Welcome to the Ultralight Corporation second quarter 2025 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alex Vialto of – excuse me – Mr. Linesh, please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us for Ultralife Corporation's earnings conference call for the second quarter of 2025. With us on today's call are Mr. Mike Manna, Ultralife CEO, and Mr. Phil Fain. ultralife's chief financial officer the earnings press release was issued earlier today and if anyone has not received a copy i invite you to visit the company's website at ultralifecorporation.com where you will find the release in the investor relations section before turning the call over to management i'd 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 uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in U.S. and foreign military spending, acceptance of our new products on a global basis, and disruptions or delays in our supply of raw materials and components due to business conflicts, global conflicts, weather or other factors not under our control. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Ultralife's financial results is included in the company's filings with the SEC, included in the latest quarterly form on Form 10-Q. In addition, on today's call, management will refer to non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Ultralife's CEO, Mike Manna. Please go ahead, Mike.

Good afternoon. Welcome to our call on Ultralife's Q2 operating results. Earlier this morning, we reported Q2 sales of $48.6 million with an operating income of $2.3 million, including a one-time adjustment of $0.3 million. Net profit was $0.9 million, which resulted in $0.05 EPS on a gap basis and $0.07 on an adjusted basis. In Q2, we faced direct headwinds from tariffs, unfavorable product mix shifts across the business, softness in our oil and gas business as customers were hesitant to commit to capital projects, and anticipated order timing challenges, particularly in our communication system segment, which negatively affected gross margin. Despite these pressures, we maintained our focus on growth, continued to invest in new product development, with several offerings advancing into validation and production. This is the second full quarter reporting with the Electrochem results, and as planned, we successfully transitioned their ERP and office systems to Ultralife systems in Q2. With the Ultralife back office now in place, several manufacturing support systems related to execution and quality will finalize transition in Q3. Our overall strategy of continued diversification through M&A and new product development is key to stabilizing and increasing the profitability of the business, but it is important to note that we are still often a component or accessory to a customer product, and therefore we have limited ability to control order flow, timing, and mix. On the consolidation front, we completed the closure of our Misagua operation and incurred some one-time cost associated with that effort, which will not repeat going forward. With that said, we continue to generate cash, and I'm pleased to report that we're ahead of schedule in paying down our debt from the electric M acquisition, with over $2.7 million repaid in Q2. I will now turn it over to Phil to talk through the detailed numbers.

Thank you, Mike, and good afternoon, everyone. This morning, we released our second quarter results for the quarter ended June 30th, 2025. We have also updated our investor presentation in the Investor Relations section of our website, and we'll file our Form 10-2 with the SEC shortly. Consolidated revenues totaled $48.6 million, compared to $43 million for the second quarter of 2024. Revenues from our battery and energy product segment were $45.9 million, compared to $36.7 million last year. Excluding third-party sales for Electrochem, which we acquired on October 31, 2024, sales for the segment were essentially flat year-over-year. Government defense sales for the 2025 quarter increased 61.1%, reflecting strong demand from the U.S.-based global prime. This growth was offset by a 20.4% decrease in commercial sales, resulting from declines in medical battery sales of 39% due to the timing of orders, and in oil and gas sales of 23.1% due to macroeconomic and geopolitical factors. The sales split between commercial and government defense for our battery business was $68.32, compared to $75.25 reported for the 2024 quarter, and the domestic to international split was $73.27, compared to $53.47 for the 2024 period, representing the heightened domestic shipments of our government defense products. Revenues from our communications system segment of $2.7 million declined 57.2% from the $6.3 million we reported last year. Primarily attributable to large shipments in the prior year of integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor, magnified by delays in the timing of purchase orders during the 2025 second quarter of approximately 2.7 million, which have been pushed out to the second half by the respective customers. On a consolidated basis, the commercial to government defense sales split was 65-35, almost identical to 6436 for the 2024 second quarter, highlighting our acquisition of Electrochem and lower communication system sales. Our total backlog with high confidence orders exiting the second quarter was $89 million and remains diverse in nature across our commercial and government defense customer base. The replenishment rate remains solid, especially after almost $100 million of sales in the first half of 2025. Our consolidated gross profit was $11.6 million, essentially flat with the 2024 period. As a percentage of total revenues, consolidated gross margin was 23.9%, a 300 basis point decline from the 26.9% reported for last year's second quarter, primarily related to product mix, tariffs, and lower factory throughput at some of our operations. Gross profit for our battery and energy products business was 10.8 million compared to $10 million last year, an increase of 8.9%. Gross margin was 23.6% compared to 27.1% last year. The year-over-year reduction resulted from sales mix reflecting the declines in generally higher margin medical and oil and gas sales, higher tariff costs due to the need to purchase components at inopportune times to fulfill certain orders and the one-time write-off of some discrepant materials. For our communication system segment, gross profit was $0.8 million compared to $1.6 million for the year earlier period. Gross margin was 28.4% compared to 25.6% last year, primarily due to favorable sales mix, although negatively impacted by the lower factory volume. Operating expenses were $9.3 million, an increase of 1.7 or 22.2% from the year earlier quarter. The year-over-year increase is comprised of $0.7 million dollars related to the inclusion of Electrochem, a 25.3% increase in new product development costs related to continued investment or product offering, and certain one-time non-recurring expenses, which include costs related to our acquisition and integration of Electricum. As a percentage of revenues, operating expenses were 19.2% compared to 17.8% for last year's second quarter. Operating income was $2.3 million compared to $3.9 million last year, reflecting the 57.2% decline in communication system sales, the decline in battery and energy products gross margin, and the one-time non-recurring cost totaling $0.3 million. Accordingly, the operating margin decreased to 4.6% for the second quarter compared to 9.1% for the 2024 second quarter. Another expense reported below operating income was $1.2 million for the quarter compared to $0.1 million for the year earlier period, primarily resulting from the increase in interest expense on the acquisition debt and the impact of foreign currency fluctuations. The 2024 period benefited from the receipt of $0.2 million from our insurance carrier related to the ransomware cyber attack experienced by the company in the first quarter of 2023. Our tax provision for the second quarter was $0.2 million compared to $0.9 million for the 2024 quarter computed on a GAAP basis at statutory rates. Net income was $0.9 million or five cents per share on a GAAP fully diluted basis. This compares to net income of $2.7 million or $0.18 per share for the 2024 quarter. 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, adjusted fully diluted EPS was $0.07 per share for the second quarter of 2025 compared to $0.22 the 2024 period. Adjusted EBITDA, defined as EBITDA including non-cash, stock-based compensation expense, in one-time acquisition and other costs, as well as non-cash purchase accounting adjustments not reflective of our ongoing operations, was $4.1 million, or 8.5% of sales, compared to $5.4 million or 12.6% for the prior year quarter. Adjusted EBITDA on a TTM basis is $15.4 million or 8.6% of sales. Turning to our balance sheet, we ended the second quarter with working capital of $69.1 million in a current ratio of $3.3 compared to $67.9 million and 3.3 for 2024 year-end. Our liquidity remains solid. I am happy to report that in the second quarter, we received $1.8 million from our Employee Retention Credit, including interest, which we filed under the Coronavirus Aid, Relief, and Economic Security Act in June of 2023. These funds, in their entirety, were used to reduce our acquisition debt during the quarter. In the first half of 2025, we have reduced our debt principal by $3.4 million, which already exceeds the $2.8 million amortization required for the full year under our debt agreement. While we do not have any draws on the $30 million revolver portion of our debt agreement and no plans to do so, our balance sheet provides the borrowing base capacity for this amount. Looking forward, our increasing sales funnel diversified government defense medical and oil and gas end markets, the sheer volume and pending traction of our growth initiatives and the further actions we will be taking to improve our gross margins, including the vertical integration opportunities associated with our acquisition of Electrochem, position us well to recognize the leverage of our business model. I will now turn it back to Mike.

Thank you, Phil, for the detailed review of the Q2 2025 results. As mentioned in the last call, our priorities remain clear for 2025. First, we completed the main system transition of the ElectriChem acquisition into Ultralice back office, successfully migrating email, office, and ERP systems as planned in Q2. We are transitioning the balance of manufacturing support systems in Q3, which will conclude the one-time cost associated with these activities. We continue to expand vertical integration opportunities enabled by the acquisition of Electrichem, allowing us to incorporate Electrichem cells into existing PAC assemblies and broaden our addressable market in areas such as pipeline inspection, seismic telemetry, and sauna buoys. We are qualifying cells with several oil and gas customers to enable transition of their battery packs to utilize electric hemp cells and expect to see benefit of these efforts in 2026. Secondly, we are committed to improving our sales opportunity pipeline to support growth throughout 2025, while continuing to focus on strategically diversifying our business and customer base. We have made a concerted effort to improve our marketing through search engine optimization, targeted ads, and contact engagement within specific customers, initially focused on our transformational projects. I'm happy with the quality of leads and the opportunity sizes are increasing as our funnel grows across a variety of end markets. Third, we are focused on improving and stabilizing gross margin through pricing, material cost deflation, and lean productivity projects in both the battery and energy and communications businesses. We experienced headwinds in both product mix and order flow in Q2 that muted some of these efforts. We continued multiple initiatives across our facilities, including a major lean project completed in Q2 at our ElectroChem site. This effort eliminated the need to hire 30 additional employees to support increased cell sales, including a new purchase order from a major defense contractor scheduled for delivery this year, and increased cell volumes expected from the vertical integration of our oil and gas battery packs. Switching to the organic growth projects and new product development underway for the businesses, there is positive momentum on several fronts. The communication systems business is expanding the ruggedizer server case portfolio to service new programs and server variants, which will provide greater opportunity to expand market share in ruggedized computing environments. Our newest 3U portable server case is complete and now available for orders. Our recently launched DC power supply, supporting various server platforms where no AC power is available, most notably tactical vehicles, is now undergoing tests with multiple customers prior to expected contract awards. The newly developed 20-watt amplifier, which provides radioagnostic functionality to support international markets, is in the hands of multiple partners for evaluation and systems tests, with initial orders expected later this year. We developed this radio-agnostic amplifier to further support the needs of the warfighter with what we believe is the smallest, lightest, and most power-efficient 20-watt manned portable amplifier in the marketplace. We believe our total addressable market for this amplifier starts at $5 million per year, so happy to see this out in customer testing. Meanwhile, we are finalizing the design of our next high-performance amplifier, targeting advanced radio platforms with the latest high-speed waveforms utilized by U.S. and allied forces. This amplifier continues our heritage of small, radioagnostic, high-efficiency man-worn and vehicular amplification products, with this new variant available in late 2025 for customer testing. Both amplifiers will be showcased at our booth at the Defense and Securities Equipment International show in London starting September 9th. In a project we haven't covered previously, we received the production purchase order for a new advanced speaker which we developed for a prime partner with initial shipments completing in 2025. We expect this to be a recurring revenue stream going forward which further diversifies the business and builds on our history of having exceptional audio quality and ruggedness found in our McDowell product line of radio speakers. On the battery and energy side of the business, we have a great deal of activity across several new products, with new business being the key focus. As mentioned earlier, we established initial production capabilities for our thin cell technology to support customers in the medical wearable sector and various item tracking applications. The sales pipeline continues to strengthen with several new projects now in the qualification phase. Our main current medical patch customer continues to build their system and test their software, and we are awaiting orders for the product. Meanwhile, we receive initial purchase orders to qualify two thin cells for a major contract manufacturer for portable industrial tracking applications with revenue beginning in 2026 once we successfully complete validation. The 123A product line, which currently service the IoT and illumination markets, is seeing growing interest in medical battery pack assemblies from both domestic and international customers. We have samples of both the manganese and carbon monofluoride cells being tested by multiple customers currently, and these applications include flashlights, night vision, and tracking products. Meanwhile, our advanced vinyl chloride technology aimed at metering and telemetry applications continues to progress through customer qualification and field testing, with all reports to date positive. This has been a long qualification cycle, but we anticipate multiple commercial discussions in the metering space to commence in the back half of 2025 for deliveries beginning in 2026. products. We continue to round out the family of X5 medical card products with a pre-release of our latest product, a portable power bank that provides power-to-pole mounted equipment or any item that requires extended run time utilizing USB-C, mostly targeting tablet and portable computers. Samples are shipping now to various partners with production volumes available later this year. The conformal wearable battery, originally developed for the Integrated Visual Augmentation System or IVAS, continues to evolve as a commercial product to our international or internal development efforts. We have received a new PO from an initial partner in Q2, which is expected to ship this year. Lastly, on the battery and energy side of the business, we have several ongoing projects with existing customers to modernize legacy designs and transition to newer technologies, reflected an increased R&D spend in Q2. These initiatives are essential to sustaining our base business, strengthening customer relationships, and ensuring our product lines are optimized for manufacturability and long-term component availability. Investing in new product development is essential to diversifying and strengthening our product portfolio, driving future growth, and building on our legacy of delivering critical power solutions. Our priorities remain converting long-term development efforts into revenue, advancing vertical integration in an oil and gas segment, and maintaining a strong focus on operational efficiency initiatives. While I remain cautious due to ongoing challenges with scaling, tariff impacts, and product mix, I see encouraging signals pointing to growth for I'm optimistic about the second half of the year and into 2026. Our communication Systems Group is expected to rebound from a tough first half. We're beginning to see early purchase orders from long-term new product programs selling new products to new customers, a rebound from our medical and oil and gas customers, and sustained growth in global defense spending, and an expanding opportunity pipeline across both businesses. Now we'll go back to the operator for questions.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw a question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question today is from John Deicher from Pinnacle. Your line is open.

Hi, good morning. Just a couple of quick questions. Do you have any feel for what the

tariffs cost you this past quarter? Absolutely. $539,482 left $126,000 received back from customers. So bottom line hit was $400,000. And John, what hurts most about that is we were forced into a situation to purchase some components at the very peak of the China tariffs that makes you sick when you look back and have to go through something like that to meet certain delivery orders.

It was bad timing of the arrival during that peak 150 plus percent period.

Okay. I guess that's my second question. Based on what you know now with the current But tariffs, how do you see that impacting the third quarter, tariffs?

It's important to note we've been, you know, I wouldn't say we've been experiencing the Section 301 tariffs from the first Trump's presidency the entire time. So the tariff rate that's there currently is not that much higher for us than what it's been the entire time since, you know, five, six, seven years ago. except for that period of time when it really expanded to, you know, over 100%. So we don't expect with what we know right today that it's going to have as much impact as it did in Q2 because we don't expect it to see that really exorbitant tariffs. But, you know, we're kind of, you know, sitting and waiting with some of that that goes on every day with, you know, Every day it's changing, so it's definitely a very fluid situation, I would say.

And we're also passing a tariff surcharge on to our customers as well.

You are, okay. Okay, that's good to hear. Regarding the employee retention credit that you received and applied to the debt, which we're happy to see, Is there any more of that credit that's going to flow through in the balance of the year, or have you captured everything?

No, we captured every penny plus interest. Very, very happy that that came through.

Okay, great. And I guess finally, in terms of the insurance reimbursement for the cyber attack, I think you said it was $200,000 in the quarter. How much have you received so far from the insurance company, and how much more are you looking to receive?

Sure. It's $235,000 is what we have received. And as you probably know, John, that is now a lawsuit that we have commenced in the Supreme Court of Wayne County, where we are located, for a jury trial that's going to happen in 2026. So right now we're going through all the discovery and all that. We believe our case is very, very solid, and we're looking at an amount that's in the millions because it's the business interruption, the business impact that happened to our business, which we feel is covered by the policy that we had in place. So to answer your question, it's in the millions of dollars.

Okay, and the trial date is sometime in 2026, you say?

Yeah, discovery ends. It's all public information. Discovery ends in the first quarter of 2026 with the trial planned for mid-year of 2026.

It's all public, so is the amount that you're actually seeking to obtain disclosed in the complaint?

In the court documents, I don't believe so. It's all in the discovery documents that's going to be coming out. Okay, they've not been... At some point, should it actually go to trial?

Okay, but the complaint has been filed in the Supreme Court of New York, Wayne County.

Yes, it has. Yes.

Okay, without specifying the amount of damages that you're seeking. Correct.

I believe that that is the case. If not, I will go through it, and I will personally call you and let you know if it is publicly disclosed.

That's great. I appreciate the color. Thank you very much, and good luck. Thank you.

Thank you. Our next question is from Jake Patterson with Talenta Investment Group. Your line is open.

Hey, guys. Just a quick question on the B&E commercial segment. I know last time we talked, it sounded like oil and gas was pretty stable. I know the macro and whatnot has probably impacted the orders there. But, I mean, as we sit here today and maybe have a little more certainty than we did mid-quarter, is there anything to call out maybe on orders returning or demand, just any updates you can provide on the two end markets, medical and oil and gas?

Sure. You know, when it comes to oil and gas, it comes down to two numbers. It comes down to what is the WTI index, and the WTI this morning was a tad under $65, and the Brent index is about $4 or $5 over that. So the oil and gas customers, and believe me, we cover all of them. We cover all the blue chippers, international, domestic. We cover the wildcatters, and they're all playing the profit games of when they're going to order and how much they're going to make on it. And, you know, we know over the last couple years, these companies just didn't sit around idly and wait for the WTI to go up. They've restructured. They've made improvements. They've made efficiencies. So their break-even point is lower than what it once was. But it's a numbers game for those. and they'll come right out and tell us that got it okay um and then on the medical side it's just the flow of orders and i will point out jake that what was interesting about the comparison q2 of last year of 2024 was the second largest uh medical uh sales volume month in the history of the company and it's just on the timing on the timing of the orders and of course we're very very bullish with the relationships we have with the new products that have been introduced and it uh it's just a time game it all evens out yeah and what we've been hearing from customers

is some of them are you know they're they're being cautious with their cash they're trying to manage cash they're paying for tariff charges on things that you know when they show up so you know you got to make sure that you can pay your tariffs and they're they're being very

careful and studious with their order flow. Got it. Okay. I guess kind of just staying on that discussion, the margins, I know you guys mentioned a few drivers of the decline. Is there any way to kind of bucket, like, where the impacts were felt the most? I know the tariffs

were, what, $400,000, and then... Yeah. I mean, I can break that off for you. I can do that. I look at it this way. The tariffs, the net amount of the tariffs cost us 100 basis points of margin. The mixed impact caused us around almost 200 basis points of margin. And the rest of it was throwing out some materials that we couldn't use going forward, some overtime and labor inefficiencies, and just the impact of some volumes going through some of the other facilities, which in total was probably 30 or 40 basis points.

So, I mean, I guess visibility into those kind of higher margin markets returning is limited, but, I mean, if you guys get back to kind of a normalized demand environment, There's no reason we shouldn't see margins kind of back into that high to mid-20s range at some point.

Yeah, and in my closing remarks there, I did say, you know, we are seeing somewhat of a return on our medical and oil and gas business so far with what we have visibility to in the second half compared to Q2. So, you know, so far it's looking up.

And then, you know, once ComSystems order flows return to a more expected level, their margins are generally higher than battery and energy products. So the mix impact on the ComSystems is worth 100 basis points when all is said and done, or slightly less than that, but it does have a pretty significant impact because their margins are generally in the approaching 30% or or in some cases higher yeah no

absolutely that's pretty much it for me appreciate it comment on that so our

focus is is the officers of the company is is what do we have to do what are what our what are our actions that we need to execute when the mix isn't the ideal mix of how do we get the margins up to the levels that we expect and we're not just sitting around waiting for mix and waiting for orders we're we're out there every day with looking at the best alternatives for execution to get the margins up on let's say the mark on a static a static mix thanks so much for

your question. As a reminder, if you would like to ask a question, please press star one one on your telephone, and then you'll hear an automated message advising that your hand is raised. Our next question comes from Will Lauber with Visionary Wealth Advisors. Your line is open.

Yeah, that was a pretty crappy quarter, but you did. I've never remembered you guys highlighting so many potential kind of things for later this year and next year. Can you put any kind of quantification or kind of how certain you are on some of these opportunities materializing?

Let's start there. You know, we're not proud of it by any means. You know, there's a lot going on. There has been a lot going on. You know, I sit on these calls time after time saying, you know, we're in qual, we're in qual, we're in qual. And, you know, I get sick of hearing my voice sometimes saying it, so I'm sure it rings hollow in some cases on these calls. But, you know, unfortunately, we're, like I said in the open air, we're hostage to a lot of our customers' success and their product launches in some cases. So it's been a long wait, but I will say we're starting to see some, you know, initial POs. we're seeing some qualification activity uh beyond just uh we're doing testing it's more site visits and and things like that more on the pre-production launch areas uh but i don't have paper in hand that to talk about you know dollars and figures and things like that i wish i did but we're definitely you know we have a lot of hooks in the water as we've talked about on every call and that's been part of our diversification strategy is to really not rely on one one growth initiative to carry us through, and we're, you know, we're working hard to land multiples. And, you know, I'm hoping over the next, you know, 12 to 18 months here, we land multiple large opportunities, and I'm in a much different spot talking about the revenue increases and the profit increases than the waiting for qual to complete position.

I mean, can you kind of, maybe if you can't quantify it qualitatively, how you guys feel about the potential opportunities now compared to historically?

We believe in all the opportunities, and we're doing them all because they're what we call chunks of additional revenue to the business. You know, nothing's a $1 million adder. They're all $5 to $20 million potential adders to the business, so that if we actually hit a couple of them, it becomes a meaningful increase to the bottom line and gets us closer to our scale ambitions because we're still subscale at this point.

And, you know, we also want to be in the unique position where we're a sole supplier or we're locked in with a great relationship. I guess the testimony being we've been through it as partners for, what, like three, four, five years with these companies, and they're depending on us, we're depending on them, and things are progressing. And the glimmer of light when you see the progress is what this is all about because we're incredibly impatient in the roles that we do and as shareholders with the insiders owning almost 40% of the company. We're incredibly impatient. So we're pushing as hard as we possibly can. But then again, we have a much better understanding of the process and what they're going through. They're playing for the big W, too, in the markets with our products.

So maybe you can refresh my memory. I know you guys have obviously had some big deals over time here, but have you ever had multiple, we call it a couple million-plus dollars deals hit all within like the same year, year and a half or two?

Not in recent memory, no. It would be back before probably 2010 that we really were in some of those activities.

So what you're saying is that the potential is there for that to happen again?

Well, that's the position that we're playing for.

I mean, we've invested a lot of money and effort in a lot of new products across both businesses. not just to spend the money obviously we're spending the money ahead of revenue to fuel some of our growth ambitions and you know some of these projects just take a lot longer than you ever would expect I mean our biggest customer in medical you know it was six years from when our battery was developed before the product actually launched with the medical customer so it was a lot of sitting on your hands waiting, but now they're one of our best customers and one of our bigger customers, which is fantastic, and we have a great relationship. So, it takes longer than you want

in some cases, for sure. Okay. All right. Thank you. Thank you, Will. Thank you. I am showing no other questions at this time, so I would now like to turn it back to Mike Manna for closing remarks.

Thank you, everyone, for participating in today's call. We look forward to seeing you next time on our Q3 2025 call. Have a great day.

This does conclude the program. You may now disconnect.