# Ultralife Corp: Form 10-Q for the period ended Jun 30, 2023

- Company: [Ultralife Corp](/companies/ulbi.md) (CIK 875657)
- Form: 10-Q
- Filed: 2023-07-27
- Accepted by EDGAR: Jul 27, 2023, 07:31 ET
- Period: 2023-06-30
- Accession: 0001437749-23-020795
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875657/000143774923020795/ulbi20230630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875657/000143774923020795/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $42.7m | us-gaap:Revenues |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $74.6m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $32.1m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $56.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $10.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $18.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $1.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $3.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $5.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $10.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $3.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $3.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $3.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $3.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 16,144,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 16,141,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $386.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $1.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $8.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $87.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $175.4m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $29.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $55.7m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $22.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-06-30 | $2.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | $119.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,672 characters.

#### Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, changes in economic conditions including inflation and supply chain disruptions affecting our business, revenues and earnings adversely; the continued impact of COVID-19 causing delays in the manufacture and delivery of our mission critical products to end customers; our reliance on certain key customers; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; the unique risks associated with our China operations; breaches in information systems security and other disruptions in our information technology systems; potential disruptions in our supply of raw materials and components; fluctuations in the price of oil and the resulting impact on the demand for downhole drilling; our ability to retain top management and key personnel; our resources being overwhelmed by our growth; possible future declines in demand for the products that use our batteries or communications systems; safety risks, including the risk of fire; variability in our quarterly and annual results and the price of our common stock; rising interest rates increasing the cost of our variable borrowings; purchases by our customers of product quantities not meeting the volume expectations in our supply agreements; potential costs attributable to the warranties we supply with our products and services; our inability to comply with changes to the regulations for the shipment of our products; our ability to utilize our net operating loss carryforwards; our entrance into new end-markets which could lead to additional financial exposure; negative publicity concerning Lithium-ion batteries; possible impairments of our goodwill and other intangible assets; our exposure to foreign currency fluctuations; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; known and unknown environmental matters; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; our ability to comply with government regulations regarding the use of “conflict minerals”; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” “would,” “could,” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk factors or to publicly announce the results of any revisions to any of the forward looking statements in this report to reflect new information or risks, future events or other developments.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements and notes thereto in Part I, Item 1 of this Form 10-Q, and the consolidated financial statements and notes thereto and risk factors in our Annual Report on Form 10-K for the year ended December 31, 2022.

The financial information in this MD&A is presented in thousands of dollars, except for share and per share amounts, unless otherwise specified.

#### General

We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems related to those product lines. We continually evaluate ways to grow, including the design, development and sale of new products, expansion of our sales force to penetrate new markets and territories, as well as seeking opportunities to expand through acquisitions.

We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and foreign defense departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTITM, ABLETM, ACCUTRONICS™, ACCUPRO™, ENTELLION™, SWE Southwest Electronic Energy Group™, SWE DRILL-DATA™, SWE SEASAFE™, Excell Battery Group™ and Criterion Gauge brands. We have sales, operations and product development facilities in North America, Europe and Asia.

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges (See Note 10 in the notes to consolidated financial statements.)

Our website address is www.ultralifecorporation.com. We make available free of charge via a hyperlink on our website (see Investor Relations link on the website) our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written request to the attention of Philip A. Fain, CFO, Treasurer and Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.

#### Overview

Consolidated revenues of $42,692 for the three-month period ended June 30, 2023, increased by $10,566 or 32.9%, over $32,126 for the three-month period ended June 30, 2022, reflecting increases in government/defense sales of 111.5% and commercial sales of 9.2%. Sales for our Battery & Energy Products segment increased 12.3% from $30,140 in the second quarter of 2022 to $33,861 for the second quarter of 2023, and sales for our Communications Systems segment increased 344.6% from $1,986 to $8,831.

Gross profit was $10,588, or 24.8% of revenue, for the three-month period ended June 30, 2023, compared to $7,646, or 23.8% of revenue, for the same quarter a year ago. The 100-basis point improvement primarily resulted from higher factory volume and favorable product mix for our Communications Systems business.

Operating expenses increased to $6,923 for the three-month period ended June 30, 2023, compared to $6,853 for the three-month period ended June 30, 2022. The increase of $70 or 1.0% was primarily attributable to slightly higher new product development investments in the 2023 period. Operating expenses represented 16.2% of revenues compared to 21.3% of revenues for the year-earlier period.

Operating income for the three-month period ended June 30, 2023 was $3,665, or 8.6% of revenues, compared to $793, or 2.5% of revenues, for the year-earlier period. The increase in operating income resulted from the 32.9% increase in revenues leveraged by the 100-basis point improvement in gross margin and the 510-basis point improvement in operating expenses to revenues ratio.

Other income (expense) for the second quarter of 2023 includes an Employee Retention Credit of $1,544 under Section 2301 of the Coronavirus Aid, Relief and Economic Security Act which was filed with the Internal Revenue Service during the period.

Net income was $3,340 or $0.21 per share – basic and diluted on a GAAP basis, compared to net income of $512 million or $0.03 per share – basic and diluted for the second quarter of 2022. Adjusted EPS was $0.29 - basic and diluted for the second quarter of 2023, compared to $0.03 - basic and diluted for the 2022 period. Adjusted EPS excludes the provision for deferred taxes of $1,278 which primarily represents non-cash charges for U.S. taxes which will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” on Page 23 for a reconciliation of adjusted EPS to EPS.

Adjusted EBITDA, defined as net income attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $6,296, or 14.7% of revenues, for the second quarter of 2023, compared to $2,185, or 6.8% of revenues, for the second quarter of 2022. See the section “Adjusted EBITDA” beginning on Page 21 for a reconciliation of adjusted EBITDA to net income attributable to Ultralife.

With backlog increasing to $110,875 and durable demand across our diverse end markets, the near-term highest priority remains to recapture gross margin through continued execution of price realization activities, qualification of alternate component suppliers, and lean manufacturing initiatives. These actions position us to deliver high-quality, sustainable profitable growth for 2023 generating incremental cash flow to pay down our acquisition debt and further invest in our businesses. We continue to strengthen our relationships with our key customers using our global new product development and sales resources to support future growth in target markets.

#### Results of Operations

### Three-Month Periods Ended June 30, 2023 and June 30, 2022

**Revenues.** Consolidated revenues for the three-month period ended June 30, 2023 were $42,692, an increase of $10,566, or 32.9%, over $32,126 for the three-month period ended June 30, 2022. Overall, government/defense sales increased 111.5% and commercial sales increased 9.2%.

Battery & Energy Products revenues increased $3,721, or 12.3%, from $30,140 for the three-month period ended June 30, 2022 to $33,861 for the three-month period ended June 30, 2023, reflecting increases of $2,268 or 9.2% in commercial sales and $1,453 and 26.6% in government/defense sales. The increase in commercial sales was driven by a $1,966 or 25.2% increase in medical sales reflecting an increased demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices and a $1,694 or 17.9% increase in oil & gas sales reflecting a rebound in the energy sector. These increases in commercial sales were partially offset by a $1,392 or 18.8% decrease in industrial and other commercial sales primarily attributable to 9-Volt and our new Thionyl Chloride and thin cell battery cells for which sales are expected to rebound in future periods.

Communications Systems sales increased $6,845, or 344.6%, from $1,986 for the three-month period ended June 30, 2022 to $8,831 for the three-month period ended June 30, 2023. The increase was primarily attributable to shipments of vehicle-amplifier adaptor orders to a global defense contractor for the U.S. Army and of integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor for an ongoing allied country government/defense modernization program.

Our total backlog at June 30, 2023 was $110,875 representing a 40.1% increase over the comparable $79,147 for the same period last year, with $76,400 due to ship over the remaining six months of 2023. Total backlog increased $2,772 or 2.6% compared to the backlog of $108,102 at March 31, 2023.

**Cost of Products Sold / Gross Profit.** Cost of products sold totaled $32,104 for the quarter ended June 30, 2023, an increase of $7,624, or 31.1%, from the $24,480 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 76.2% for the three-month period ended June 30, 2022 to 75.2% for the three-month period ended June 30, 2023. Correspondingly, consolidated gross margin increased from 23.8% for the three-month period ended June 30, 2022, to 24.8% for the three-month period ended June 30, 2023, primarily reflecting higher factory volume and favorable product mix for our Communications Systems business.

For our Battery & Energy Products segment, gross profit for the second quarter of 2023 was $7,543, an increase of $392 or 5.5% from gross profit of $7,151 for the second quarter of 2022. Battery & Energy Products’ gross margin of 22.3% decreased by 140-basis points from the 23.7% gross margin for the year-earlier period, primarily reflecting lingering inefficiencies resulting from the January 2023 cyberattack, disposition of certain non-conforming materials and continued investments in the transition of new products to high volume production, partially offset by improved price realization.

For our Communications Systems segment, gross profit for the second quarter of 2023 was $3,045 or 34.5% of revenues, compared to gross profit of $495 or 24.9% of revenues for the second quarter of 2022. The 960-basis point increase in gross margin was primarily due to higher factory volume and favorable product mix compared to last year’s second quarter.

**Operating Expense.** Overall, operating expenses were 16.2% of revenue for the quarter ended June 30, 2023 compared to 21.3% of revenue for the quarter ended June 30, 2022. Amortization expense associated with intangible assets related to our acquisitions was $227 for the second quarter of 2023 ($203 in selling, general and administrative expenses and $24 in research and development costs), compared with $323 for the second quarter of 2022 ($298 in selling, general, and administrative expenses and $25 in research and development costs). Research and development costs were $1,778 for the three-month period ended June 30, 2023, an increase of $106 or 6.3%, from $1,672 for the three-months ended June 30, 2022. The increase is largely attributable to an increase in new product development in our Communications Systems business to pursue both government/defense major programs and commercial opportunities. Selling, general, and administrative expenses were essentially flat year over year, decreasing from $5,181 for the second quarter of 2022 to $5,145 for the second quarter of 2023.

**Other Income (Expense).** Other income (expense) totaled $1,058 for the three-month period ended June 30, 2023 compared to ($115) for the three-month period ended June 30, 2022. Other income for the 2023 period includes an Employee Retention Credit (“ERC”) of $1,544 under Section 2301 of the Coronavirus Aid, Relief and Economic Security Act which was filed with the Internal Revenue Service during the second quarter of 2023. Interest and financing expense increased $263, or 148.6%, from ($177) for the second quarter of 2022 to ($440) for the comparable period in 2023. The increase is primarily due to the financing of our acquisition of Excell in December 2021, working capital funding resulting from the January 2023 cyberattack and rising interest rates. Excluding the $1,544 gain for the ERC, miscellaneous income (expense) amounted to ($46) for the second quarter of 2023 compared to $62 for the second quarter of 2022, primarily attributable to foreign exchange gains and loss due to fluctuations in foreign currency exchange rates.

**Income Taxes.** The tax provision for the 2023 second quarter was $1,375 compared to $170 for the second quarter of 2022. Our effective tax rate increased to 29.1% for the second quarter of 2023 as compared to 25.1% for the second quarter of 2022, primarily attributable to the magnitude of our income reported in the 2023 quarter, including the Employee Retention Credit, and the geographic mix of our operating results. The income tax provision for the second quarter of 2023 is comprised of a $97 current provision for taxes expected to be paid on income primarily in foreign jurisdictions, representing a cash-based effective tax rate of 2.1%, and a $1,278 deferred tax provision which primarily represents non-cash charges for U.S. taxes that will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. For the comparable 2022 period, the income tax provision was comprised of a $143 current tax provision, representing a cash-based effective tax rate of 21.1%, and a $27 deferred tax provision. The period over period change in the cash-based effective tax rate is primarily attributable to the geographic mix of our operating results. See Note 6 to the consolidated financial statements in Item 1 of Part I of this Form 10-Q for additional information regarding our income taxes.

**Net Income Attributable to Ultralife.** Net income attributable to Ultralife was $3,340, or $0.21 per share – basic and diluted on a GAAP basis for the three-month period ended June 30, 2023, compared to $512, or $0.03 per share – basic and diluted, for the three-month period ended June 30, 2022. Adjusted EPS was $0.29 on a diluted basis for the second quarter of 2023, compared to $0.03 for the second quarter of 2022. Adjusted EPS excludes the provision for deferred taxes of $1,278 and $27 for the 2023 and 2022 periods, respectively, which primarily represent non-cash charges for U.S. taxes that will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” on Page 23 for a reconciliation of adjusted EPS to EPS.

Weighted average shares outstanding used to compute diluted earnings per share decreased from 16,149,278 for the second quarter of 2022 to 16,143,686 for the second quarter of 2023. The decrease is attributable to stock option exercises since the second quarter of 2022 offset by a decrease in the average stock price used to compute diluted shares from $4.93 for the second quarter of 2022 to $4.52 for the second quarter of 2023. Accordingly, dilutive shares of 20,352 were added to basic weighted average shares for the 2022 period compared to 2,334 for the 2023 period.

### Six-Month Periods Ended June 30, 2023 and June 30, 2022

**Revenues.** Consolidated revenues for the six-month period ended June 30, 2023 were $74,608, an increase of $12,109, or 19.4%, over $62,499 for the six-month period ended June 30, 2022. Overall, government/defense sales increased $10,216 or 67.1% and commercial sales increased $1,893 or 4.0% . On January 25, 2023, the Company experienced a ransomware cyberattack which impacted our ability to process orders, ship products, provide services to our customers and effectively manage our sales and operating planning process over a several week period for our Newark, NY location and an even longer period for our Virginia Beach, VA location. A large portion of our time during the quarter was devoted to data restoration, systems security augmentation, and regulatory reporting of the cyberattack, all of which were successfully accomplished with no ransom paid. Management continues to work on its cybersecurity insurance claim covering the cost of engaging external cybersecurity experts and the business interruption impact.

Battery & Energy Products revenues increased $3,041, or 5.1%, from $59,290 for the six-month period ended June 30, 2022 to $62,331 for the six-month period ended June 30, 2023. The increase was attributable to a $1,893 or 4.0% increase in commercial sales and a $1,148 or 9.6% increase in government/defense sales. The increase in commercial sales was driven by a $3,601 or 19.5% increase in oil & gas sales reflecting the recent rebound in the energy sector and a $597 or 3.9% increase in medical battery sales due to the high demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices. These increases in commercial sales were partially offset by a $2,305 or 16.9% decrease in industrial and other commercial market sales primarily due to timing of demand for 9-Volt and our new Thionyl Chloride and thin cell battery cells which are expected to rebound in future periods.

Communications Systems revenues increased $9,068, or 282.6%, from $3,209 for the six-month period ended June 30, 2022 to $12,277 for the six-month period ended June 30, 2023. This increase was primarily attributable to shipments of vehicle-amplifier adaptor orders to a global defense contractor for the U.S. Army and of integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor for an ongoing allied country government/defense modernization program.

**Cost of Products Sold / Gross Profit.** Cost of products sold totaled $56,584 for the six-month period ended June 30, 2023, an increase of $8,689, or 18.1%, from the $47,895 reported for the same six-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 76.6% for the six-month period ended June 30, 2022 to 75.8% for the six-month period ended June 30, 2023. Correspondingly, consolidated gross margin increased from 23.4% for the six-month period ended June 30, 2022, to 24.2% for the six-month period ended June 30, 2023, primarily reflecting higher factory volume and favorable product mix for our Communications Systems segment, tempered by the inefficiencies experienced at our Newark, NY and Virginia Beach, VA facilities resulting from the January 2023 cyberattack.

For our Battery & Energy Products segment, gross profit for the first six months of 2023 was $14,055, an increase of $183 or 1.3% over gross profit of $13,872 for the comparable 2022 period. Battery & Energy Products’ gross margin of 22.5% decreased by 90 basis points from the 23.4% gross margin for the year-earlier period, primarily reflecting lingering supply chain disruptions, inefficiencies resulting from the January 2023 cyberattack, disposition of certain non-conforming materials and continued investments in the transition of new products to high volume production, partially offset by improved price realization.

For our Communications Systems segment, gross profit for the first six months of 2023 was $3,969 or 32.3% of revenues, compared to gross profit of $732 or 22.8% of revenues, for the comparable 2022 period. The increase was primarily due to higher factory volume and favorable product mix compared to last year’s second quarter.

**Operating Expenses.** Operating expenses for the six-month period ended June 30, 2023 were $14,333, an increase of $227 or 1.6% from the $14,106 for the six-month period ended June 30, 2022. The increase is primarily attributable to increased new product development investments and the recording of the $100 deductible on our cybersecurity insurance policy for expenses incurred associated with the January 2023 cyberattack. Both periods reflected continued tight control over discretionary spending.

Overall, operating expenses as a percentage of revenues were 19.2% for the six-month period ended June 30, 2023 compared to 22.6% for the six-month period ended June 30, 2022. Amortization expense associated with intangible assets related to our acquisitions was $436 for the first six months of 2023 ($388 in selling, general and administrative expenses and $48 in research and development costs), compared with $651 for the first six months of 2022 ($600 in selling, general, and administrative expenses and $51 in research and development costs). Research and development costs were $3,810 for the six-month period ended June 30, 2023, an increase of $281 or 8.0%, from $3,529 for the six-months ended June 30, 2022. The increase is largely attributable to an increase in new product development in our Communications Systems business to pursue both government/defense major programs and commercial opportunities. Selling, general, and administrative expenses were essentially flat year over year, decreasing from $10,577 for the first six months of 2022 to $10,523 for the first six months of 2023, a decrease of $54 or 0.05%.

**Other Income (Expense).** Other income (expense) totaled $564 for the six-month period ended June 30, 2023 compared to ($232) for the six-month period ended June 30, 2022. Other income for the 2023 period includes an Employee Retention Credit for $1,544 under Section 2301 of the Coronavirus Aid, Relief and Economic Security Act which was filed with the Internal Revenue Service during the second quarter of 2023. Interest and financing expense increased $553, or 177.8%, from ($311) for the first six months of 2022 to ($864) for the comparable period in 2023. The increase is primarily due to the financing of our acquisition of Excell in December 2021, working capital funding resulting from our January 2023 cyberattack and rising interest rates. Excluding the ERC gain in the 2023 period, miscellaneous income (expense) amounted to ($116) for the 2023 period compared to $79 for the 2022 period, primarily attributable to foreign exchange gains and loss due to fluctuations in foreign currency exchange rates.

**Income Taxes.** The income tax provision for the 2023 six-month period was $1,242 compared to an income tax benefit of ($81) for the 2022 six-month period. Our effective tax rate increased to 29.2% for the 2023 period as compared to (30.5%) for the 2022 period, primarily attributable to the magnitude of our income reported in the first six-months of 2023, including the Employee Retention Credit, and the geographic mix of our operating results. The income tax provision for the first six months of 2023 is comprised of a $354 current provision for taxes expected to be paid on income primarily in foreign jurisdictions, representing a cash-based effective tax rate of 8.3%, and an $888 deferred tax provision which primarily represents non-cash charges for U.S. taxes that will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. For the comparable 2022 period, the income tax benefit was comprised of a $294 current tax provision, representing a cash-based effective tax rate of 110.5%, and a ($375) deferred tax benefit. The period over period change in the cash-based effective tax rate is primarily attributable to the geographic mix of our operating results. See Note 6 to the consolidated financial statements in Item 1 of Part I of this Form 10-Q for additional information regarding our income taxes.

**Net Income Attributable to Ultralife.** Net income attributable to Ultralife was $2,994, or $0.19 per share – basic and diluted on a GAAP basis for the six-month period ended June 30, 2023, compared to $344, or $0.02 per share – basic and diluted, for the six-month period ended June 30, 2022. Adjusted EPS was $0.24 on a diluted basis for the 2023 period, compared to $0.00 for the 2022 period. Adjusted EPS excludes the provision (benefit) for deferred taxes of $888 and ($375) for the 2023 and 2022 periods, respectively, which primarily represents non-cash charges (benefits) for U.S. taxes that will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” on Page 23 for a reconciliation of adjusted EPS to EPS.

Weighted average shares outstanding used to compute diluted earnings per share decreased from 16,141,083 for the first six-months of 2022 to 16,140,528 for the first six-months of 2023. The decrease is attributable to stock option exercises since the second quarter of 2022 offset by a decrease in the average stock price used to compute diluted shares from $5.11 for the six-month period ended June 30, 2022 to $4.25 for the six-month period ended June 30, 2023. Accordingly diluted shares of 24,751 were added to basic weighted average shares in 2022 compared to 2,157 in 2023.

#### Adjusted EBITDA

In evaluating our business, we consider and use adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define adjusted EBITDA as net income (loss) attributable to Ultralife before interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expense/income that we do not consider reflective of our ongoing continuing operations. We also use adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We believe the use of adjusted EBITDA facilitates investors’ understanding of operating performance from period to period by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the amortization of intangible assets acquired through our business acquisitions (affecting relative amortization expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relative depreciation expense) and one-time charges/benefits relating to income taxes. We also present adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile adjusted EBITDA to net income (loss) attributable to Ultralife Corporation, the most comparable financial measure under GAAP.

We use adjusted EBITDA in our decision-making processes relating to the operation of our business together with GAAP financial measures such as operating income (loss). We believe that adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while eliminating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of stock-based compensation, which is a non-cash expense that varies widely among companies. We believe that by presenting adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.

The term adjusted EBITDA is not defined under GAAP and is not a measure of operating income (loss), operating performance or liquidity presented in accordance with GAAP. Our adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife Corporation or other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to, the following:

- Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business;
- Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements;
- While stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and
- Other companies may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA only on a supplemental basis. Neither current nor potential investors in our securities should rely on adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of adjusted EBITDA to net loss attributable to Ultralife.

Adjusted EBITDA is calculated as follows for the periods presented:

|  | Three-Month Period Ended June 30, 2023 | June 30, 2022 | Six-Month Period Ended June 30, 2023 | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income attributable to Ultralife Corporation | $3,340 | $512 | $2,994 | $344 |
| Add: |  |  |  |  |
| Interest expense | 440 | 177 | 864 | 311 |
| Income tax provision (benefit) | 1,375 | 170 | 1,242 | (81) |
| Depreciation expense | 760 | 819 | 1,522 | 1,635 |
| Amortization expense | 227 | 323 | 436 | 651 |
| Stock-based compensation expense | 154 | 184 | 293 | 373 |
| Cybersecurity insurance policy deductible | - | - | 100 | - |
| Non-cash purchase accounting adjustments | - | - | - | 55 |
| Adjusted EBITDA | $6,296 | $2,185 | $7,451 | $3,288 |

22

#### Adjusted Earnings Per Share

In evaluating our business, we consider and use adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance. We define adjusted EPS as net income attributable to Ultralife Corporation excluding the provision (benefit) for deferred income taxes divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our tax provision that will be predominantly offset by our U.S. net operating loss carryforwards and other tax credits for the foreseeable future. We reconcile adjusted EPS to EPS, the most comparable financial measure under GAAP. Neither current nor potential investors in our securities should rely on adjusted EPS as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of adjusted EPS to EPS and net income attributable to Ultralife Corporation.

Adjusted EPS is calculated as follows for the periods presented:

|  | Three-Month Period Ended June 30, 2023 Amount | Per Basic Share | Per Diluted Share | June 30, 2022 Amount | Per Basic Share | Per Diluted Share |
| --- | ---: | --- | --- | ---: | ---: | ---: |
| Net Income | $3,340 | $.21 | $.21 | $512 | $.03 | $.03 |
| Deferred Tax Provision | 1,278 | .08 | .08 | 27 | - | - |
| Adjusted Net Income | $4,618 | $.29 | $.29 | $539 | $.03 | $.03 |
| Weighted Average Shares Outstanding |  | 16,141 | 16,144 |  | 16,129 | 16,149 |

|  | Six-Month Period Ended June 30, 2023 Amount | Per Basic Share | Per Diluted Share | June 30, 2022 Amount | Per Basic Share | Per Diluted Share |
| --- | ---: | --- | --- | ---: | --- | --- |
| Net Income | $2,994 | $.19 | $.19 | $344 | $.02 | $.02 |
| Deferred Tax Provision (Benefit) | 888 | .05 | .05 | (375) | (.02) | (.02) |
| Adjusted Net Income (Loss) | $3,882 | $.24 | $.24 | $(31) | $.00 | $.00 |
| Weighted Average Shares Outstanding |  | 16,138 | 16,141 |  | 16,116 | 16,141 |

23

#### Liquidity and Capital Resources

As of June 30, 2023, cash totaled $8,283 (including restricted cash of $81), an increase of $2,570 as compared to $5,713 of cash held at December 31, 2022, primarily attributable to draws on our credit facility and net income generated during the period.

During the six-month period ended June 30, 2023, cash provided by our operations was $386, as compared to $3,400 used in operations for the six-month period ended June 30, 2022. For the 2023 period, cash provided by our operations was comprised of net income of $3,013 plus non-cash items totaling $3,171 for depreciation, amortization, stock-based compensation, and deferred taxes, largely offset by a $5,798 increase in net working capital. The increase in working capital was driven by the procurement of inventory to proactively manage our supply chain, reduce lead times and the impact of potential cost increases on components and raw materials, and enhance our position to service customer orders, as well as the effects of the January 2023 cyberattack.

Cash used in investing activities for the six months ended June 30, 2023 was $1,013 for capital expenditures, primarily reflecting investments in equipment for new products transitioning to high-volume manufacturing.

Cash provided by financing activities for the six months ended June 30, 2023 was $3,362, largely attributable to draws on our credit facility primarily due to the sales impact of the January 2023 cyberattack as well as the advance purchase of certain critical raw materials, partially offset by principle payments on our term loan during the period.

We continue to have significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 6 to the consolidated financial statements of this Form 10-Q for additional information.

Going forward, we expect positive operating cash flow and the availability under our Revolving Credit Facility will be sufficient to meet our general funding requirements for the foreseeable future.

To provide flexibility in accessing the capital market, the Company filed a shelf registration statement on Form S-3 on March 30, 2021, which was declared effective by the SEC on April 2, 2021. Under this registration statement, upon the filing of an appropriate supplemental prospectus, we may offer and sell certain of our securities from time to time in one or more offerings, at our discretion, of up to an aggregate offering price of $100 million. We intend to use the net proceeds resulting from any sales of our securities for general corporate purposes which may include, but are not limited to, potential acquisitions of complementary businesses or technologies, strategic capital expenditures to expand and protect our competitive position, and investments in the development of transformational, competitively-differentiated products for attractive growth markets.

#### Commitments

As of June 30, 2023, the Company had $17,630 outstanding borrowings on the Revolving Credit Facility and $7,167 on the Term Loan Facility. The Company was in full compliance with all covenants under the Credit Facilities as of June 30, 2023.

As of June 30, 2023, we had made commitments to purchase approximately $1,023 of production machinery and equipment.

#### Critical Accounting Policies

Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with GAAP, but they also reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 to the consolidated financial statements in our 2022 Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q should be reviewed for a greater understanding of how our financial performance is recorded and reported.

During the first six months of 2023, there were no significant changes in the manner in which our significant accounting policies were applied or in which related assumptions and estimates were developed.

## Controls and procedures

As filed, 951 characters.

#### Evaluation of Disclosure Controls and Procedures

Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.

#### Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 27, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-020795. Last ingested by Listed: Oct 29, 2026, 16:24 ET. No prices; not investment advice.