Ultralife Corporation

Good day and welcome to this Ultralife Corporation Second Quarter 2021 Earnings Release Conference call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Buffening. Please go ahead.

Thank you, Sharon, and good morning, everyone. Thank you for joining us this morning for Ultralife Corporation's Earnings Conference call for the second quarter of fiscal 2021. With us on today's call are Mike Popolek, Ultralife's President and CEO, and Phil Fain, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning. If anyone has not yet received a copy, I invite you to visit the company's website, www.ultralifecorps.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 contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19, potential reductions in revenue from key customers, acceptance of our new products on a global basis, and uncertain global economic conditions. The company cautions investors not to place undue reliance on forward-looking statements, which reflects the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking information to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect ultralized financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on form 10. On today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics that 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, Mike.

Good morning, Jody, and thank you, everyone, for joining the call. Today I'll start by making some brief overall comments about our Q2 2021 operating performance, after which I'll turn the call over to Phil, who will take you through the detailed financial results. When the bill is finished, I'll provide an update on the progress against our 2021 revenue initiatives, then open it up for questions. For the second quarter of 2021, the company gained quarter to quarter, with sales increasing 3% and operating profit of 14%. Year over year, revenues in our oil and gas end markets rebounded, growing 49%. Medical sales abated from last year's COVID-related demand spike, yet were above pre-pandemic levels. And sales from government defense customers were soft relative to last year's strong shipment of vehicle adapter system sales under the U.S. Army's network modernization initiatives, as well as our 5390 legacy primary batteries. Supply chains and logistics continue to be the source of operational challenges, delaying some shipments and increasing freight costs. Given our solid liquidity position, we increased investment in CapEx and critical engineering resources to support new contracts and completion of transformational new products. Although these incremental costs and investments weighed on operating profit and net income year-over-year comparisons, sequential earnings per share grew 20% on the strength of gains in commercial sales. In a few minutes, I'll give you further information on our revenue initiatives But first, I'd like to ask Ultraliv CFO, Bill Fain, to take you through additional details of the second quarter 2021 financial performance. Bill?

Thank you, Mike. And good morning, everyone. Earlier this morning, we released our second quarter results for the quarter end of June 30th, 2021. We also filed our Form 10-Q 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 who helped make this happen. For the second quarter, consolidated revenues totaled $26.8 million, compared to $28.6 million reported for the second quarter of 2020, a decrease of 6.3%. Commercial sales declined 1%, reflecting a rebound in oil and gas in international industrial markets, offset by a reduction in medical sales from the initial surge of batteries for ventilators, respirators, and infusion pump in response to COVID-19 in last year's second quarter. Government defense sales declined 13.2% relative to the completion of contracts in last year's period. We estimate that our second quarter sales were reduced by approximately 1.5 million due to operational challenges associated with supply chains in logistics delaying sales to future periods, most notably in the medical and government defense sectors. Revenues from our battery and energy product segment were $22.9 million compared to $24.0 million last year, a decrease of 4.8 percent, attributable to a 48.6 percent increase in oil and gas market sales and a 23.2 percent increase in 9-volt sales. offset by a 27.9% decrease in medical sales and a 12.7% decline in government defense. The decline in government defense sales resulted from the completion in last year's second quarter of a 5390 battery order placed in December 2019 by the U.S. Department of Defense. The sales split between commercial and government defense for our battery business was 70-30 compared to 67.33 for the 2020 second quarter, and the domestic to international split was 52.48 compared to 59.41 last year, both demonstrating the continued success of our global revenue diversification strategy. Revenues from our communication system segment were 3.9 million compared to 4.5 million last year. a decrease of 13.9%. The decrease reflects 2020 shipments of vehicle amplifier adapter systems to support the U.S. Army's network modernization initiative, completing the delivery orders announced in October 2018. On a consolidated basis, the commercial to government defense split was 60-40 versus 57-43 for the year earlier quarter. Our consolidated gross profit was 7.3 million compared to 8.0 million for the 2020 period. As a percentage of total revenues, consolidated gross margin was 27.1% versus 27.9% for last year's second quarter. Gross profit for our battery and energy products business was 6.0 million, the same as reported last year. Gross margin was 26.3% an increase of 120 basis points over 25.1 percent reported last year, reflecting favorable sales product mix and lower scrap and rework on new products transitioning to high-volume production. For our communication system segment, gross profit was 1.3 million compared to 1.9 million for the year-earlier period. Gross margin of 32.1 percent compared to 42.8% last year, primarily reflecting the favorable sales mix in 2020 of the vehicle amplifier adapter systems for the U.S. Army. Operating expenses increased 0.5 million, or 9%, from 5.7 million last year to 6.2 million. This increase includes our investment in engineering resources for new product development, including resources dedicated to the conformal wearable battery IDIQ contract announced on May 17th. As a percentage of revenues, operating expenses were 23.1% compared to 19.8% for last year's second quarter. Operating income for the second quarter of 2021 was $1.1 million compared to $2.3 million for the 2020 quarter. reflecting our investments in new product development, delayed shipments due to supply chain and logistics challenges, and sales mix. Consequently, operating margin was 4.1% for the 2021 period versus 8% last year. Adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, was 2.2 million, or 8.2% of sales, compared to 3.3 million, or 11.6, for the second quarter of 2020. On a trailing 12-month basis, adjusted EBITDA, inclusive of the 1.6 million proceeds of the class action lawsuit settlement announced in Q4, was 9.7 million, or 9.1% of sales. Our tax provision for the second quarter was 0.2 million compared to 0.5 million for the 2020 quarter, computed at statutory rates while excluding the benefits of our net operating losses and tax credit carry-forwards for gap reporting purposes. Accordingly, our reported tax provision for the second quarter is based on an effective rate of 23.2 percent, while utilization of our deferred tax assets will drive the tax provision down to only 71,000 or 6.6 percent when we pay our taxes. We expect that the net operating losses and tax credits included in our deferred taxes will offset all us taxes for the foreseeable future. Using the 23.2% statutory tax rate net income was 0.8 million or 5 cents per share on a diluted basis for the 2021 second quarter. This compares to net income of 1.7 million or 10 cents per share on a diluted basis for the 2020 quarter. We utilize adjusted EPS to reflect actual 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 our net operating loss carry-forwards and other tax credits. As noted in the supplementary table in our earnings relief, adjusted EPS on a diluted basis was $0.06 per share for the 2021 second quarter compared to 13 cents for the 2020 second quarter. We estimate that the delayed shipments resulting from supply chain and logistics challenges in our investment in new product development resources adversely impacted EPS for the 2021 second quarter by approximately five cents per share. Ultralife further strengthened its balance sheet and liquidity in the second quarter. with cash on hand increasing 16% to $15.8 million and debt decreasing 37% to $0.7 million from the first quarter. We ended the 2021 second quarter with working capital of $48.8 million and a current ratio of 4.1, 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 realizing the full leverage potential of our business model. I will now turn it back to Mike.

Thank you, Phil. During the quarter, we continued to advance our revenue growth strategy consisting of market and sales reach expansion, primarily through diversification, new product development with strategic capex when appropriate to drive competitive advantage, and a disciplined approach to acquisitions to quickly gain resources, scale, market access, technology, and new products. At our Better Energy Products business, Market and sales reach expansion has been about diversifying more into the global commercial and international government defense market to lessen our revenue fluctuation as a result of lumpiness in our core U.S. government defense business. Medical has been a key target area, and for Q2 2021, overall global battery energy products medical revenue represented approximately 29% of total B&E sales. Demand from existing customers was strong in applications for ventilators, respirators, infusion pumps, digital x-ray, and surgical robots. We also received over $8 million in delivery orders from existing medical customer blanket and or multi-year agreements. With respect to our oil and gas and subsea electrification commercial revenue, our suite team provided approximately 20% of total battery energy product sales. Though overall SWE revenues were down slightly year-over-year due to the non-recurrence of a short-cycle medical product bill last year to support the COVID response, we continue to see encouraging signs of improvement in SWE's core oil and gas end market as revenues to these end markets in Q2 were up a strong double-digit rate year-over-year. For B&E's U.S. government defense business, which represented approximately 28% of total B&E product sales, shipments were primarily for radio battery and chargers to OEM Prime. In Q2, revenue was down year over year as stated earlier. However, the highlights of the quarter actually came from two noteworthy opportunities that we have been developing for some time. First of all, our first article testing for the next generation BA5390 primary battery was finally completed and approved in Q2, a key milestone in the development cycle for U.S. government defense products. Once the DoD wraps up two remaining reports and approvals of their own, we will be eligible for delivery orders and the potential revenue streams they bring. Though by nature, with IDIQ government contracts, there are no guarantees of any future orders, the historical revenue average over the last 11 or so years has been about $3.5 million per year, with revenues in any given year ranging from the hundreds of thousands of dollars up to almost $10 million. Secondly, regarding an exciting new opportunity for on-soldier power capability, on May 17th, we were very pleased to announce that we were one of four companies awarded an IDIQ contract under the U.S. Army's $1.25 billion contract conformal wearable battery program. Our potential contract is not to exceed $168 million during the three-year base award period with the potential for up to an additional $350 million should the six one-year option periods all be exercised. As is the case in any indefinite delivery indefinite quantity IDIQ contract, the timing of deliveries and quantities are at the discretion of the U.S. Army. and includes successful completion of first article testing, demonstrating full compliance with the contractual product specification and program requirement. We are currently aggressively pursuing the development and sourcing phase of the process via additional engineering and CapEx resource investment to meet an ambitious VAT schedule that is expected to finish in early 2022 with potential production awards thereafter. As just illustrated, new product development remains a fundamental part of our organic growth strategy. In addition to the new product development associated with the next generation 5390 battery and the new conformal wearable battery, we advanced several other multi-year transformational projects during the quarter. Regarding our next generation hot swappable medical cart battery, we are in the process of completing certification testing of key components and plan to have demo units at an international location within the next few weeks to support targeted customer transaction for a strategic channel partner. And we are also showing prototypes of this new product in August at a major trade show in the United States. Also, volume production manufacturing continues in support of existing customers for our recently completed new Smart U1 battery. In addition, We have roughly a dozen or so new customers currently evaluating our version of this workhorse form factor product, serving numerous applications under consideration in markets such as medical carts, automated guided vehicles, and robotics. Regarding the new 5790 and XR1238 CFX blend primary batteries, we are currently targeting completion of the 5790 FAT testing later this year. and have a specific customer project evaluating the new XR123A battery pack for a medical application. These new CFX blended products remain on our and our customers' priority list given their higher energy and longer run time. We also continue to mature opportunities with our OEM public safety radio batteries and next generation ruggedized modular large format energy storage batteries. Regarding efforts to expand our competitive differentiation, we continue to invest in strategic CapEx. The new manufacturing line at our Newark, New York facility for our new premium lithium manganese dioxide 3-volt cell is now fulfilling initial customer orders. We have also received our first large OEM order from a major illumination customer for 500,000 pieces to be shipped throughout the balance of this year and are currently in negotiations for potential volumes in 2022 and beyond. Discussions continue while testing and product evaluations are underway with approximately 20 to 30 customers with approximate individual lot sizes ranging from 300,000 to 3 million units per year. Initial voice of the customer feedback shows positive responses for our product's power, safety, and contribution to the OEM device's competitive differentiation. In China, the performance attributes expected from the completion of the first phase of our project to upgrade our thionyl chloride ER cell are now being confirmed by customer testing. This is exciting, as to date, we have approximately 15 to 20 customers in various stages of project evaluation and commercialization as we ramp up production, representing roughly $8 to $10 million of opportunity over the next one to three years. As you may recall, this overall project involves several steps of product and process improvement, which will help us multiply by several fold our total available market with newly identified commercial and industrial applications. Another area where we are seeing clear revenue growth opportunities emerge is in the application of our thin cell battery for wearable products and vital sign monitoring applications. Also, medical and other industrial customers continue to tap into our China operations or supply a battery-packed solution, not just ourselves, which is growing our value proposition. In Q2, our total China operations revenue was up sequentially from Q1 by over 49%, an indicator of growing global demand for our China capabilities. Our goal remains to produce the highest value proposition, best quality, and safest products in whichever one of our global locations best serves the supply chain of the particular end market and or OEM customer. Looking at communication systems, Q2 new product development revenue from products less than or equal to three years old represented approximately 13% of communication systems revenues. Communication systems completed initial orders for radio mount deliveries in Q2 in support of a previously mentioned new handheld radio which enables its installation onto multiple mobility platforms to include ground vehicles, fixed-wing, and helicopters. Follow-on awards are anticipated as early as Q3 2021 and throughout the next three years. Regarding the U.S. Army's handheld, man-packed, small-form fit and leader radio programs, we are awaiting the potential for our next round of awards for the leader program later this year with deliveries possible in 2022. As radios are a critical driver of the communication systems business, the team is continually focused on the technology innovations, market trends, and customer requirements to position us for future business supporting both handheld and MANPAC radios and integrated systems. The impact of COVID-19 continues to be felt within global military sales, lowering the volume of sales and delaying program awards. Additionally, Supply chain issues continue to impact electronic component availability, resulting in extended material lead time, manufacturing timelines, and clouding revenue forecasting. For supply chain components that are available, the shortage of global transport resources is causing delivery delays, often compounded with increased transportation and logistics costs. Our teams are working closely with suppliers to actively manage sales and operations planning protocols to mitigate supply chain and manufacturing impact to the extent possible. Communication Systems has also been working to expand into the commercial market with multiple system integration product initiatives with several key customers. We are pleased to have been recently selected for the development and production of a mobile data cart that will enable analysis of autonomous vehicle data during testing and manufacturing of the vehicle. If successful, this would be one of the first purely commercial product offerings from communication system. Initial prototypes are in development for delivery in Q3 with potential production orders to follow close behind to meet customer program requirements. Separately, we are also in the prototype phase for a virtualized radio access network enclosure supporting 5G network deployments worldwide. This is our second all commercial business opportunity and we anticipate first low-volume orders in the fall of 2021 and production volumes to pick up in 2022 and beyond. The expansion of my communications system into commercial products and integration opens the door to solid global growth opportunities and broader applications, leveraging our engineering expertise and experience with system integration of sophisticated communications equipment component used by the government defense customers in difficult environments. This diversification into commercial products, combined with our participation in ongoing military radio programs, grounds our optimism about the long-term growth of the communications systems business. In closing, for the second quarter of 2021, although some of the year-over-year comparables were different, difficult, we were pleased to see revenue and earnings gains quarter to quarter throughout the company. While overcoming some expected non-recurring year-over-year revenues, navigating timing and cost impacts from supply chain and logistical challenges, and stepping up CapEx and technical resource investments in new products and new contracts, we maintain total company profitability, positive cash flow, and a solid balance sheet. Our top priority is to continue to move forward on revenue realization from our transformational projects delivering new, meaningful, sustainable annual revenue stream in attractive growth markets from new, competitively differentiated products. At Communications Systems, these projects include potential leader radio follow-on awards, new OEM MANPAC radio answeries, integrated computing solutions, and next-generation 21 amplifiers. At B&E, our transformational project list includes 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 subsea electrification battery packs. Our strong balance sheet, solid cash flow from operations, and disciplined execution of our business model afford us the opportunity to simultaneously pursue organic revenue growth through our transformational projects, invest in new product development and strategic CapEx for competitive advantage, and seek out impactful acquisitions, all with the aim of growing the business with profitable revenues each and every year. Operator, this concludes my prepared remarks, and we'd be happy to open up the call for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach other equipment. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Mr. Gary to preside from Elliott Rose Wealth Management. Your line is open. Please go ahead.

Good morning. First of all, congratulations on that conformal battery win. $500 million over 10 years is a pretty sweet deal to win. I know it's an IDIQ. I know it's not guaranteed, but that's pretty intriguing. Thank you. And then if you look at the $168 million over three years, that also averages over $50 million per year. So if they exercise all of it, it's $500 million over 10 years. If they do the three years, it's $50 million over those three years if they do the maximum. So that's a wonderful coup, and I just wanted to start out by congratulating you on that. Okay. My first question is going to the basic business, starting with medical. So you had the surge last year for COVID, which made it a tough comparison. But then you mentioned in the release that medical still, even though it was down because of that tough comparison, was still increased from pre-COVID levels. Um, so that's encouraging. And I guess my question is, um, are you seeing any more of the COVID type orders come in now with the Delta variant and the hospitalizations increasing? And then secondly, um, if, if not, or not yet, um, do you feel the overall strength so that it's surpassing pre COVID levels, uh, is due to the fact that, uh, with vaccines and, and, uh, we're getting sort of back to normal despite the Delta variant, elective procedures are increasing.

Yeah, I mean there's a couple pieces there, Gary. You know, in terms of the salient impact on our revenue and earnings relative to the medical demand, I think the biggest impact we're seeing either way has been in some of the supply chain challenges where Some of the components are more difficult to get, and there's been some delays, not only from the standpoint of our ability to provide for our customers, but our customers being able to provide for their customers. And so there's somewhat of a cascading effect where some of the demand has been pushed out a little bit. By the same token, we've also, you know, knew that there was some – you know, early parts of the year where we had some, you know, very high year-over-year comparables to overcome. And we were actually delighted in Q2 to get a number of new orders from longstanding customers that aggregated close to $8 million, over $8 million, as I mentioned in my prepared remarks, which if you may recall from, you know, previous earnings calls and prepared remarks, it's about double what we typically see in a quarter. So Obviously disappointed that things get deferred and the revenue doesn't necessarily come in the timeframe we'd like it to and the earnings results, but very pleased to see that those customers haven't gone away and they're still placing orders and we'll make it through the supply chain challenges and get back to normal hopefully sooner than later. But we don't know what we don't know relative to the latest round of the variants of COVID But what we can say is that through this experience, whether it be the increased demand for products over the last year or so or working through some of the challenges of supply chain logistics, that we've gotten very close to our key customers. And that's probably the biggest benefit and silver lining of this whole thing is we've gotten very close to our key customers, and I'm confident that will yield dividends as we go forward.

Mike, that $8 million in blanket orders, is that for one to three years?

No, that's a much shorter time frame. Those tend to be more over the next 12 months or so.

Oh, wonderful. Okay, and that's up 100% from previous blanket orders. My second question deals with SWE. So, 49% increase as rig count came back. I think rig count now, and maybe I'm off on this, but last I looked was doubled. from the COVID March 2020 lows. I don't know, you might have something new on that that's different, but I saw it double. So the improvement in SWE on the oil and gas side, not the subsea side, is that mostly due to the increase in rig count and oil staying at about 70 a barrel? And is that at a level that was pre-COVID or is that still has a ways to go?

No, Gary, you know, we look at a number of variables, and the variables we look at are not just the domestic rig count, but we look at the Canada rig count, the international rig count. They're all up from when COVID started. And we then break down our SWE business into really five components. We break it down into downhole drilling, pipeline inspection, subsea, platform products, and we break it down into the great medical work that they've done in Where we're seeing in Q2 the orders come from, it's all downhill drilling. And that's its price, its rig count. And, you know, one thing we're seeing is that the demand is more global. So we're really seeing a 50-50 split in the SWE business between international and U.S. So it's a pretty favorable trend that we experienced in Q2.

Thank you, Phil. Is it... I don't think any of us expect it to necessarily get back to where it was years ago in light of the new environmentalism out there. But do you expect it to maybe get to 75% of prior levels? And if that's the case, whatever level you expect it to get it to, is that where it's at now or does it still have to go up another 50% or so?

Well, I can respond to that, Gary. I think we had a very solid second quarter, and the question being, what are the next couple quarters going to be looking like? Is Q2 a catch-up blip, or what are we going to see in the remaining literally three or four quarters going forward? There certainly is... The increase in WTI, when we bought SWEET, WTI was $62. It's $72.50 right now. As Mike mentioned in his remarks, there is not a lot of forward visibility. With the major customers that we deal with, you get a call, you get a PO, they want it as soon as possible. But with increased travel and the increased usage of oil and gas, hopefully in a post-COVID period, the trend should be favorable. Now, to answer your original question, we were trending, and this was all disclosed in our Ks and our Qs and all that, we were trending around $7 million a quarter for SWE when we initially bought them. I would say, you know, right now we're probably 70% of the running rate of where we were. So certainly, a ways to go. But then again, we have improved our business model as well, as we talked about in past calls.

Yeah. Okay. Thank you. That's good color. Um, Mike on, uh, on the three volt opportunity, um, with, uh, uh, remote sensors and, other internet of things, uh, opportunities. Um, do you see that the three volt, as you mentioned, you know, various China orders and you've mentioned various, uh, customers looking for tens of thousands, hundreds of thousands, or a million plus units. Does that represent ultimately a $3 to $5 million annual run rate opportunity? Or what would be a fair number?

You know, a number of the transformational projects tend to fall in the $8 to $10 million range. You know, to be transformational, we want them to have a meaningful impact on our overall revenue trajectory. And so when we look at the investment that was made for the 3-volt in Newark, we look at what the capacity is expected to be. You know, we expect the capacity to be more of, you know, the 9 to 10 million units a year, which would say that the revenue is, you know, is higher, you know, closer to $10 million potentially per year than some of the numbers that you've just mentioned.

Oh, wonderful. Okay. Yeah. Gee, that's like almost triple what I thought the potential was. That's great.

Secondly... I'm sorry, Gary. I apologize for interrupting. You know, the number of different opportunities that we have range in various sizes. So, you know, we don't want to do 100% of the volume, you know, with a real low-price type customer. We want to have a nice mixed blend of various different customers so we don't have all the rags in their own basket, in a single basket. You know, we have the XR123A product line that we could build on the same line as well. So, you know, we're looking at, you know, lot sizes from, you know, 300,000 to 3 million per year per single customer, but with multiple customers, you know, providing a nice blended mix from a, you know, delivery timing standpoint as well as from a margin opportunity as well.

Understood. Wonderful. Eight to 10 million, that's super. You mentioned this new emerging opportunity in comm systems on the commercial side with the mobile data card, 5G opportunities, et cetera, where you might start getting some production orders before the end of the year and then follow on for calendar 22. Is that considered a transformational opportunity like the 3-pole where it's 8 to 10 million or is that a 3 to 5 million opportunity?

You know, certainly we take liberties in what we call transformational or not. But, you know, when I look at this, it's transformational in a number of different ways. You know, when you think back and you've been with, you know, this stock, you know, since I've been here, at least I remember, where we were pretty much a component manufacturer in comm systems. So, you know, a high-end and very sophisticated component, but never as a component manufacturer. And we've gone into new platforms where we integrate a type solution. And I look at this next potential step, and we're still not there yet, but the indications are favorable. This next big step is then taking it even further and taking an integrated system type of capability and putting it into a brand new end market, a new platform is the way I would look at it. So it's transformational in terms of broadening the lanes of which the communications systems business gets to play, It's transformational because it's an integrated solution versus just a single component. And from the economic rewards of being a key supplier in that area, I think some of the biggest contracts that we've announced over the last couple of years have been in the area of integrated solutions. So I guess to sum up, I would say it's transformational both in its diversification of the end markets for communication systems as well as a potential impact on revenue.

Okay. That's wonderful as well. Moving to the previously awarded $80 million IDIQs, I guess they were spread between the 5390 and the 5790. You mentioned that 5390 has completed a final testing and you're just awaiting orders. And then 5790 later this year might complete testing. Do you think you'll get any orders this calendar year on the 5790 if it completes testing October, November, maybe a little revenue at year-end, or is it all 2022 revenue on the 5790?

You know, we're really trying to focus on completing the testing, and we know that the revenue opportunities are there, and I wouldn't want to jinx myself or get ahead of ourselves talking about revenue until that testing is done. We know that these are long and lengthy tests, and that's why, frankly, we're making the additional investment in the conformal uh, first article testing opportunity because we know how difficult they can be and how demanding the end user customers can be. And so, uh, I, I think it's an appropriate way to comment on potential revenue from the 5790 at this point.

Okay. And the 80 million IDIQ again is, uh, eight to 10 years. So, um, I guess the combined 5390, 5790 is an eight to $10 million annual revenue opportunity. So it fits into your, uh, transformational revenue range. Um, That moves me on to another revenue stream. So the ER product line and the smart U1 battery, is that considered transformational? Is that $8 million to $10 million, or is that smaller, more of a $3 million to $5 million opportunity?

No, I think that certainly the ER product line, and this has all been about doubling and tripling and quadrupling the available market, But we definitely believe that that has an opportunity to be in the $8 million to $10 million revenue range over the next one to three years.

Okay, that's great too. All right, moving to radios. So originally the contract was $2.3 billion over 10 years to Harris, L3 Harris now, Harris Communications and TALIS. So we thought it was down the middle, so I guess $1,150,000,000 each over 10 years, etc. So I guess my first question is, and my understanding is, I read the transcript for the first quarter conference call that L3 Harris gave. And in that conference call, they mentioned that they had completed testing, final testing, and final LRIP production on handheld man pack, I believe, handheld. And then they expected, I think it was Leader, shortly. And then on June 10th, just last month, Paris Global Communications was awarded a $3.3 billion contract for radios, communications, spare parts, et cetera, completion date of 2026. So $3.3 billion. over the next five years. So I'm a little confused. So is that $2.3 billion over 10 years, as far as you understand, still the main modernization, radio modernization contract, and the $3.3 billion is something else? Or is the $3.3 billion that was awarded exclusively to Harris just the updated version of the $2.3 where they increased it by a billion, gave it all to Harris? And then I haven't seen an announcement from TALIS, so I don't know if I missed it or it's not public, but is TALIS still involved? So I guess I'm asking you just to clarify me on the $2.3 billion original contract, the recent $3.3 billion from Harris, and does TALIS stand in the mix as far as you know?

Yeah, Gary, I can take that. The original Leader Radio contract has not been modified yet. had not been modified at all. Anything that you may have heard or read subsequent to that point in time is likely another project, another radio. There's a lot happening in radio communications without a doubt. But there has been no change, at least thus far, in what we have been made aware of as to regarding who is going to get future leader radio awards. In the original 2.3 announcement, it was said it would initially be 50-50, and then it would be competitively bid. So we sharpen our pencil and refine our product along with our radio partner nonstop. And you may have seen several awards announced by Harris, a couple of awards. It doesn't mean that TALIS didn't get the awards. it would mean that TALIS likely serviced those awards through existing inventory. So as it exists right now, it's right down the middle. It's fair game going forward with no changes that at least we're aware of.

Okay, so you sell batteries to Harris and amplifiers and other accessories, Viper, et cetera, to TALIS. so you remain designed in to the, both those products that just, you know, both of both those companies products that based on Harris's statements have basically finished, uh, testing. So they're going into full rate, full run production, low rate, I mean, full rate production from low rate initial production. Uh, and maybe that June 10th award, the 3.3 billion is the government's recognition that they completed testing and, And these are the full-rate production orders that are coming now. So I guess my question is, in terms of batteries to Harris and amplifiers to Talus, do you guys represent, in the final price of these radios, do you represent 5% of the business or 10%? I mean, the Kuhn.

Gary, I don't think it would be appropriate to even try to speculate what that is. We don't have access to any potential OEMs final pricing. And what I will say about these overall contracts is that it's extremely difficult being once or twice removed from the U.S. Army in many of these cases working through the OEM to get a really clear picture exactly what contract is a current contract that people happen to be talking about on a given day. We've seen even in the batteries for soldiers that we're directly involved with, over the course of an IDIQ there could be multiple direct spot buys and other delivery awards and subsequent IDIQs that are sort of nested within the time period you would think that another IDIQ was in play. I would imagine that the radios are not too much different. It may be even more complicated. It's really difficult to speculate as to what is the current contract that's being let and who's getting what piece and then how do we extrapolate to our piece. What we do try to do is we try to stay extremely close with our customers. We try to support them in any way we possibly can. We violently protect their confidential information and make sure that we're the best supplier to these OEMs and that we put them in the best position to win. uh, whatever product we, we serve, but it, but I think it'd be almost impossible to try to talk about what percentage of, of the overall cost, uh, our product represents. And I hope you'd understand that that's, I think it's a fair way to look at it.

Yeah. Yeah. Uh, I, I, I got you, but certainly, um, whatever level of business we've been doing with both of them up till now, it seems like it should increase everything else. I'm not asking you to say yes or no, but, uh, to comment on it, but, you know, based on, uh, the Harris conference call saying they, they completed testing and are going into full rate production and the evidence of that $3.3 billion new contract, uh, seems like, you know, both companies should be moving into full production and that should bode well for us because we're designed in. So if they're going to increase their shipments to the government, uh, presumably, um, there's going to be more batteries and more amplifiers for us. Um, And let me just ask the last question there. So, Phil, you mentioned, and we talked about it, you talked about it a couple times in your script, about the final shipments in the June quarter of last year, 2020, of amplifiers to TALIS on the previously awarded contract. I think you said October 2018 or something like that. So it's been a long time, October 18th. So it's been almost three years without any follow-up orders. So I'm guessing they've been, as you just mentioned, Phil, they were shipping from inventory. But as they start to go into production along with Harris, is there an expectation that you're going to be having some new amplifier orders coming over the next six to 12 months?

Yes. That's the only answer I can give you, Gary. That's my personal expectation. It may seem like a long time between the time the order was placed and the development period and the testing period. The big variable here was the timing of the field tests. It seemed like it took an eternity, but for a radio, the most complicated radio, a military radio in existence to date, the tests are very, very expensive. and they were complicated by all the factors that we've talked about in the past resulting from COVID. So it may seem like an extended period of time, but for such a complex opportunity, it's, I guess, not too unexpected from our part with our experience.

Okay. Yeah, I just wanted to make sure that because we haven't gotten any follow-ons that, They didn't replace our amplifiers with someone else's, or we lost them as a customer. So it's just they worked down inventory, were already designed in, and would be getting orders as that moves into full production from LRIP production. And then we had evidence by the Harris conference call, by the Harris $0.3 billion award. And then I think some preliminary numbers came out for the next U.S. Defense Department budget, which shows shipments up 50% or more. on radios.

The answer is we'll know when the order is issued, when the next order is issued. I could be optimistic, I could be pessimistic, but until that order is placed, we're fighting as hard as we possibly can to be in as competitive a position as we possibly can be, and that's how we play.

Yeah, understood. Moving on to conformal battery, the wearables. Mike, you mentioned in the script early 22 you could have finished testing. That seems pretty fast. I mean, when we look at the testing for the 80 million IDIQ, the 5390, 5790, and then as we just discussed, the testing on the radios, understandably the radios are many factors more complex than than body, wearable body batteries. Is that the reason why testing could be done so quickly? You mentioned early 22 and maybe starting to get some production orders for the balance of 22.

Yeah, I think you heard it correctly in the prepared remarks you talked about it being a very ambitious schedule. And that's one of the reasons why we've elevated our investment in CapEx and and resources to try to position ourselves as best as possible. You know, we've known those development cycles and those VAT testing cycles and other products, and you've heard about it in multiple earnings calls. So, yeah, it's a fast schedule. We're confident about it. We have a – it's not our first rodeo. We've done, you know, similar type batteries and actually sort of prototypes of the type of battery we're talking about here. But we know how rigorous the testing can be and how demanding the end-user customer can be, and so we know it's an ambitious schedule. You know, we sort of pride ourselves in trying to, you know, maximize, you know, the top and the bottom line every single quarter, you know, year over year and even quarter to quarter. And that's where we made a big deal about the additional investment that we took this quarter to make sure that we're positioned as fast as possible to meet the requirements of the customer. And that's a pretty quick bet cycle.

Okay. So when I look forward to the next three to five years, and going forward from here sequentially. You know, oil stays firm with an economic recovery, and SWE seems like it's positioned to continue to do well. Medical, yet a tough year-over-year comparison with the first COVID quarter of last year, but medical has been a perennial gainer, and the demographics and the tager on medical seem, you know, pretty strong, and elective procedures coming back as vaccinations take hold. And then I look at the new six or seven revenue streams, new revenue streams, the $8 to $10 million you mentioned in 3-volt IoT and remote sensors, the $8 to $10 million commercial opportunity and comm systems, the $8 to $10 million on the $80 million IDIQ for 5390s, 5790s, the $8 to $10 million in smart UI batteries, the ER product line rollout, radios, we just talked about MANPAC, LEADER, handheld, VIPER, with Talus and Harris going into production. We've gotten some evidence on the $3.3 billion contract that Harris just won, plus some preliminary budget estimates on that. So I don't know if that's $8 to $10 million like everything else, or that's a factor higher because it's such a big contract. And then finally, conformal battery, which could scale up to $50 million a year if you look at the total exercising of all the options, 500 million over 10 years, or if you look at the first three years, as you just mentioned, the government's very ambitious to get this conformal battery, and 168 million over three years is over 50 million a year. So when I add it all up, I come to, you know, conservatively, you know, 50 to 100 million in annual incremental potential business. They're all IDIQs, and you don't know until you know. But even if that plays out over the next one, two, or three years, and you do spike to $50 million in incremental revenue, whether it's $20 million, $50 million, $80 million, or $30 million, $60 million, $90 million, whatever it is, when I do my math, even discounting your gross margin to the low 20s from where it's historically been, and I know your target's 30%, I come to, again, I don't know if it's A year from now or three years from now, but I come to $1.50 in earnings per share, totally shielded with the NOL carry forward. Now, when we look at the last three years, the last time you guys put three years or four years of good earnings together, so if you go back the last three or four years, you've been flat between $0.35 and $0.40, but prior to that, you had three or four years when you went from, you know, like break-even to $0.07 to $0.18 to $0.27 to $0.39 or something like that. When you put together four years in a row of increasing revenue and increasing earnings, the stock peaked at about $11.50 on the $0.40. So you're headed north of a 25 PE. So if I'm right, again, we don't know if it's a year, two, three, or four, and you do $1 to $1.50, I come up with... you have a $25 to $40 stock price. So with that potential possibility, and again, I'm not asking you to comment on that or et cetera, my question is as follows. To do everything you're talking about, despite having $50 million in working capital and $15 million in cash, no debt, and $50 to $100 million in your line of credit, to do all that, you know, to fund all those new lines of business and the potential to go from a $100 million business to a $200 million business over the next two, three, four, five years, you're going to need a lot of working capital and a lot of liquidity. So I guess what I'm saying is maybe instead of, since the potential is so significant to get a $25 to $40 stock price on a buck plus in earnings, maybe... it's worth considering if and when the stock gets to the teens, instead of using your first opportunity to do a secondary or an equity deal in terms of dilution for the current patient long-term shareholders, maybe you do a convertible debt deal and then as all these projects go to full production and what I just said starts to transpire and the stock does go into the 20s, then maybe you do a a secondary of just stock, you know, to raise working capital and to pay off the convertible debt. Is that something you would consider?

Well, I'll just say this, Gary. We consider all the different options. Those that you mentioned, some that you haven't mentioned, and I think an overriding factor, you mentioned the word dilution. Well, 38%, 38.5% of Ultralight is owned by insiders. So, you know, we're all aligned. Management is 100% aligned with shareholders as we should be, of course, as we should be. So it puts us in a position where we look at all the different opportunities, including, most importantly, cash generated from our own operations, cash generated from the efforts, the daily efforts that we're putting into reducing inventory, And then from there, we look outwards, and we have a great relationship with our primary lender, great opportunities going forward. So everything is game, including some of the things that you mentioned. But I will say that diluting the shareholders, unless it's for incredibly accretive reasons, wouldn't necessarily be at the very top of the list. And I'll leave it at that.

Okay, that's fair, Phil. I guess, you know, My original scenarios was, hey, you know, if we could get to 130, 140 million in business, we'd have a stock in the teens, and then maybe you do a secondary. But in light of the conform award, which a lot of us weren't aware of, and the size of all these transformational opportunities, it seems like the potential is much more significant than any of us thought before. And again, granted, it has to come to pass. You have to get the orders, their IDIQs, et cetera. But that's pretty true for every other public company and non-public company. They have to get the orders and they have to execute. But I guess in light of the recent developments and the $50 to $100 million annual incremental revenue potential, which would double the size of the company, It seems like my old target of 15 is low, and if it's 25 to 40, what I'm talking about, again, whether it's two, three, four years, it seems like you might be able to use some additional tools instead of just a regular equity deal. And that gets me to my second question. Now that you're through the difficult annual year-over-year earnings comparisons, with those final shipments in the June 2020 quarter from the amplifiers, it seems like we're generally speaking with all these revenue lines coming to fruition, et cetera, and the year-over-year comparisons getting easier, we're on the verge of maybe multiple quarters of positive sales and earnings comparisons. And with all that potential we just discussed, It seems like, you know, now would be the time to, on the IR front, to maybe do something that you haven't done before, which would be to start, you know, attending conferences. There's probably 25 small cap brokers out there that do conferences. You know about Roth and Sedoti and B. Reilly, Stifle, et cetera, et cetera. And most of them are done virtual. So it's not a, big deal for you guys to sit down an hour at your conference room and do a zoom conference. It seems to make sense to plant the seeds now before it's, you know, self-evident and in the face of investors. That way you have the, you know, 15 and you've done 12, 13 cent quarters before. So as these new revenue streams come on and you do 15, 20, 25 cent quarters, you're already planted a lot of seeds with investors. You know, again, you've, it's been 10 years and you've only gotten one analyst report. So, and you haven't done conferences. So, uh, on the verge of positive earnings comparisons on the verge of some explosive revenue opportunities, uh, it seems now would be the time to go plant the seeds. Uh, and then as you start delivering, uh, these double digit quarters and people see a 15 cent quarter, they see a 20 cent quarter, they see a 25 cent quarter. Um, you know, investors will be able to take advantage of that. Because it doesn't make sense to me for the stock to be at eight bucks, which it was at before you got the conformal award. And, you know, you have two or three times the earnings potential that you did the last, you earned 40 cents and the stock had gotten to 11. So to me, the stock seems excessively cheap. You have a seven and a half dollar book value, you have cash, no debt, your enterprise value is less than one times, mostly and you have this spectacular potential revenue and earnings in front of you. So would you consider doing some of the enhanced IR to plant the seeds for the company?

Gary, thank you for your thoughts on that.

Okay, and last question. Since you're full with these seven revenue stream opportunities, Is it correct that you're not really focusing on M&A now and you're going to use your working capital, cash, line of credit to fund all these developments? Or do you feel you can do both at the same time?

Gary, it's not correct that we haven't been focused on M&A. At any given time, we have both internal and external resources talking to multiple companies. It's just we haven't talked about it. We haven't announced anything. And when something like that develops into something that is something we'd want to disclose, we will definitely disclose it.

So it's not off the table, even though you're really full with opportunity here?

No, no.

All right, guys. Hey, thanks very much, and congratulations.

All right, thanks, Greg. Thank you.

Once again, ladies and gentlemen, please press star 1 to ask a question. It appears that there are no further questions at this time. I would like to turn the conference back to Mr. Popielek for any additional or closing remarks.

Thank you very much again for joining us for the second quarter 2021 earnings call. We look forward to sharing with you in our quarterly progress calls in the future the status of some of the things we talked about today. I'd also like to note, as Phil mentioned, we updated our investor presentation on our website, so please check it out. Everybody have a great day. Thanks very much for participating.

That concludes today's conference. Thank you, everyone, for your participation.