Ultralife Corp Q2 FY2021 Earnings Call

Good day, and welcome to the 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 Burfening. 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 Popielec, 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.ultralifecorp.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 reflect 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 Ultralife'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. 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 Phil 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 up 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 prepandemic levels, and sales from government defense customers were soft relative to last year's strong shipments 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 continued 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 Ultralife's CFO, Phil Fain, to take you through additional details of the second quarter 2021 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our second quarter results for the quarter ended June 30, 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 and international industrial markets, offset by a reduction in medical sales from the initial surge of batteries for ventilators, respirators and infusion pumps 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 and logistics delaying sales to future periods, most notably in the medical and government defense sectors. Revenues from our Battery & Energy Products segment were $22.9 million, compared to $24 million last year, a decrease of 4.8%, attributable to a 48.6% increase in oil and gas market sales, and a 23.2% 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 Communications Systems 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 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 & Energy Products business was $6 million, the same as reported last year. Gross margin was 26.3%, an increase of 120 basis points over 25.1% reported last year, reflecting favorable sales product mix and lower scrap and rework on new products transitioning to high-volume production. For our Communications Systems segment, gross profit was $1.3 million, compared to $1.9 million for the year-earlier period. Gross margin of 32.1% 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 17. 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 noncash 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 from 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 carryforwards for GAAP reporting purposes. Accordingly, our reported tax provision for the second quarter is based on an effective rate of 23.2%, while utilization of our deferred tax assets will drive the tax provision down to only $71,000, or 6.6%, when we pay our taxes. We expect that the net operating losses and tax credits included in our deferred taxes will offset all U.S. taxes for the foreseeable future. Using the 23.2% statutory tax rate, net income was $0.8 million or $0.05 per share on a diluted basis for the 2021 second quarter. This compares to net income of $1.7 million or $0.10 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 noncash U.S. taxes expected to be fully offset by our net operating loss carryforwards and other tax credits. As noted in the supplementary table in our earnings release, adjusted EPS on a diluted basis was $0.06 per share for the 2021 second quarter compared to $0.13 for the 2020 second quarter. We estimate that the delayed shipments resulting from supply chain and logistics challenges and our investment in new product development resources adversely impacted EPS for the 2021 second quarter by approximately $0.05 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 Battery & Energy Products business, market and sales reach expansion has been about diversifying more into the global commercial and international government defense markets 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 multiyear agreements. With respect to our oil and gas and subsea electrification commercial revenue, our SWE team provided approximately 20% of total Battery & Energy Products sales. Though overall SWE revenues were down slightly year-over-year due to the nonrecurrence of a short-cycle medical product billed 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 Products sales, shipments were primarily for radio battery and chargers to OEM Primes. In Q2, revenue was down year-over-year, as stated earlier. However, the highlights of the quarter actually came from 2 noteworthy opportunities that we have been developing for some time. First of all, our first article testing for the next-generation BA-5390 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 2 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 capabilities, on May 17, we were very pleased to announce that we were one of 4 companies awarded an IDIQ contract under the U.S. Army's $1.25-billion conformal wearable battery program. Our potential contract is not to exceed $168 million during the 3-year base award period with the potential for up to an additional $350 million should the 6 1-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 include successful completion of first article testing, demonstrating full compliance with the contractual product specification and program requirements. We are currently aggressively pursuing the development and sourcing phase of the process, the additional engineering and CapEx resource investment to meet an ambitious BAT 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 multiyear transformational projects during the quarter. Regarding our next-generation hot-swappable medical card 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 transactions 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 cards, automated guided vehicles and robotics. Regarding the new 5790 and XR123A CFx blend primary batteries, we are currently targeting completion of the 5790 fab 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 battery. 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 negotiation 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 products' power, safety and contribution to the OEM devices' 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 million to $10 million of opportunity over the next 1 to 3 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 ThinCell battery for wearable products and vital-sign-monitoring applications. Also, medical and other industrial customers continue to tap into our China operations for supply of battery pack solutions, not just our cells, 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 capability. Our goal remains to produce the highest value proposition, best quality and safest products, in which every 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 3 years old represented approximately 13% of Communication Systems revenues. Communication Systems completed initial orders for radio mount deliveries in Q2 in support of our 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 3 years. Regarding the U.S. Army's handheld ManTech small form fit and Leader Radio programs, we are awaiting the potential for a 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 technology innovations, market trends, and customer requirements to position us for future business supporting both handheld and ManTech 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 times, manufacturing time lines, 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 card 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 Systems. 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 by Communication Systems into commercial products and integration opens the door to solid global growth opportunities in 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, rounds our optimism about the long-term growth of the Communication Systems business. In closing, for the second quarter of 2021, although some of the year-over-year comparables were difficult, we were pleased to see revenue and earnings gains quarter-to-quarter throughout the company. While overcoming some expected nonrecurring 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 maintained 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 streams in attractive growth markets from new competitively differentiated products. At Communication Systems, these projects include potential Leader Radio follow-on awards, new OEM ManTech radio ancillaries, integrated computing solutions, and next-generation 20-watt amplifiers. At B&E, our transformation 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, ThinCell 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.

We will now take our first question from Mr. Gary Siperstein from Eliot Rose Wealth Management.

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. And then if you look at the $168 million over 3 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 3 years, it's $50 million over those 3 years if they do the maximum. So that's a wonderful coup, and I just wanted to start out by congratulating you on that. 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. So that's encouraging. And I guess my question is, are you seeing any more of the COVID-type orders come in now with the Delta variant and the hospitalizations increasing? And then secondly, if not, or not yet, do you feel the overall strength so that it's surpassing pre-COVID levels is due to the fact that with vaccines and people getting sort of back to normal despite the Delta variant, elective procedures are increasing?

Yes. I mean there's a couple of pieces there, Gary. 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 customer 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 also knew that there were some early parts of the year where we had some very high year-over-year comparables to overcome. And we were actually delighted in Q2 to get a number of new orders from long-standing customers that aggregated close to $8 million over $8 million, as I mentioned in my prepared remarks, which if you may recall from previous earnings calls in 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 time frame we'd like it to in the earnings results, but I'm 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 and logistics that we've gotten very close to our key customers. And that's probably the biggest benefit and silver lining in 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, so that $8 million in blanket orders, is that for 1 to 3 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.

Yes.

My second question is about SWE. There has been a 49% increase as the rig count has returned. I believe the rig count is now double what it was at the lows in March 2020 due to COVID. I might be mistaken on that, but that's what I saw. The improvement in SWE in the oil and gas sector, excluding the subsea side, is it primarily a result of the rise in rig count and oil prices stabilizing around $70 a barrel? Is this pricing at a level we saw before COVID, or does it still have room to grow?

No, Gary, we consider a variety of factors, including the domestic rig count as well as the rig count in Canada and internationally. All of these metrics have improved since the onset of COVID. We segment our SWE business into five key areas: downhole drilling, pipeline inspection, subsea, platform products, and the significant medical work being done. In Q2, the orders are primarily driven by downhole drilling, influenced by price and rig count. We're also noticing a more global demand, with a balanced split in our suite business between international markets and the U.S., which reflects a positive trend we've observed in Q2.

Thank you, Phil. I don't think any of us expected to necessarily return to levels seen years ago considering the new environmentalism. Do you anticipate reaching maybe 75% of those prior levels? If so, is that the level you expected to achieve, or does it still need to increase by another 50% or so?

I can respond to that, Gary. We had a very solid second quarter. The question is about what the next couple of quarters will look like. Is Q2 an exception, or will we see consistent performance in the next 3 or 4 quarters? There is certainly an increase in WTI; when we acquired SWE, WTI was $62, and it is now $72.50. As Mike noted, there is limited forward visibility with our major customers. We often receive calls with purchase orders that they want fulfilled quickly. However, with increased travel and oil and gas usage hopefully rising in a post-COVID environment, the trend should be positive. To answer your original question, we were trending around $7 million a quarter for SWE when we first acquired them. Currently, we're probably at about 70% of the previous running rate. There's still room for growth, but we have also improved our business model, as we've discussed in previous calls.

Yes. Okay. That's good color. Mike, on the 3-volt opportunity with remote sensors and other Internet of Things opportunities, do you see that, the 3-volt, as you mentioned various China orders, and you mentioned various customers looking for tens of thousands, hundreds of thousands or million-plus units, does that represent ultimately a $3 million to $5 million annual run rate opportunity? Or what would be a fair number?

A number of the transformational projects tend to fall in the $8 million to $10 million range, so 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, and we look at what the capacity is expected to be, we expect the capacity to be more of the 9 million to 10 million units a year, which would say that the revenue is higher, closer to $10 million potentially per year than some of the numbers that you've just mentioned.

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

In my prepared remarks, I'm sorry, Gary, I apologize for interrupting. The number of different opportunities that we have range in various sizes. So we don't want to do 100% of the volume with a real low-price-type customer. We want to have a nice mix and blend of various different customers so we don't have all our eggs in their own basket in a single basket. We have the XR123A product line that we could build on the same line as well. So we're looking at lot sizes from $0.3 million to $3 million per year for a single customer, but with multiple customers providing a nice, blended mix from a delivery timing standpoint as well as from a margin opportunity as well.

Understood. Wonderful, $8 million 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 stop getting some production orders before the end of the year and count and then follow-on for calendar '22. Is that considered a transformational opportunity like the 3-volt where it's $8 million to $10 million? Or is that a $3 million to $5 million opportunity?

Certainly, we interpret what we consider transformational in various ways. When I evaluate the situation, I see it as transformational in multiple aspects. Reflecting on our journey, particularly for those who have been with this stock since my tenure began, we primarily operated as a component manufacturer in communications systems. Although we specialized in high-end and sophisticated components, we were never just a component manufacturer. We've expanded into new platforms where we've integrated solutions. Looking ahead, while we aren’t fully there yet, the signs are encouraging. This significant next step will further advance our integrated system capabilities into a completely new end market. I perceive this as a new platform. Thus, it's transformational as it expands the scope of our Communication Systems business. It's transformative because we’re offering an integrated solution rather than just standalone components. Moreover, economically, being a key supplier in this domain means potential for substantial contracts that we’ve announced recently, which focus on integrated solutions. To summarize, I see it as transformational in diversifying end markets for Communication Systems and its potential revenue impact.

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 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?

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 specific 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 first article testing opportunity because we know how difficult they can be and how demanding the end-user customers can be. And so I think it's inappropriate, really, to comment on potential revenue from 5790 at this point.

Okay. And the $80 million IDIQ, again, is 8 to 10 years, so I guess the combined 5390-5790 is an $8 million to $10 million annual revenue opportunity. So it fits into your transformational revenue range. That moves me on to another revenue stream. So the ER product line and the Smart U1 battery, is that considered transformation? 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, this has all been about doubling and tripling and quadrupling the overall 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 1 to 3 years.

Okay, that sounds good. Let's talk about radios. Initially, the contract was worth $2.3 billion over 10 years with Harris, now L3Harris, and Thales. We expected it to be split evenly, roughly $1 billion and $150 million each over the decade. My first question is, as I reviewed the first quarter conference call transcript from L3Harris, they indicated that they had finished testing and the final low-rate initial production on handheld ManTech, and they anticipated completing Leader soon. Additionally, on June 10, Harris Global Communications received a $3.3 billion contract for radios and communication spare parts, with a completion date set for 2026, which breaks down to $3.3 billion over the next five years. I'm a bit unclear; is the original $2.3 billion contract still the main radio modernization contract, while the $3.3 billion is separate? Or is the recent $3.3 billion contract just an updated version of the $2.3 billion contract where the amount was increased by $1 billion and awarded solely to Harris? Also, I haven't seen any announcements regarding Thales, so I’m unsure if they've made a statement or if it hasn’t been made public; are they still part of this project? I’m looking for clarification on the original $2.3 billion contract, the $3.3 billion awarded to Harris recently, and Thales' involvement as far as you are aware.

Yes, Gary, I can address that. The original Leader Radio contract has not been changed at all. Any information you may have heard or read after that time probably pertains to another project or another radio. There is a lot happening in radio communications for sure. However, there has not been any change regarding who will receive the future Leader Radio awards from the original $2.3 billion announcement. It was stated that it would initially be split 50-50 and then subject to competitive bidding. We continuously refine our product alongside our radio partner. You may have noticed several awards announced by Harris, but that doesn't mean Thales wasn't involved; it likely indicates that Thales supported those awards using existing inventory. As it stands now, everything is balanced, and there are no changes that we're aware of moving forward.

You sell batteries to Harris and amplifiers and other accessories to Thales. You continue to be integrated into both companies' products, which according to statements from Harris, have completed testing and are moving into full production from initial production. The $3.3 billion award on June 10 may indicate the government's acknowledgment of this transition to full-rate production. My question is, regarding the batteries to Harris and amplifiers to Thales, what percentage of the final price of these radios do you represent? Is it 5% or 10%?

Gary, I don’t believe it’s suitable to speculate on that matter. We lack access to any potential OEM's final pricing. Regarding the overall contracts, it is very challenging to gain a clear understanding of what current contracts people are discussing, especially when we are one or two steps removed from the U.S. Army, working through the OEM. In our experience with soldier batteries, there can be multiple direct spot buys and delivery awards throughout an IDIQ, which might overlap with what one might think pertains to another IDIQ. I would assume the situation with radios is similarly complex, if not more so. Therefore, it's tough to determine the current contract being issued, who is getting which part, and how to relate that to our involvement. Our focus is to maintain a close relationship with our customers and support them as much as possible while safeguarding their confidential information. We aim to be the best supplier for these OEMs and to ensure they are well-positioned to succeed with the products we provide. However, I believe it's nearly impossible to discuss what percentage of the overall cost our product accounts for, and I hope you can appreciate that perspective.

I understand your point. However, it appears that our current business levels with both companies should lead to additional growth across the board. While I’m not expecting a direct answer, I would like to mention that given the Harris conference call indicating they have completed testing and are moving into full-rate production, along with the new $3.3 billion contract, it suggests that both companies should ramp up full production. This is positive for us since we are already integrated into their designs. If they are increasing shipments to the government, it likely means they will need more batteries and amplifiers from us. Regarding the last question, Phil, you noted several times in your remarks about the final shipments of amplifiers to Thales in the June quarter of last year tied to the contract awarded back in October 2018. It’s been nearly three years without any follow-up orders, which I assume means they have been relying on inventory for their needs. As they move into production along with Harris, can we expect to see new amplifier orders in the next 6 to 12 months?

Yes. That's the only answer I can give you, Gary. That's my personal expectation. And it may seem like a long time between the time the order was placed in the development period and the testing period. The big variable here was the timing of the field test. It seemed like it took an eternity, but for a radio, the most complicated radio, 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. Yes, 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 work down inventory. We're already designed in and would be getting orders as that moves into full production from LRIP production. And then we had that evidenced by the Harris conference call, by the Harris $3.3 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 definitive answer is that we will know when the next order is issued. I could be optimistic or pessimistic, but until that order is placed, we are doing everything we can to remain as competitive as possible, and that is our strategy.

Yes, I understand. Regarding the conformal battery for wearables, Mike, you mentioned that testing could be completed by early 2022, which seems quite fast. When we consider the testing for the $80 million IDIQ contract and the complexities involved with radios compared to wearable body batteries, is that why testing can proceed so swiftly? You indicated that we might start seeing production orders for the latter part of 2022.

Yes, you heard it correctly in the prepared remarks. We discussed having a very ambitious schedule, which is one reason we've increased our investment in capital expenditures and resources to position ourselves as effectively as possible. We are aware of the development and testing cycles from other products, as you've heard in multiple earnings calls. So yes, it's a fast schedule, and we are confident about it. This isn't our first experience; we have done similar batteries and prototypes of the type we are discussing here. However, we recognize the rigorous testing requirements and the high expectations from end-user customers. We understand the ambitious nature of this schedule. We strive to maximize both the top and bottom lines each quarter, year-over-year, and even quarter-to-quarter. This is why we emphasized the additional investment we made this quarter to ensure we are in the best position to meet customer requirements, especially given the quick fabrication cycle involved.

Looking ahead to the next 3 to 4 years, if oil prices remain stable with an economic recovery, it appears that SWE is positioned for continued success. In the medical sector, despite a challenging year-over-year comparison due to last year's COVID-related performance, it has consistently shown growth; the demographics and compound annual growth rate for medical are strong, and elective procedures are rebounding as vaccinations progress. Additionally, I see several new revenue streams, including the $8 million to $10 million from 3-volt, IoT, and remote sensors, the $8 million to $10 million commercial opportunity in communication systems, and similar amounts for the IDIQ contracts for 5390s and 5790s, Smart UI batteries, and various products from our upcoming ER product line. With contracts such as the $3.3 billion awarded to Harris, we have more insight into potential earnings in these areas. The conformal battery could reach $50 million annually, and if all options are exercised, that totals $500 million over 10 years. Looking at the government's ambitious goals, projected earnings of $168 million over 3 years translate to more than $50 million yearly. Overall, I estimate a conservative annual incremental business potential of $50 million to $100 million. Even if this materializes over one to three years with variable revenue growth, my calculations suggest earnings per share between $1 and $1.50, bolstered by NOL carryforwards. Historically, during periods of similar earnings, prices peaked around $0.40, leading to a price-to-earnings ratio above 25. If this pattern holds and the company achieves $1 to $1.50 per share, we could see stock prices in the range of $25 to $40. Given this potential, I recommend considering alternative funding strategies to support new lines of business. Instead of opting for a secondary equity offering when the stock reaches the teens, it might be more beneficial to pursue a convertible debt deal initially. This can later be followed by a stock offering once the projects are fully operational and if the share price rises into the $20s, allowing for the payment of convertible debt while raising needed capital. Would you consider this approach?

This is Gary. We are evaluating various options, including those you mentioned and some that you haven't. A key aspect is that 38.5% of Ultralife is owned by insiders, which means we are all aligned. Management is fully aligned with shareholders, as it should be. This alignment allows us to consider all opportunities, focusing particularly on cash generated from our operations and efforts to reduce inventory. Additionally, we maintain a strong relationship with our primary lender, providing us with great opportunities ahead. We are open to all possibilities, including those you brought up, but I want to emphasize that diluting shareholders, unless for highly beneficial reasons, is not our primary focus.

Okay, that's fair, Phil. Initially, I thought if we could reach $130 million or $140 million in business, the stock could land in the teens, potentially leading to a secondary offering. However, considering the recent conform award, which many of us were unaware of, and the size of these transformational opportunities, it appears the potential is much larger than we previously anticipated. Of course, this depends on actually securing the orders and the IDIQs. This is true for every public and private company—they need to obtain orders and execute. Given the recent developments and the potential for an additional $50 million to $100 million in annual revenue, which could effectively double the company's size, it seems my earlier target of $15 is too low. If we're looking at a range of $25 to $40, depending on the timeframe of 2, 3, or 4 years, it seems you could utilize additional strategies beyond just a standard equity deal. Now that you have passed the challenging year-over-year earnings comparisons from the June 2020 quarter with those final amplifier shipments, it looks like we're positioned well with these revenue streams beginning to take shape. With comparisons becoming easier, we could be on the brink of several quarters of positive sales and earnings. Considering the potential we've discussed, now would be an ideal time for investor relations to start engaging in activities that have not been done before, like attending conferences. There are numerous small-cap brokers that host conferences, such as ROTH, Sidoti, B. Riley, and Stifel, many of which are virtual, making it easy for your team to participate from your conference room. It's important to lay the groundwork now before it becomes obvious to investors. If you achieve $0.15 per share again—having previously reported quarters at $0.12 and $0.13—as new revenue streams emerge and you hit quarters at $0.15, $0.20, or $0.25, you’ll have already started planting those seeds with investors. It's been a decade with only one analyst report and no conference participation. With positive earnings comparisons and significant revenue opportunities ahead, now is the time to plant those seeds. As you start delivering double-digit quarters and investors see $0.15, then $0.20, then $0.25, they will benefit from that exposure. It doesn't make sense to have the stock at $8 when you had gotten it higher pre-conformal award, and now you have 2 to 3 times the earnings potential. You previously earned $0.40 and saw the stock rise to $11. Therefore, the stock seems undervalued to me, especially considering the $7.50 book value, the cash on hand, zero debt, and an enterprise value under 1x. You have exceptional revenue and earnings potential ahead. Would you consider enhancing your investor relations efforts to begin planting those seeds?

Gary, thank you for your thoughts on that.

Okay. And last question. Since you're full with these 7 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 that develops into something that is something we'd want to disclose, we will definitely disclose it.

It appears that there are no further questions at this time. I would like to turn the conference back to Mr. Popielec for any additional or closing remarks.

Great, thank you very much again for joining us for the second quarter 2021 earnings call. We look forward to sharing with you on 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 the website, so please check it out. Everybody have a great day. Thanks very much for participating. Bye-bye.

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