Welcome to the Ultralife Corporation Second Quarter 2025 Conference Call. [Operator Instructions] 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 Villalta of -- excuse me line, 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's 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 onetime adjustment of $0.3 million. Net profit was $0.9 million, which resulted in $0.05 EPS on a GAAP 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 Systems segment, which negatively affected gross margin. Despite these pressures, we maintained our focus on growth continuing 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 of an 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 Mississauga operation and incurred some onetime costs 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 Electrochem acquisition, with over $0.7 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 30, 2025. We have also updated our investor presentation in the Investor Relations section of our website and will file our Form 10-Q with the SEC shortly. Consolidated revenues totaled $48.6 million compared to $43 million for the second quarter of 2024. Revenues from our Battery & Energy Products 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 Systems 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 64-36 for the 2024 second quarter, highlighting…

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 Electrochem acquisition into Ultralife back office, successfully migrating e- mail office and ERP systems as planned in Q2. We are transitioning the balance of manufacturing support systems in Q3, which will conclude the onetime costs associated with these activities. We continue to expand vertical integration opportunities enabled by the acquisition of Electrochem, allowing us to incorporate Electrochem cells into existing pack assemblies and broaden our addressable market in areas such as pipeline inspection, seismic telemetry and sonobuoys. We are qualifying cells with several oil and gas customers to enable transition of their battery packs to utilize Electrochem 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 & Energy and Communications businesses. We experienced headwinds in both product mix and order flow in Q2 and 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,…

[Operator Instructions] Our first question today is from John Deysher from Pinnacle.

Just a couple of quick questions. Do you have any feel for what the tariffs cost you this past quarter?

Absolutely. $539,482 less $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 you have to go through something like they have 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 tariffs, how do you see that impacting the third quarter tariffs?

Well, I think it's important to note, we've been -- 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 5, 6, 7 years ago, except for that period of time when it really expanded to 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 to see that really exorbinant tariffs, but we're kind of sitting and waiting with some of that goes on every day with 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.

Yes.

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, do you -- 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 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. And 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?

Yes. Discovery ends, It's all public information, the discovery ends in the first quarter of 2026, with the trial planned for midyear of 2026.

Okay. it's all public. So is the amount that you were 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...

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.

Okay. That's great. I appreciate the color. And good luck.

Our next question is from Jake Patterson with Talanta Investment Group.

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 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 2 end markets, medical and oil and gas?

Sure. When it comes to oil and gas, it comes down to 2 numbers. It comes down to what is the index and the WTI this morning was a tad under $65. And the Brent index is about $4, $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 we know over the last couple of 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 profit -- their breakeven 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. And then I...

It's just the for orders. And I will point, Jake, that what was interesting about the comparison, Q2 of last year of 2024 was the second largest medical sales volume in the history of the company. And it's just 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's just a time game it all evens out.

Yes. And what we've been hearing from customers is some of them are -- they're being cautious with their cash. They're trying to manage cash. They're paying for tariff charges on things that -- when they show up. So you got to make sure that you can pay your tariffs and they're being very careful and studious with their order flow.

Got it. Okay. And then 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 probably...

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 mix 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 in 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. .

Okay. 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, a reason we shouldn't see margins kind of back into a high to mid-20s range at some point?

Yes. In my closing remarks that I did say we are seeing a 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 far, it's looking up.

And then once Comm Systems, the order flows returned to a more expected level their margins are generally higher than battery and energy products. So the mix impact on the Comm Systems -- it's 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 in some cases, higher.

Yes. No, absolutely. That's pretty much it.

So our focus is the officers of the company is what do we have to do, what 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 out there early day with looking at best alternatives for execution to get the margins up on, let's say, on a static mix.

[Operator Instructions] Our next question comes from Will Lauber with Visionary Wealth Advisors.

Yes. That was a pretty crappy quarter. But you did -- I've never remember 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?

Well, Will, and we agree, it was a crappy quarter. Let's start there. We're not proud of it by any means. The -- there's a lot going on. There has been a lot going on. I sit on these calls time after time saying we're in qual, we're in qual, we're in qual. And I get sick of hearing my voice sometimes saying it. So I'm sure it rings hollow in some cases on these calls. But Unfortunately, we're -- like I said in the open air, we're hostage to a lot of our customers' success in their product launches in some cases. So it's been a long wait, but I will say we're starting to see some initial POs. We're seeing some qualification activity beyond just we're doing testing. It's more site visits and things like that, more on the preproduction launch areas. But I don't have paper in hand to talk about dollars and figures and things like that. I wish I did. But we're definitely -- we have a lot of hooks in the water, as we've talked about on every call, and it's been part of our diversification strategy is to really not rely on 1 growth initiative to carry us through, and we're working hard to land multiples. And I'm hoping over the next 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 Quala 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 and...

Well, 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. Nothing's a $1 million adder. They're all $5 million 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 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 like 3, 4, 5 years with these companies, and they're depending on us. We're depending on them. And things are progressing. And that's -- 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 2 in the markets with our products.

Okay. So maybe you can refresh my memory. I know you guys have obviously had some big deals over time here, but you ever had multiple I would call it a couple of million plus dollars deals hit all within like the same year, 1.5 years or 2?

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

And so what you're saying is that is -- the potential is there for that to happen again?

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

Yes. 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 some of these projects just take a lot longer than you ever would expect. I mean our biggest customer in medical -- it was 6 years from when our battery was developed before the product actually launched with the medical customer. So it was a lot of hand 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.

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. Bye now.

This does conclude the program. You may now disconnect.