxes for the foreseeable future. Using the 24.2% statutory tax rate, net income was 0.7 million or 4 cents per share on a diluted basis for the 2021 first quarter. This compares to net income of 1.1 million or 7 cents per share on a diluted basis for the 2020 quarter. We utilize adjusted EPS to reflect actual cash taxes paid or to be paid and define adjusted EPS as EPS excluding the provision for non-cash U.S. taxes expected to be fully offset by net operating loss carry-forwards and other tax credits. As noted in the supplementary table in earnings release, adjusted EPS on a diluted basis was $0.05 per share for the 2021 first quarter compared to $0.08 for the 2020 first quarter. We estimate that the adverse impact of COVID-19 to our adjusted EPS for the 2021 first quarter with $0.06 per share. Ultralight further strengthened its balance sheet and liquidity in the first quarter with cash on hand increasing 28% to $13.7 million and debt decreasing 27% to $1.1 million from year-end 2020. During the first quarter, the company received proceeds of $1.59 million from the lithium ion battery antitrust settlement awarded in the first quarter of 2020. We ended the 2021 first quarter with working capital of 46.9 million in a current ratio of 3.8 compared to 45.8 million and 3.4 for year end 2020. As a result, we remain well positioned to fund organic growth initiatives including new product development and strategic capital expenditures, while expediting our organic growth through accretive M&A. Going forward with our resilient business model, ample liquidity, diversified end markets, and growth initiatives, we remain steadfastly focused on releasing the full leverage potential of our business model. I will now turn it back to Mike. Thank you, Phil.

In 2021, we continue to be focused on increasing our revenue growth opportunities through diversification, expansion of markets and sales reach, new product development and strategic CapEx, and potential acquisitions. For the battery and energy products business, diversification and market and sales reach expansion has meant further penetrating the global commercial markets as well as the international government defense markets which has helped deleverage our historical concentration and mitigate lumpiness in the U.S. government defense market. For Q1 2021, overall global B&E medical revenue was up 32% year-over-year and represented 31% of total B&E product revenues. Demand from existing customers was strong in applications for ventilators, respirators, infusion pumps, digital x-ray, and surgical robots. We also received delivery orders for existing medical customer blanket and or multi-year agreements. Our UK team delivered another solid quarter with sales increasing at a strong double-digit rate. We are expanding our participation at major medical device OEM customers with new and existing products and pursuing new opportunities in IoT applications with European customers for our new range of ER and CR products. Regarding our oil and gas and subsidy electrification commercial revenue, our SWE team provided approximately 17% of total battery and energy product sales. Those SWE total revenues were down year over year due to ongoing softness in its core oil and gas market. We saw steady signs of early improvement, and SWE's overall Q1 revenue exceeded expectations with roughly equal sales contributions from our oil and gas, as well as our CSAFE Subsea battery products. We also continue to make investments in the manufacturing capability and qualifications for SWE to do more of our medical business, and SWE was recently certified to ISO 1345 quality levels for manufacturing medical batteries. For B&E's U.S. government defense business, revenue was up 30% year-over-year and represented approximately 32% of total B&E product sales, with shipments primarily for radio battery and chargers to OEM primes. The process is also ongoing for first article testing, results evaluation, and customer approval with our DOD DLA IDIQs for the next Gen 5390 and new CFX Blend 5790 primary batteries. At the same time, we continue to be engaged with the various DOD entities and OEM primes in pursuit of other exciting new opportunities for on-soldier power and charger capability. Looking at Battery Energy Products' new product development, 22% of revenues were from products introduced less than or equal to three years ago. During the first quarter of 2021, continued progress was made on several multi-year projects, including but not limited to OEM public safety radio batteries, a next generation medical cart battery, a new military conformal battery, and next generation ruggedized modular large format energy storage batteries. We also recently completed the development of our new smart U1 battery and have begun full production volume manufacturing. This product and future variants will serve applications under consideration in markets such as medical carts, automated guided vehicles, and robotics, and we are currently targeting initial anchor customers. In addition to the investment in new product development and multi-generational product planning, we continue to deploy strategic CapEx investment in our facilities to strengthen our competitive differentiation. In our Newark, New York facility, as a new manufacturing line, for our new premium lithium manganese dioxide 3-volt cell transitions to full production, we are fulfilling initial customer orders and in discussion with several other potential large customers. This new manufacturing line is also capable of producing a high-performance variant to our new 3-volt cell in a similar form factor, except using a CFX-blended battery chemistry. The CFX-blended cell will offer significantly longer runtime and thus enhance system reliability to address growing applications in IoT and remote sensor markets. Initial trials are ongoing this quarter to validate the design and finalize techno specifications. In China, we have completed the first phase of our project to upgrade our thionyl chloride ER cell. This overall project involves several stages of product and process improvements, which will help us multiply several fold our total available market with newly identified commercial and industrial applications. These newly formulated and designed ER high rate and low rate products are now available for sampling and production ready. At Communication Systems, new product development revenue from products less than or equal to three years ago represented approximately 25% of Communication Systems revenues. Communication Systems also delivered initial prototype radio mounts in Q1, supporting a new handheld radio and enabling installation onto multiple mobility platforms to include ground vehicles, fixed wing, and helicopters. Initial orders are in process for delivery in Q2, with follow-on awards anticipated as early as Q3 in 2021 and throughout the next three years. The impact of COVID-19 continues to be felt with global military sales, including delays due to vehicle production lines. Overall, comm system sales were lower, but engagement with primary OM customers was sustained at a high rate using virtual tools to support technical collaboration and planning for future program awards. Regarding the U.S. Army's handheld, man-packed small form fit and leader radio programs, Operational tests and evaluations were completed in Q1 with the U.S. Army HMS Program Office, and expectation is the U.S. Army will move forward with higher rates of production orders in 2021. Based on communication systems' continued focus on the domestic military radio market and key radio OEMs, communication systems remains well-positioned for future business, supporting both single- and two-channel, handheld and man-packed radios, ancillaries, and integrated solutions. Updating the cutting edge server technology system integration activity mentioned in the previous earnings calls. Upon successful completion of DoD test and evaluation, communications systems received a small volume initial production order from a DoD customer with deliveries in Q2 with follow on orders anticipated later in 2021. The system configuration is a two-case system with one housing the server and the other providing an uninterruptible power supply backup with ancillary items. This base configuration is expected to be filled before another program, which completed trials in March, with procurement anticipated in Q4 2021. Growth into commercial system integrations by communication system is anticipated in Q2. with initial order and delivery later in 2021. This key diversification will provide strong growth opportunities for communication systems and allow for broader application of our experience and past performance within the GND system integration into new global markets. We remain very optimistic about this emerging growth area and further expansion of this key OEM relationship as demands materialize in 2021. In closing, For the first quarter of 2021, we were delighted to start the year with another consecutive quarter of solid year-over-year revenue growth in our core Battery Energy Products business. While transitioning new products to full production and investing in additional resources to capture new revenue streams, we continue to maintain total company profitability, positive cash flow, and a solid balance sheet. In 2021, we are focused on obtaining initial revenue from our maturing transformational projects. These are projects that will deliver new meaningful, sustainable annual revenue streams in attractive growth markets from new competitively differentiated products. As a recap, at Communication Systems, these include, but are not limited to, potential Leader Radio follow-on awards, new OEM MANPAC radio answeries, integrated computing solutions, and the next generation 21 amplifiers. At B&E, our transformational project list includes, but is not limited to, the new 3-volt product line, the new ER product line, the smart U1 battery product line, the 5790 and XR123A CFX blend primary batteries, and several other new public safety, thin cell, medical, and subsidy electrification battery packs. We expect completion of these transformational projects to support our strategic objective of increasing our revenue growth rate, as well as improving revenue and EPS consistency. As we remain vigilant in following the established guidelines to keep our employees out of COVID's harm's way, we look forward with the world and turning past the pandemic and moving forward. We are leveraging our strong position in military defense, energy, and medical, which are some of the largest mission-critical end markets, to participate more fully in some of the fastest-growing markets, particularly those playing a key role in critical infrastructure, the ultimate umbrella mega-market. As a total company, our strong balance sheet, solid cash flow from operation, and disciplined execution of our business model by our management team afford us the opportunity to simultaneously pursue organic revenue growth through our transformational projects, invest in new product development and strategic ethics for competitive advantage, and seek out impactful acquisitions. Our goal in 2021 remains to deliver our next year of profitable growth. Operator, this concludes my prepared remarks, and I'd be happy to open up the call for questions.

Ladies and gentlemen, if you'd like to ask a question, you can do so now by pressing star 1 on your telephones. That's star 1 if you'd like to ask a question. We'll now take our first question from Josh Sullivan, the benchmark company. Please go ahead. Your line is open.

Good morning, and thank you for taking my questions here. If we think of the portfolio of all these organic initiatives you have right now, just from 30,000 feet, can you just help us organize those in a timeframe of maturity? You have such an array of opportunities that are coming to fruition here. Just help us think of the cadence when these various investments should shift into contributors here over the next 12 to 18 months.

Perfect. Yes, the Smart UN batteries, as I mentioned, are already available for production right now. The first wave of project and product improvements for the ER ethyl chloride cells are available now. We're starting to ship some of the initial 3-volt IOT batteries that we've been working on the last couple of years as we speak and currently ramping up that production throughout the end of this year. And we didn't talk about it, but we also have some energy storage batteries where we've shipped some initial prototypes for. So in pretty much every one of those cases, we're starting to get small initial quantity revenues. And now it's all about ramping it up, balancing supply and demand, getting as much throughput for the products to get it out to customers, and to work on our manufacturing inefficiencies as we go up the learning curve.

Excellent. And then just relatedly, how should we think of the progression of margins just as those development programs shift over? I mean, is there a subsequent need to raise sales and marketing or engineering? Just how should we think of the margin profile kind of improving as these development programs come to an end and the sales kind of pick up here?

If I look back in an unscientific way, As we put new programs in place and new products and even some of the evolutionary things which we call multi-generational product planning, so someone had a product in a prior year, they have a new product that they want as their product line evolves and we help them develop it. In addition to the time to develop the product itself and meeting all the technical requirements, it many times can take us six, nine, 12 months before we're sort of hitting on all cylinders again from a manufacturing perspective. I think right now, you know, we talk about our gross margins being impacted by product mix, and there's some, you know, top-level things, you know, different market segments, oil and gas versus sometimes not. And I think mix also relates to some of the legacy products versus the next-generation products and how that impacts gross margin. But I, you know, generally think it's about a six- to nine-month period where we can get up to full production rates and start to improve the margins of those products.

Got it. And then maybe just shifting over to the medical market in general, can you just provide some color on some of those multi-year agreements you mentioned in the prepared remarks?

Yeah, I mean, so it takes a long time to get the contract to begin with. There's a lot of requirements in the medical industry and on markets for A lot of traceability and a lot of paperwork has to be in order. So on the front end of those projects, it takes a long time to get them qualified. But then once we're sort of in, in established pricing, technical parameters, delivery requirements, payment terms and things, it's a very sticky type of relationship. where unless there's some massive change in technical capability or massive price-level change, it's such a headache for the end customer to change that it just tends to be a very sticky, ongoing-type relationship. So we have several of those types of relationships now, which anywhere from a million to a couple million to sometimes a half a million in any given quarter, we'll get a delivery order against one of those blanket orders And I comment on those because that's sort of a core platform-type revenue stream that we just sort of expect and we track very, very closely. But it isn't something that sort of pokes through the threshold of sort of a big material or strategic event that we do a press release or something for. So after like three or four years of pain and agony sometimes getting the projects through to where they need to be and getting all the commercial arrangements worked out with our customers, we tend to enjoy a multi-year relationship after that point. Lastly, I'll say is that, you know, we get asked the question a lot about, you know, is this medical spike just COVID or does this all go away when everybody's vaccinated and COVID goes away? And what I've said in many different forms and the data seems to support and the activity seems to support that counterintuitively, you know, this period of time has given us an opportunity to stay even closer with our customers and not only deliver on the products that we've been delivering with these customers, but also pursue new opportunities with those same customers because we've sort of been through the battles and the trenches together.

And kind of related to that, I mean, how exposed are you to kind of the return of elective surgeries just as people go back to the hospital? I mean, do your products get exposure to as we see people return to elective surgeries?

For sure, for sure. I mean, that was one of the things we do, Phil does, is really, you know, I think intellectually appropriate analysis of, you know, goes into this and goes out as a result of COVID. And one of the goes out of this was an impact of what we thought was related to elective surgeries not being performed. And that went into our calculus and to the sum of numbers we quote and put in our queue and so forth and so on. So, yeah, we do have exposure to elective surgeries. I don't know if it's massive.

from where it is right now. I can quantify this. Josh, when we talked about the 32% increase in medical, I could with confidence tell you that half of that, 16% of that, was related to what we'll call the COVID impact, the COVID surge, and half of that, the other 16%, is related to elective surgeries and ongoing increases. So I think that's a solid way of looking at that.

Got it. No, that's very helpful. And then just maybe on the thin cell opportunity within the medical field, any early anecdotes you can provide us there or, you know, how the uptake is coming?

It's actually moving quite well. We're in some discussions right now that I can't get into, but we would hope to see that increasing over the next couple quarters in a pretty substantial way.

Got it. And then maybe on the oil and gas market, where should we look for early signs of recovery for your products just in the general market? Are you more deep sea or land rig exposed? Where can we look in the open market to see maybe where your products should see some early uptake?

The one number that we're most interested in, Josh, is rig count. And quite frankly, what we do is every Friday morning when we get in, we first One of the first things we look at is how Baker Hughes reports both domestic and international rig counts, week over week and then year over year. And that's been steadily increasing. The second thing we look at, which is like watching the stock price, is the WTI. And the WTI this morning was pushing $65.00. When we bought Sui, it was approximately $62. A combination of those two and a combination of looking at the news regarding travel are probably some of the bigger factors that are influencing us.

Anecdotally, we listen every Friday. We have our global sales force on the line. I listen in on those calls. You can just hear it in the voices of the sales guys in those areas, I mean, and just the amount of activity that they're being exposed to in a week-to-week basis. It's just the empirical data suggesting that the activity is improving.

Got it. Yeah. And then just on the defense market overall, you know, we had COVID impacting a lot of the testing and evaluation ranges and facilities, and now we're obviously moving past that. You know, do you think that will help with some of your products in moving contracts forward? Just curious if you're seeing a positive trend in the testing and evaluation.

Yeah, on the testing and evaluation, Josh, it's always been a waiting game for us, and things seem to always be delayed. But there has been some very positive momentum that we're seeing, and, you know, From our end, we're pushing the testing as fast and as hard as we can. And I think the results that we've gotten back have been pretty positive. But there's no doubt that there have been delays over the last year in the field testing and the lab testing of our products because folks are away from their equipment and they're working more independently than as groups as has happened in the past. So I think there's positive indicators on the overall actions that seem to be coming together.

And maybe I'll just end on the large format batteries that you mentioned. Can you just highlight that opportunity a little bit more and how we should be thinking that coming together?

We do a number of large format batteries that over the years we've sold for – border protection in various places, military, non-military, other government type applications. And we haven't talked about it in some time other than at a pretty high level, but we're starting to do some initial shipments of that product. It's being very well received to some of our channel partners that are focused on some of those systems. So still to come on that, but it's a brand new product area. I think there's a picture of it. I thought there was a picture of it in our investor presentation as well. Yes. It's a stackable large format battery that's a modular type of design that is sort of our next generation after our sort of rev zero multi-kilo module battery.

Yeah, Josh, that's page eight of our investor presentation deck, far left, bottom.

Oh, perfect. Okay. Well, thanks again for taking the time to answer my questions.

Thank you. We will now take our next question from Gary Sipperstein from Elliott Rose Wealth Management. Please go ahead, your line is open.

Hey guys, good morning and thanks for the thorough presentation. I guess starting with SWE, you know, you talked about RigHound and WTO. Do you get the sense that it's already bottomed, and have you seen that in your orders? In other words, was January the worst and maybe a little better in February, a little better in March, or February was the worst, was better? Any level there?

It's interesting, Gary. As I mentioned in my comments, they were better than we thought, so maybe we were expecting the worst, but it was better than we thought. But I'd also like to take the moment to the fact that, you know, we've taken advantage of this slow period with the oil and gas. I mean, it's not something we would have wanted to predict or have happen. But as you recall when we did the initial acquisition that we were really excited to get the people and the technical capabilities associated with SWE. And so while, you know, we've gone through the ups and downs of the oil and gas market, in the meantime, I think there's been two separate projects that SWE is doing or has done for us already. charger project, and they're also working on some new military defense batteries. So I think ultimately, you know, this will be a serendipitous type of a period of time. But we're just cautiously optimistic in the core oil and gas market that they're over, you know, exceeding our expectations initially. But it's way too soon to tell if that's going to continue on to the rest of this year. But the indicators seem positive.

Okay, and then it seemed like in your commentary that we're finally starting to see a little light at the end of the tunnel in terms of a lot of these investments and a lot of these projects starting to move towards fruition. And I think you mentioned on the MANPAC handheld leader, you said something about testing was completed in Q1 or at least that round of testing. Is there more testing to go, or does that mean we should start seeing some additional orders?

You may recall there were low-rate production to be in with, and those were delivered under the contracts that we publicized. And then the early part of this year, the Army went through their operations testing evaluation, and there's various levels of feedback we get on that. I mean, how does a product perform versus specification? In an absolute sense, how is the overall program performing versus expectations? And our indications are in our discussions with our channel partner, again, we're one step removed going through one of our OEMs, but we're being told that it should go to full reproduction, there should be some type of RFQ process over the next several months with an award process probably several months thereafter. And so we're cautiously optimistic that that'll actually play out the way they say it is, and that there's another follow-on opportunity for us for our leader radio product.

So does that mean there's a shot at actually some revenue by the end of this year, or do you expect it all to start next calendar year?

Yeah, to be very honest, I mean, we would hope that it would happen sooner rather than later. But in this overall environment, on all levels, it's probably more prudent to think of it as a 2021 activity.

Okay. And then you mentioned in communication systems that commercial customer and that that's starting to get closer to some revenue for us. You didn't identify what the product was. Maybe you can't. You certainly, I guess, can't mention who the customer is. But, you know, being a commercial customer, can you at least tell us, you know, what vertical it sells into or a little bit on the particular industry without naming the customer?

Yeah, I mean, I don't mean to be elusive, and I apologize for that. But, you know, the product is basically taking a high-end server product, computing server product, and moving that capability closer to its end use. And so it's further afield as opposed to into a, you know, sort of a nice cushy data warehouse somewhere. And so our role here is taking, you know, this very sophisticated and expensive piece of equipment and integrating electrically, you know, weather-wise, mechanically into an integrated solution like we've done so successfully with the rest of the communication systems products. And so that those applications can be served the closest to their end need. And so those activities are There's some military applications in several different areas. There's factory automation. There's an opportunity in 5G. There's some opportunities in oil and gas. I mean, it's just the whole concept of being able to have supercomputing power closer to where it's actually used and closer to the source versus back in some central office and our ability to integrate that solution in a battle-hardened way. That's what it's all about. You know, we're tipping our toe in the water in some of these new markets. It's extremely exciting for us, and we think we have a solid track record leveraging our government defense integration capability, and we think that's why, you know, this commercial OEM came to us. And we're starting to see some initial orders still on the military side. We're looking to try to have that, you know, see if that branches over into commercial side, and then it just could open up a whole new end market for us.

Okay, and this is all around our amplifiers?

No, it's mostly around the OEM server and all the ancillary equipment associated with that.

Okay, so what are we actually selling them? It's not batteries? It's not amplifiers? It's other pieces?

No, it's a complete integrated solution. There are some other cases where we do vehicle adapters. We're providing power supplies and cooling and all the I.O. capabilities. In this case, we're doing the same thing except for the main event is this high-end type server.

Okay. Okay. Thank you for that, caller. And in terms of the 3V, so that's, I think you mentioned to the last caller, that's ready to go now, finally. So there's been testing, and you've got the manufacturing space and Newark all set for that. Um, so we should start getting some revenues out of that either in this quarter or next quarter.

Yeah, we're starting to already see some revenue, some smaller revenue, but it's immaterial to our results at this point. But, uh, we are shipping, uh, commercial product customers right now.

Okay. And, uh, so, so in the commentary, you talked about, uh, COVID costing you six cents on the quarter. So, uh, everything else being equal and I guess, uh, COVID hadn't really started last year. So you would have actually done closer to 11 cents in the quarter versus 8 cents last year in the absence of COVID. And then last year had in some shipments from that one-time contract. So I'm just curious, if it's apples and apples, instead of earning, if you take that out from last year that didn't repeat this year, Would last year have been a nickel or three cents? And then without COVID, would we have been at 11 cents? Is that sort of what you think would have happened, apples and apples?

Yeah, Gary, I think your math is pretty accurate. What I do is I try to be as intellectually honest and as precise as I possibly can be when I look at the impact of COVID. It's literally a list by customer of It's confirmed. It's the incremental cost to the minute level and it's a number that I'm very comfortable with and accordingly that's why it's in our releases and in our comments. When I look at last year, there was a significant amount of shipments made by communication systems. It was a big it was a challenging, uh, you know, a year over year comparison. And I think the team did, did, did well. Uh, but I, it getting, getting down to your numbers, it, it, it's, it would be in the, in the 11 cent range. And last year, if I, if, if I took out the impact, uh, of, of the big shipments, it would, uh, be in the range that you, that you mentioned, maybe, maybe even a little bit less.

Okay. And, uh, So those shipments last year, I guess, completed in Q2 of last year. So this should be our last – Q2 should be our last tough comparison. And then maybe we could start – I know you don't forecast, but it sounds like we're setting up to have positive comparisons starting in Q3 on the earnings front. And I think, Mike, you did say in your closing comments that – you're hopeful that we can increase earnings this year versus last year, grow profits. So that would imply a pretty nice potential in the back half after we get through Q2, which could be the last negative comparison. I mean, is that all fair?

Yeah, we're trying to always do better year over year by quarter and total year. And, you know, we provide information for people to be fully transparent as we, you know, what the circumstances present themselves, COVID, what the impact we think that is. But on a day-to-day basis running the business, it's all about executing on these transformational projects. We want to get the projects done. We're making some extra investment to make sure they get done, not only get done just to be done, but done and actually are hitting their objectives in terms of performance and economics. So We provided information that we think would fill in the mathematical perspective, but on a day-to-day basis, it's all focused on execution and control the things we can control. It's difficult to, from a year-over-year basis, take last year's success as the reason that we don't get year-over-year improvement this quarter. We just don't run that way. I think we try to do a very transparent job in providing the numbers that we have. But this is really all about getting transformational projects done and improving execution and efficiency to get those margins back up.

Understood. You didn't say anything about M&A in the quarter. Can you, you know, with that $100 million shelf you filed, plus the line of credit being $30 million plus, And now having pretty much cash, no debt, you know, you get a lot of ammunition. Can you sort of tell us what's going on there? Is anything getting close? Do you have four or five companies you've been talking to for six months or 12 months? You know, I guess what are the odds of the possibility of some significant game changing acquisition in the back half of the year?

Well, Gary, I'm not going to get into the specifics, but I will tell you that I'm spending, in some cases, a majority of my time with certain other very, very industry-knowledgeable individuals trying to find the right acquisition for us that meets our criteria. There's a lot of companies out there that have a lot of sizzle, and that's really about it. You know, our criteria for M&A have not changed. And we look back. We look back at the great contribution that Accutronics has made, the great contribution that Sweet has made, accretive since day one, both for every quarter. We're looking for companies that meet our criteria and that will allow us to continue our profitable growth while at the same time expanding our end market diversification. And very active involvement, and I'll leave it at that.

That's great. That's great. And we didn't talk a lot about the IDIQs. Is it still 70, 80 million or more? And maybe I missed it. Maybe you described the product and didn't use the word IDIQ, but Are those sort of moving through testing? And I know you said there's been some hesitation in testing, and maybe it'll get better as COVID mitigates a little bit. But is that getting closer to a potential revenue opportunity this year?

For sure. This is something I review every three weeks personally. In the latest updates, you know, we're working through the process. You know, I said it's an interim process with the government. And, you know, we're getting close to, I would hope that, you know, 5390 next gen would be finished up in the summer time frame. And, you know, hopefully the 5790 bat testing would be done in the fall, late fall time frame. And then we'd have, we're all ready to go for delivery orders. So it is an iterative process. And as Josh mentioned, there has been some delay in some of the testing and evaluation with people in and out. of their offices, but, you know, we haven't taken our eye off it. We keep pushing it, and at the same time, we've got a lot of other things on our plate, too, so we're trying to make sure we have the right visibility, we have the right people involved, and we're trying to get through this process, but, yeah, that's about the time frame. Late summer, 5390, hope to be through FAT, and then, you know, fall to late fall, hopefully the 5790 is through FAT.

Okay, thank you for that color, Mike. So just to conclude, I mean, I can't, you know, I've been a long-term shareholder and follower. I can't remember another time in the last decade when the company's been as, if you will, as pregnant as you are now with opportunity. You know, maybe the gestation has been longer than nine months and we're waiting for this baby to crown. But it seems once we get through the last negative comparison in Q2, And some of these things, whether it's the three vote, the IDIQ, the handheld, the leader, the man pack, the commercial customer out of comm systems, the recovery in SWE in oil and gas, the continuing recovery of elective surgery in medical. I mean, my God, we're tremendously pregnant and it seems like we could have quintuplets as these different projects start shipping, and then as you move into full production, the margins increase. So I'm looking forward to some fun coming up very shortly. It seems we're on the brink. So thanks, guys, and congratulations.

Thanks, Gary. Appreciate it. Thank you, Gary.

Thank you. That will conclude today's Q&A, and I will now turn the call back to Michael for closing remarks.

All right, great. Well, thank you once again, everybody, for joining us for the first quarter of 2021 earnings call. We really look forward to sharing with you our quarterly progress in each quarter's conference call in the future. We did update, as Phil mentioned, the investor presentation website as we do each quarter, so check it out. Everybody have a great and safe day. Thank you very much for participating.

Ladies and gentlemen, that will conclude today's conference. You may now all