Ultralife(ULBI) - 2022 Q4 - Annual Report

PART I This section provides a comprehensive overview of Ultralife Corporation's business, including its segments, products, history, operations, and competitive landscape ITEM 1. BUSINESS Ultralife Corporation provides power solutions and communications/electronics systems to government, defense, and commercial sectors globally, focusing on custom-engineered solutions and continuous growth General Business Overview Ultralife Corporation specializes in designing and manufacturing power and communications systems for global government, defense, and commercial sectors - Ultralife Corporation designs and manufactures power and communications systems, including rechargeable and non-rechargeable batteries, charging systems, and custom-engineered solutions for government, defense, and commercial customers globally[17] - The company's products are sold through OEMs, industrial and defense supply distributors, and directly to U.S. and foreign defense departments, with strong brand recognition[18] - Ultralife reports in two operating segments: Battery & Energy Products and Communications Systems, with segment performance measured at the gross profit level[19] Battery & Energy Products Segment This segment focuses on manufacturing and marketing advanced non-rechargeable and rechargeable battery solutions and charging systems - The Battery & Energy Products segment manufactures and markets Lithium Manganese Dioxide, Lithium Manganese Dioxide Carbon Monofluoride hybrid, and Lithium Thionyl Chloride non-rechargeable batteries (9-volt, cylindrical, thin cell) for applications like smoke alarms, wireless security, military radios, and medical devices[20] - Lithium batteries offer significant advantages over other non-rechargeable technologies, including higher energy density, lighter weight, longer operating time, longer shelf life, and wider operating temperature range[20] - The segment also develops and markets lightweight, high-energy Lithium-ion and Nickel Metal Hydride (NiMH) rechargeable batteries and charging systems for communications, medical, and portable electronic devices[21] Battery & Energy Products Segment Financials (2022) | Metric | Value (in thousands) | | :----- | :------------------- | | Revenues | $119,995 | | Gross Profit | $26,154 | Communications Systems Segment This segment designs and manufactures robust communications systems and accessories primarily for military and commercial applications - The Communications Systems segment designs and manufactures communications systems and accessories under McDowell Research and AMTI brands, supporting military requirements with products like RF amplifiers, power supplies, and integrated communication systems for fixed or vehicle applications[24][25] - Commercial products integrate information technology equipment and power conversion into rugged cases for automotive, cellular carriers, and manufacturing industries[26] Communications Systems Segment Financials (2022) | Metric | Value (in thousands) | | :----- | :------------------- | | Revenues | $11,845 | | Gross Profit | $3,246 | Corporate Operations This section details the allocation of corporate income and expenses, including research and development and administrative costs, without direct revenue generation - Corporate reports the balance of income and expense, including research and development, and selling, general and administrative expenses, with no direct revenues[27] Corporate Operating Expenses (2022) | Metric | Value (in thousands) | | :----- | :------------------- | | Operating Expenses | $29,271 | Company History and Acquisitions Ultralife's history includes its formation, public offering, and strategic acquisitions aimed at expanding its product portfolio and market reach - Ultralife was formed in December 1990, acquired Kodak's 9-volt Lithium Manganese Dioxide battery technology in March 1991, and went public in December 1992[30] - Key acquisitions include ABLE New Energy Co., Ltd. (2006) for Lithium batteries, McDowell Research, Ltd. (2006) for military communications, Accutronics Limited (2016) for smart batteries, Southwest Electronic Energy Corporation (SWE, 2019) for high-performance smart battery systems, and Excell Battery Canada Inc. (2021) for smart battery systems in industrial markets[31][32][35][36][37] - The Excell acquisition in 2021 aimed to diversify commercial revenue, expand into new OEM device verticals, and scale the Battery & Energy Products business[37] Products, Services and Technology The company offers a diverse range of non-rechargeable and rechargeable batteries, along with advanced communications systems, leveraging proprietary technologies - Non-rechargeable batteries include Lithium Manganese Dioxide, Lithium Manganese Dioxide Carbon Monofluoride hybrid, and Lithium Thionyl Chloride technologies, offering advantages like lighter weight, longer operating time, and stable power[38][39] - Rechargeable batteries, primarily Lithium-ion and Nickel Metal Hydride, are designed for high energy density, long cycle life, and design flexibility, serving military, medical, and portable electronic devices[46][47][48] - Communications Systems products include RF amplifiers, integrated systems (vehicle-mounted, SATCOM), and power systems for military and commercial applications, designed for extreme environments[53][54][55][56] Sales and Marketing Strategy Ultralife employs a multi-channel sales approach, targeting commercial OEMs and government agencies globally through direct sales, agents, and distributors - The company employs sales and marketing personnel in North America, Europe, and Asia, selling directly to commercial customers (OEMs) and government/defense agencies, and through sales agents, distributors, and retailers[58][59] - A significant portion of business comes from U.S. and foreign government contracts, which are subject to procurement laws and competitive bidding processes[60] Sales to Major Customer and Geographic Breakdown | Metric | 2022 (in thousands) | 2021 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Sales to L3Harris Technologies | 17% of total revenues | 20% of total revenues | | Total U.S. Sales | $67,914 | $48,819 | | Total Foreign Sales | $63,926 | $49,448 | Backlog by Segment (as of December 31) | Segment | 2022 (in thousands) | 2021 (in thousands) | YoY Change (%) | | :----------------------- | :------------------ | :------------------ | :------------- | | Battery & Energy Products | $88,600 | $55,300 | 60% | | Communications Systems | $22,400 | $8,400 | 167% | | Total Backlog | $111,000 | $63,700 | 74.2% | Intellectual Property The company protects its innovations through a combination of patents, trade secrets, and trademarks, emphasizing employee expertise as a core asset - Ultralife relies on patented and unpatented proprietary information, know-how, and trade secrets, holding 36 U.S. patents and numerous international patents[73][74] - The company's success is primarily dependent on the expertise of its employees rather than solely on patent protection[73] - Ultralife protects its proprietary rights through confidentiality agreements with employees, customers, consultants, and strategic partners, and owns numerous registered trademarks[75][76] Manufacturing and Supply Chain Ultralife's manufacturing operations rely on a global supply chain, which faced significant disruptions and cost inflation in 2022 - Ultralife manufactures products from purchased raw materials and components, with ISO 9001 and ISO 13485 certified facilities in North America, Europe, and Asia[77] - Raw material prices and availability were impacted by COVID-19 and supply chain disruptions in 2022, with potential continued effects in 2023[79] - Certain materials for Battery & Energy Products are from single or limited sources, posing risks of supply interruption, though alternative sources are believed to be available in some cases[81][82] Inventory Carrying Value (as of December 31, in thousands) | Segment | 2022 | 2021 | YoY Change (%) | | :----------------------- | :---------- | :---------- | :------------- | | Battery & Energy Products | $32,771 | $25,677 | 28% | | Communications Systems | $8,421 | $7,512 | 12% | Research and Development The company invests in R&D to drive new product development in battery and power solutions, with anticipated expenditure increases for future initiatives Research and Development Expenditures (in thousands) | Category | 2022 | 2021 | YoY Change (%) | | :------------------------------------- | :------ | :------ | :------------- | | Total R&D Expenditures | $7,874 | $8,042 | -2.1% | | Customer Sponsored R&D (in COGS) | $793 | $1,216 | -34.8% | - The decrease in customer-sponsored R&D in 2022 was offset by increased costs for engineering resources to support new product development in the Battery & Energy Products segment, including the full-year impact of Excell's operations[88] - Future R&D expenditures are expected to increase by 10% or more over 2022 levels, driven by initiatives in new battery and power solutions, Thionyl Chloride battery projects, and Communications Systems products[89] Safety, Regulatory, and Environmental Compliance Ultralife adheres to stringent international regulations governing battery transportation, hazardous substances, export controls, and conflict minerals - Lithium batteries are subject to strict transportation regulations (PHMSA, ICAO, IATA, IMDG) requiring specific testing, packaging, labeling, and shipping, which the company believes it complies with[94] - The company complies with environmental directives such as EU RoHS, EU Battery Directive, and China RoHS 2, which restrict hazardous substances and mandate battery recycling and disposal responsibilities[95][96][98] - Operations are subject to U.S. and international trade and export controls (ITAR, EAR), with compliance crucial to avoid fines or loss of export privileges[102][103][104][106] - The Dodd-Frank Act requires disclosure on 'conflict minerals,' necessitating due diligence inquiries of suppliers to ascertain mineral origins[111] Competition The company operates in highly competitive markets, differentiating itself through design flexibility, performance, and customer support against a wide range of competitors - Competition in battery and communications systems markets is intense, ranging from startups to major international companies with greater resources[112] - Ultralife competes on design flexibility, performance, price, reliability, and customer support, but faces risks of technological obsolescence and rapid market acceptance of competitors' products[112] - The Lithium battery cell industry has high technological and economic barriers to entry, requiring large capital expenditures and significant production/design expertise[113] Employees This section provides an overview of Ultralife's workforce, categorized by function, and notes the absence of labor union representation Employee Count (as of December 31, 2022) | Category | Number of Employees | | :------------------- | :------------------ | | Production | 424 | | Sales and Administration | 78 | | Research and Development | 45 | | Total | 547 | - None of Ultralife's employees are represented by a labor union[114] ITEM 1A. RISK FACTORS Ultralife faces numerous risks, including adverse impacts from economic conditions, supply chain disruptions, and inflation, which significantly affected gross margins in 2022 - Economic conditions, including inflation and supply-chain disruptions, adversely affected business, revenues, and earnings in 2022, leading to a gross margin reduction from 25.1% in 2021 to 22.3% in 2022[116][193] - Key contributing factors to gross margin decline included rapid cost inflation on raw materials, incremental fees for expedited critical components, and internal manufacturing inefficiencies due to irregular component availability[116][193] - A significant portion of revenues (17% in 2022, 20% in 2021) is derived from a single major customer, L3Harris Technologies, a global defense primary contractor, posing a concentration risk[121][296] - Operations in China are subject to unique risks, including regulatory changes, labor laws, environmental regulations, taxes, intellectual property enforcement, currency fluctuations, and geopolitical factors[127][344] - The company experienced an unauthorized entry into its IT systems in January 2023, causing a partial disruption of business operations and production/shipping downtime of approximately two weeks[129][130] - Rising interest rates will increase the cost of variable borrowings under the Amended Credit Facilities, adversely affecting earnings[145][146] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report for the fiscal year ended December 31, 2022 - No unresolved staff comments were reported[170] ITEM 2. PROPERTIES Ultralife Corporation owns two buildings in Newark, New York (250,000 sq ft) and one in Missouri City, Texas (69,000 sq ft), primarily serving the Battery & Energy Products segment - Ultralife owns two buildings in Newark, New York (250,000 sq ft) and one in Missouri City, Texas (69,000 sq ft), primarily for Battery & Energy Products operations[171] - Leased facilities include approximately 97,000 sq ft in Shenzhen, China; 25,000 sq ft in Newcastle-under-Lyme, UK; 24,000 sq ft in Canada (Calgary, Mississauga, Vancouver) for Battery & Energy Products, and 32,500 sq ft in Virginia Beach, Virginia for Communications Systems[171] - Research and development efforts are conducted across multiple locations, including Newark, New York; Missouri City, Texas; Newcastle-under-Lyme, UK; Shenzhen, China; Canada; Tallahassee, Florida; and Virginia Beach, Virginia[171] ITEM 3. LEGAL PROCEEDINGS Ultralife Corporation is subject to routine legal proceedings and claims but believes their final disposition will not materially adversely affect the company's financial position, results of operations, or cash flows - The company is involved in legal proceedings and claims arising in the normal course of business[172][341] - Management believes the ultimate resolution of these matters will not have a material adverse effect on the company's financial position, results of operations, or cash flows[172][341] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Ultralife Corporation's operations - Mine Safety Disclosures are not applicable to the registrant[173] PART II This section covers Ultralife's market for common equity, management's financial discussion, and the company's audited financial statements and related disclosures ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Ultralife's common stock is listed on the NASDAQ Global Market under 'ULBI', with approximately 5,000 registered holders as of March 1, 2023, and no cash dividends have ever been paid - Ultralife's common stock is listed on the NASDAQ Global Market under the symbol 'ULBI'[175] - As of March 1, 2023, there were approximately 5,000 registered holders of common stock[175] - The company did not purchase any of its common stock in 2022 or 2021[176] - Ultralife has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, intending to retain earnings for future operations and expansion[177] ITEM 6. [RESERVED] This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ultralife's consolidated revenues increased by 34.2% to $131.8 million in 2022, driven by strong growth in Battery & Energy Products, while gross margin decreased to 22.3% due to supply chain disruptions and cost inflation Consolidated Financial Highlights (in thousands, except EPS) | Metric | 2022 | 2021 | YoY Change ($) | YoY Change (%) | | :-------------------------------------- | :---------- | :---------- | :------------- | :------------- | | Revenues | $131,840 | $98,267 | $33,573 | 34.2% | | Cost of Products Sold | $102,440 | $73,625 | $28,815 | 39.1% | | Gross Profit | $29,400 | $24,642 | $4,758 | 19.3% | | Gross Margin | 22.3% | 25.1% | -2.8 pp | | | Operating Expenses | $29,271 | $24,607 | $4,664 | 19.0% | | Operating Income | $129 | $35 | $94 | 268.6% | | Net Loss Attributable to Ultralife | $(119) | $(234) | $115 | 49.1% | | Net Loss Per Diluted Share | $(0.01) | $(0.01) | $0.00 | 0.0% | | Adjusted EBITDA | $6,575 | $4,418 | $2,157 | 48.8% | - The 280-basis point decrease in gross margin was primarily due to supply chain disruptions, rapid cost inflation not fully offset by timely price increases, incremental fees for expedited components, and internal manufacturing inefficiencies[193][208] - Operating expenses increased by $4.7 million, mainly due to the full-year contribution of Excell ($4.4 million) and a one-time severance charge of $0.8 million for the former President and CEO[195][212][213] - Cash used in operations was $1.3 million in 2022, compared to $4.3 million generated in 2021, primarily due to an $8.7 million increase in inventory procurement to manage supply chain challenges and meet customer orders[225] General Overview Ultralife's strategic focus on power and communications solutions, growth through acquisitions, and the impact of ongoing supply chain challenges are discussed - Ultralife provides power solutions and communications/electronics systems to government, defense, and commercial customers globally, operating in Battery & Energy Products and Communications Systems segments[182][183] - The company pursues growth through mergers, acquisitions, and joint ventures to broaden product scope and market opportunities, with recent acquisitions including Accutronics (2016), SWE (2019), and Excell (2021)[184][185][186][187] - COVID-19 continued to cause supply chain disruptions and increased lead times in 2022, making financial impact estimation difficult, but demand for products remained strong, evidenced by a 74.2% increase in backlog to $111.0 million[191] Results of Operations (2022 vs. 2021) This section analyzes the company's financial performance, highlighting revenue growth, gross margin decline, and changes in operating expenses and net loss Revenue Breakdown (in thousands) | Segment | 2022 | 2021 | YoY Change ($) | YoY Change (%) | | :----------------------- | :---------- | :---------- | :------------- | :------------- | | Battery & Energy Products | $119,995 | $87,083 | $32,912 | 37.8% | | Communications Systems | $11,845 | $11,184 | $661 | 5.9% | | Total Revenues | $131,840 | $98,267 | $33,573 | 34.2% | - Battery & Energy Products revenue growth was primarily driven by the full-year contribution of Excell ($27.0 million) and organic sales growth in the oil & gas market (14.6%), while medical sales were slightly down due to component shortages[192][204] - Communications Systems revenue increase was due to the receipt of components for large international and U.S. Army Leader radio program orders[192][205] Gross Profit Breakdown (in thousands) | Segment | 2022 Gross Profit | 2022 Gross Margin | 2021 Gross Profit | 2021 Gross Margin | YoY Margin Change (pp) | | :----------------------- | :---------------- | :---------------- | :---------------- | :---------------- | :--------------------- | | Battery & Energy Products | $26,154 | 21.8% | $21,062 | 24.2% | -2.4 | | Communications Systems | $3,246 | 27.4% | $3,580 | 32.0% | -4.6 | | Total Gross Profit | $29,400 | 22.3% | $24,642 | 25.1% | -2.8 | - Operating expenses as a percentage of revenues improved to 22.2% in 2022 (21.6% excluding severance) from 25.0% in 2021[195][213] - Interest and financing expense increased by $0.7 million to $0.95 million in 2022 due to debt financing for the Excell acquisition[196][214] - The company reported a net loss attributable to Ultralife of $0.119 million in 2022, an improvement from $0.234 million in 2021, with diluted EPS remaining at $(0.01) for both years[198][216] Adjusted EBITDA This section provides a reconciliation and analysis of Adjusted EBITDA, a key non-GAAP metric used to evaluate the company's operational profitability - Adjusted EBITDA, a non-GAAP measure, is used to assess operating performance and enhance comparability, defined as net income (loss) before net interest expense, income taxes, depreciation, amortization, stock-based compensation, and certain non-recurring items[218] Adjusted EBITDA Reconciliation (in thousands) | Metric | 2022 | 2021 | | :-------------------------------------- | :------ | :------ | | Net loss attributable to Ultralife | $(119) | $(234) | | Add: | | | | Interest and financing expense, net | $951 | $242 | | Income tax (benefit) provision | $(326) | $79 | | Depreciation expense | $3,177 | $2,906 | | Amortization of intangible assets | $1,282 | $633 | | Stock-based compensation expense | $776 | $671 | | Non-cash purchase accounting adjustments| $55 | $121 | | Severance to Former President & CEO | $779 | $- | | Adjusted EBITDA | $6,575 | $4,418 | - Adjusted EBITDA increased by 48.8% to $6.6 million in 2022 from $4.4 million in 2021[199][223] Liquidity and Capital Resources This section details Ultralife's cash position, working capital, debt obligations, and capital allocation strategies, including the use of net operating loss carryforwards Liquidity Metrics (as of December 31, in thousands) | Metric | 2022 | 2021 | | :------------- | :-------- | :-------- | | Cash on Hand | $5,713 | $8,413 | | Working Capital| $50,075 | $47,600 | | Current Ratio | 2.7 | 3.5 | - Cash decreased by $2.7 million in 2022, primarily due to $8.7 million used for inventory procurement amidst challenging supply chain conditions[224][225] - Cash used in investing activities was $1.7 million for capital expenditures in 2022, reflecting investments in equipment for new products[226] - Cash provided by financing activities was $0.5 million in 2022, mainly from net borrowings on the credit facility for raw material purchases[227] - As of December 31, 2022, the company had $8.2 million outstanding on the Term Loan Facility and $13.3 million on the Revolving Credit Facility, and was in full compliance with debt covenants[229][325] - The company has significant U.S. net operating loss carryforwards ($41.0 million) and tax credit carryforwards ($2.6 million) available to offset future taxable income[150][243][364] Critical Accounting Policies and Estimates This section outlines the significant accounting policies and estimates that require management's judgment, such as revenue recognition, inventory valuation, and goodwill impairment - Revenue is recognized upon transfer of control to the customer, generally upon shipment, or delivery for specific contract terms, with extended warranty contracts recognized evenly over their term[234][235][286][287] - Inventories are valued at the lower of cost (FIFO method) or net realizable value, with provisions for excess, obsolete, or slow-moving inventory based on future demand and market conditions[237][258][280] - Goodwill and indefinite-lived intangible assets are not amortized but are tested for impairment annually or when circumstances indicate, using discounted cash flow models and other income-based valuation models[238][239][261][283][284] - Income taxes are accounted for using the asset and liability method, with deferred tax assets and liabilities determined by temporary differences, and a valuation allowance recognized if deferred tax asset realizability is not more likely than not[242][295] - Stock-based compensation cost is measured at grant date fair value (using Black-Scholes or Monte Carlo simulation) and expensed over the employee's service period[245][301][356] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Ultralife Corporation is not required to provide quantitative and qualitative disclosures about market risk - Ultralife Corporation is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company[249] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents Ultralife Corporation's audited consolidated financial statements for the years ended December 31, 2022 and 2021, including the balance sheets, statements of loss and comprehensive loss, changes in shareholders' equity, and cash flows - The financial statements include Consolidated Balance Sheets, Consolidated Statements of Loss and Comprehensive Loss, Consolidated Statements of Changes in Shareholders' Equity, and Consolidated Statements of Cash Flows for 2022 and 2021[252] - Freed Maxick CPAs, P.C. provided an unqualified opinion on the financial statements, stating they present fairly, in all material respects, the financial position and results of operations in conformity with GAAP[253] - Critical audit matters identified were the estimate for excess, obsolete, and slow-moving inventory reserve and the goodwill impairment analysis, both requiring a high degree of auditor judgment[257][259][261][262] Report of Independent Registered Public Accounting Firm This section presents the auditor's opinion on the consolidated financial statements and highlights critical audit matters - Freed Maxick CPAs, P.C. issued an unqualified opinion on Ultralife's consolidated financial statements for 2022 and 2021, affirming fair presentation in accordance with GAAP[253] - Critical audit matters included the estimate for excess, obsolete, and slow-moving inventory reserve and the goodwill impairment analysis, both involving significant auditor judgment[257][259][261][262] Consolidated Balance Sheets This section provides a snapshot of Ultralife's financial position, detailing assets, liabilities, and shareholders' equity at year-end Consolidated Balance Sheet Highlights (as of December 31, in thousands) | Asset/Liability/Equity | 2022 | 2021 | YoY Change ($) | | :--------------------- | :---------- | :---------- | :------------- | | Total Current Assets | $78,988 | $66,524 | $12,464 | | Total Assets | $168,430 | $159,538 | $8,892 | | Total Current Liabilities| $28,913 | $18,924 | $9,989 | | Total Liabilities | $52,027 | $41,795 | $10,232 | | Total Shareholders' Equity| $116,403 | $117,743 | $(1,340) | - Cash decreased from $8.4 million in 2021 to $5.7 million in 2022, while inventories increased from $33.2 million to $41.2 million[267] - Long-term debt, net, increased from $18.9 million in 2021 to $19.3 million in 2022[267] Consolidated Statements of Loss and Comprehensive Loss This section presents the company's revenues, expenses, net loss, and comprehensive loss for the reported fiscal periods Consolidated Statements of Loss and Comprehensive Loss (Years Ended December 31, in thousands, except per share) | Metric | 2022 | 2021 | | :-------------------------------------- | :---------- | :---------- | | Revenues | $131,840 | $98,267 | | Gross profit | $29,400 | $24,642 | | Operating income | $129 | $35 | | Loss before income taxes | $(446) | $(151) | | Income tax (benefit) provision | $(326) | $79 | | Net loss | $(120) | $(230) | | Loss attributable to Ultralife Corporation| $(119) | $(234) | | Net loss per share (Basic & Diluted) | $(0.01) | $(0.01) | | Comprehensive loss attributable to Ultralife Corporation | $(2,216) | $(105) | - Foreign currency translation adjustments contributed to a significant increase in comprehensive loss in 2022, reaching $(2,097) thousand compared to $129 thousand in 2021[268] Consolidated Statements of Changes in Shareholders' Equity This section details the changes in Ultralife's equity accounts, including net loss, stock-based compensation, and foreign currency adjustments - Total Ultralife Corporation equity decreased from $117.7 million in 2021 to $116.3 million in 2022[269] - The accumulated other comprehensive loss increased significantly from $(1.653) million in 2021 to $(3.750) million in 2022, primarily due to foreign currency translation adjustments of $(2.097) million[269] - Stock-based compensation expense (stock options and restricted stock) totaled $776 thousand in 2022, up from $671 thousand in 2021[269][352] Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities for the fiscal periods Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Activity | 2022 | 2021 | | :-------------------------------------- | :---------- | :---------- | | Net cash (used in) provided by operating activities | $(1,263) | $4,325 | | Net cash used in investing activities | $(1,679) | $(26,333) | | Net cash provided by financing activities | $518 | $19,642 | | Decrease in cash | $(2,700) | $(2,240) | | Cash - End of year | $5,713 | $8,413 | - Cash used in operating activities in 2022 was primarily due to an $8.7 million increase in inventories[272] - Investing activities in 2021 included $23.5 million for the Excell acquisition, which was not present in 2022[272] - Interest paid increased significantly from $142 thousand in 2021 to $930 thousand in 2022[272] Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the amounts presented in the primary financial statements Note 1 - Summary of Operations and Significant Accounting Policies This note describes Ultralife's business, consolidation principles, and key accounting policies for revenue, inventory, and R&D - Ultralife Corporation and its subsidiaries (ABLE, Accutronics, SWE, Excell, Ultralife India) offer power solutions and communications/electronics systems globally[273][274] - Financial statements are prepared in accordance with GAAP, requiring management estimates for goodwill, inventory reserves, deferred tax assets, and business combinations[276] - Revenue is recognized upon transfer of control, typically at shipment, with extended warranty revenue recognized over the contract term[286][287] - Research and development expenditures were $7.874 million in 2022 and $8.042 million in 2021, including customer-sponsored activities[293] - One customer, a large global defense primary contractor, accounted for 17% of total consolidated revenues in 2022 and 20% in 2021[296] Note 2 – Acquisition This note details the acquisition of Excell Battery Canada Inc., including the purchase price allocation and its financial contribution - On December 13, 2021, Ultralife acquired Excell Battery Canada Inc. and its subsidiaries (Excell) for a net purchase price of $23.519 million in cash[308] - Excell, a designer and manufacturer of high-performance smart battery systems, serves industrial markets including downhole drilling, medical devices, and automated meter reading[310] - The acquisition was funded by cash on hand and borrowings under Amended Credit Facilities[312] Excell Acquisition Purchase Price Allocation (in thousands) | Asset/Liability Acquired | Value | | :----------------------- | :---------- | | Cash | $736 | | Accounts receivable | $3,570 | | Inventories | $3,622 | | Property, plant and equipment | $429 | | Goodwill | $10,989 | | Other intangible assets | $8,870 | | Net assets acquired | $24,256 | - For 2022, Excell contributed $28.145 million in revenue and $1.844 million in pre-tax income[320] Note 3 – Debt This note outlines Ultralife's credit facilities, outstanding debt, interest terms, and future principal repayment obligations - Ultralife entered into the Third Amendment Agreement in November 2022, amending its Credit Agreement to replace LIBOR with SOFR and facilitate Excell Battery Canada's joinder as a guarantor[323] - The Amended Credit Agreement provides for a 5-year, $10.0 million Term Loan Facility and extends the $30.0 million Revolving Credit Facility through May 30, 2025[324] Outstanding Debt (as of December 31, 2022, in thousands) | Debt Facility | Outstanding Principal | | :--------------------- | :-------------------- | | Term Loan Facility | $8,167 | | Revolving Credit Facility| $13,330 | - Borrowings are secured by substantially all company assets, with interest accruing at Daily Simple SOFR Rate plus an index spread adjustment and applicable margin[329] Future Minimum Principal Repayment Obligations (as of December 31, 2022, in thousands) | Year | Amount | | :--------- | :----- | | 2023 | $2,000 | | 2024 | $2,000 | | 2025 | $15,330 | | 2026 | $2,000 | | 2027 | $167 | | Thereafter | $0 | | Total | $21,497 | Note 4 - Supplemental Balance Sheet Information This note provides additional detail on specific balance sheet accounts, including cash, inventory, property, plant, equipment, and goodwill Cash and Restricted Cash (as of December 31, in thousands) | Category | 2022 | 2021 | | :------------- | :------ | :------ | | Cash | $5,634 | $8,329 | | Restricted cash| $79 | $84 | | Total | $5,713 | $8,413 | Inventory Composition (as of December 31, in thousands) | Category | 2022 | 2021 | | :-------------- | :---------- | :---------- | | Raw materials | $29,200 | $21,660 | | Work in process | $2,757 | $4,227 | | Finished products | $9,235 | $7,302 | | Total | $41,192 | $33,189 | Property, Plant and Equipment (as of December 31, in thousands) | Category | 2022 | 2021 | | :----------------------------- | :---------- | :---------- | | Total Cost | $92,660 | $91,423 | | Less: Accumulated depreciation | $(70,944) | $(68,218) | | Net Total | $21,716 | $23,205 | - No goodwill impairment was identified in the annual test as of October 1, 2022[338] Goodwill by Segment (as of December 31, in thousands) | Segment | 2022 | 2021 | | :----------------------- | :---------- | :---------- | | Battery & Energy Products | $25,935 | $26,575 | | Communications Systems | $11,493 | $11,493 | | Total Goodwill | $37,428 | $38,068 | Amortization of Other Intangible Assets (in thousands) | Financial Statement Caption | 2022 | 2021 | | :---------------------------------- | :----- | :----- | | Research and development expense | $97 | $118 | | Selling, general and administrative expense | $1,185 | $515 | | Total | $1,282 | $633 | Note 5 - Commitments and Contingencies This note discloses the company's contractual commitments, risks associated with foreign operations, and warranty obligations - Ultralife has commitments to purchase approximately $661 thousand of production machinery and equipment as of December 31, 2022[343] - The company's operating facility in China is subject to various risks, including regulatory changes, labor laws, environmental regulations, and geopolitical factors[344] - The former President and CEO, Michael D. Popielec, was involuntarily terminated on November 22, 2022, resulting in a one-time severance charge of $779 thousand in Q4 2022[345][346] Accrued Warranty Obligations (in thousands) | Metric | 2022 | 2021 | | :--------------------------- | :---- | :---- | | Beginning Balance | $133 | $149 | | Accruals for warranties issued | $287 | $142 | | Settlements made | $(97) | $(158) | | Ending Balance | $323 | $133 | Note 6 – Stock-Based Compensation This note details the company's stock-based compensation plans, related expenses, and outstanding stock options Non-Cash Stock Compensation Expense (in thousands) | Category | 2022 | 2021 | | :-------------- | :---- | :---- | | Stock options | $761 | $618 | | Restricted stock| $15 | $53 | | Total | $776 | $671 | - The 2014 Long-Term Incentive Plan (LTIP) was amended in July 2021 to increase authorized shares to 2,750,000, with grants available through June 2, 2024[354] - As of December 31, 2022, there were 1,425,693 stock options outstanding under the 2014 LTIP, with $691 thousand in unrecognized compensation costs expected to be recognized over 1.4 years[355][356] Stock Options Activity (Year Ended December 31, 2022) | Metric | Number of Shares | Weighted Average Exercise Price Per Share | | :----------------------------------- | :--------------- | :---------------------------------------- | | Shares under option – January 1 | 1,306,824 | $6.87 | | Options granted | 289,950 | $5.42 | | Options exercised | (59,500) | $3.82 | | Options forfeited or expired | (111,581) | $6.56 | | Shares under option – December 31| 1,425,693 | $6.72 | | Options exercisable – December 31 | 881,804 | $7.13 | - The weighted average fair value of options granted was $2.55 in 2022 and $2.90 in 2021[360] Note 7 - Income Taxes This note provides information on the company's income tax provision, effective tax rate, and utilization of net operating loss and tax credit carryforwards Income Tax (Benefit) Provision (Years Ended December 31, in thousands) | Category | 2022 | 2021 | | :------- | :------ | :----- | | Current | $636 | $226 | | Deferred | $(962) | $(147) | | Total| $(326) | $79 | - The effective tax rate was 73.1% in 2022 compared to (52.3%) in 2021, primarily due to the geographic mix of earnings[215][364] - As of December 31, 2022, Ultralife had $40.952 million in U.S. net operating loss carryforwards (expiring 2025-2035) and $2.6 million in U.S. tax credit carryforwards (expiring 2028-2042), which are expected to be fully realized[364] - A valuation allowance of approximately $10.0 million is maintained for U.K. net operating loss carryforwards due to limitations on utilization[365] Note 8 – Operating Leases This note details the company's operating lease arrangements, including lease costs, right-of-use assets, and future minimum lease payments Lease Expense (Years Ended December 31, in thousands) | Category | 2022 | 2021 | | :---------------- | :---- | :---- | | Operating lease cost| $894 | $762 | | Variable lease cost | $95 | $79 | | Total lease cost| $989 | $841 | - Operating lease right-of-use assets were $2.187 million and operating lease liabilities were $2.202 million as of December 31, 2022[370] - The weighted-average remaining lease term was 4.4 years, with a weighted-average discount rate of 4.5% as of December 31, 2022[370] Future Minimum Lease Payments (as of December 31, 2022, in thousands) | Year | Amount | | :--------- | :----- | | 2023 | $918 | | 2024 | $518 | | 2025 | $215 | | 2026 | $217 | | 2027 | $217 | | Thereafter | $425 | | Total | $2,510 | Note 9 - 401(k) Retirement Benefit Plan This note describes the company's defined contribution 401(k) plan and its matching contributions to employee accounts - Ultralife maintains a defined contribution 401(k) plan for substantially all employees[371] - The company matched 100% on the first 3% and 50% on the next 2% contributed by employees, up to a maximum of 4% of income, contributing $600 thousand in 2022 and $586 thousand in 2021[371] Note 10 - Business Segment Information This note provides detailed financial information for Ultralife's two operating segments, including revenue and contribution breakdowns - Ultralife reports in two operating segments: Battery & Energy Products and Communications Systems, with performance evaluated at the gross profit level[372] Segment Revenue and Contribution (2022, in thousands) | Segment | Revenue | Segment Contribution | | :----------------------- | :---------- | :------------------- | | Battery & Energy Products | $119,995 | $26,154 | | Communications Systems | $11,845 | $3,246 | | Corporate | $- | $(29,271) | | Total | $131,840 | $129 | Commercial and Government/Defense Revenue (2022, in thousands) | Segment | Total Revenue | Commercial | Government/Defense | | :----------------------- | :------------ | :--------- | :----------------- | | Battery & Energy Products | $119,995 | $93,045 | $26,950 | | Communications Systems | $11,845 | $- | $11,845 | | Total | $131,840 | $93,045 | $38,795 | | Percentage | | 71% | 29% | U.S. and Non-U.S. Revenue (2022, in thousands) | Segment | Total Revenue | United States | Non-United States | | :----------------------- | :------------ | :------------ | :---------------- | | Battery & Energy Products | $119,995 | $58,820 | $61,175 | | Communications Systems | $11,845 | $9,094 | $2,751 | | Total | $131,840 | $67,914 | $63,926 | | Percentage | | 52% | 48% | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure for the fiscal year ended December 31, 2022 - No changes in or disagreements with accountants on accounting and financial disclosure were reported[382] ITEM 9A. CONTROLS AND PROCEDURES Ultralife's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, and internal control over financial reporting was also effective - The President and CEO, and Chief Financial Officer and Treasurer, evaluated and concluded that disclosure controls and procedures were effective as of December 31, 2022[383] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO Internal Control-Integrated Framework (2013)[385][386] - There were no changes in internal control over financial reporting during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[384] ITEM 9B. OTHER INFORMATION There is no other information to report under this item - No other information was reported under this item[387] PART III This section incorporates by reference information regarding directors, executive compensation, security ownership, related transactions, and principal accountant fees ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement[391] ITEM 11. EXECUTIVE COMPENSATION Details on executive compensation are incorporated by reference from the company's definitive proxy statement - Information on executive compensation is incorporated by reference from the Proxy Statement[392] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on security ownership of beneficial owners and management, along with equity compensation plan details, is incorporated by reference from the company's definitive proxy statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[393] Equity Compensation Plan Information (as of December 31, 2022) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :---------------------------------------------- | :------------------------------------------------------------------------------------------ | :------------------------------------------------------------------------------ | :-------------------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 1,425,693 | $6.72 | 763,617 | | Equity compensation plans not approved by security holders | - | - | - | | Total | 1,425,693 | $6.72 | 763,617 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[396] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning principal accountant fees and services is incorporated by reference from the company's definitive proxy statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[397] PART IV This section lists all exhibits and financial statement schedules filed with the 10-K report, along with the required signatures ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists all exhibits and financial statement schedules filed as part of the 10-K report, including acquisition agreements, organizational documents, credit agreements, and certifications - Financial statements and schedules are included in Part II, Item 8 of this Form 10-K[398] - Freed Maxick CPAs, P.C. (PCAOB ID 317) is the auditor, based in Rochester, New York[398] - Exhibits include various agreements such as Share Purchase Agreements for Excell and Southwest Electronic Energy, Credit and Security Agreements, and amendments[398][399] - Certifications (CEO, CFO, Section 1350) and Inline XBRL documents are also filed as exhibits[399] SIGNATURES The 10-K report is duly signed on behalf of Ultralife Corporation by its President, Chief Executive Officer, and Director, Michael E. Manna, and Chief Financial Officer and Treasurer, Philip A. Fain, along with other directors, as of March 31, 2023 - The report is signed by Michael E. Manna, President, Chief Executive Officer and Director, and Philip A. Fain, Chief Financial Officer and Treasurer, as well as other directors[405][406] - The signing date for the report is March 31, 2023[405][406]