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

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.

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 (http://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 (http://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 $39,488 for the three-month period ended September 30, 2023, increased by $6,254 or 18.8%, over $33,234 for the three-month period ended September 30, 2022, reflecting increases in government/defense sales of 48.1% and commercial sales of 5.6%. Sales for our Battery & Energy Products segment increased 11.7% from $28,583 for the third quarter of 2022 to $31,919 for the third quarter of 2023, and sales for our Communications Systems segment increased 62.7% from $4,651 to $7,569.

Gross profit was $9,774, or 24.8% of revenue, for the three-month period ended September 30, 2023, compared to $6,715, or 20.2% of revenue, for the same quarter a year ago. The 460-basis point improvement primarily resulted from higher factory volume leading to greater cost absorption, efficiencies associated with improved level-loading of production and price realization.

Operating expenses increased to $7,639 for the three-month period ended September 30, 2023, compared to $7,301 for the three-month period ended September 30, 2022. The increase of $338 or 4.6% was primarily attributable to higher variable compensation, including Officer and Executive Team bonuses and salesforce commissions, and insurance costs in the 2023 period. Operating expenses represented 19.3% of revenues compared to 22.0% of revenues for the year-earlier period.

Operating income for the three-month period ended September 30, 2023 was $2,135, or 5.4% of revenues, compared to a loss of $586 for the year-earlier period. The increase in operating income resulted from the 18.8% increase in revenues leveraged by the 460-basis point improvement in gross margin and the 270-basis point improvement in operating expenses to revenues ratio.

Net income attributable to Ultralife Corporation was $1,330 or $0.08 per share – basic and diluted on a GAAP basis, compared to a net loss of $239 or $0.01 per share – basic and diluted for the third quarter of 2022. Adjusted EPS was $0.10 - basic and diluted for the third quarter of 2023, compared to a loss $0.03 - basic and diluted for the 2022 period. Adjusted EPS excludes the provision for deferred taxes of $357 which primarily represents non-cash charges for U.S. taxes that we expect will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” on Page 24 for a reconciliation of adjusted EPS to EPS.

Adjusted EBITDA, defined as net income (loss) attributable to Ultralife Corporation 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 $3,480, or 8.8% of revenues, for the third quarter of 2023, compared to $1,255 or 3.8% of revenues, for the third quarter of 2022. See the section “Adjusted EBITDA” on Page 23 for a reconciliation of adjusted EBITDA to net income attributable to Ultralife Corporation.

As we close out 2023 with a strong backlog, we are well positioned to continue profitable growth and to generate incremental cashflow to reduce our acquisition debt and further invest in our businesses, including new product development, strategic capital expenditures and accretive acquisitions.

Results of Operations

Three-Month Periods Ended September 30, 2023 and September 30, 2022

Revenues. Consolidated revenues for the three-month period ended September 30, 2023 were $39,488, an increase of $6,254, or 18.8%, over $33,234 for the three-month period ended September 30, 2022. Overall, government/defense sales increased 48.1% and commercial sales increased 5.6%.

Battery & Energy Products revenues increased $3,336, or 11.7%, from $28,583 for the three-month period ended September 30, 2022 to $31,919 for the three-month period ended September 30, 2023, reflecting increases of $1,272 or 5.6% in commercial sales and $2,064 or 36.2% in government/defense sales. The increase in commercial sales was driven by a $2,488 or 37.9% increase in medical sales reflecting an increased demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices, partially offset by a $1,216 or 7.5% 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 based on the timing of purchase orders placed by our customers.

Communications Systems sales increased $2,918, or 62.7%, from $4,651 for the three-month period ended September 30, 2022 to $7,569 for the three-month period ended September 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 September 30, 2023 was $101,087 with approximately $35,100 due to ship over the remaining three months of 2023. Total backlog decreased $5,066 or 4.8% compared to the backlog of $106,153 for the same period in 2022 primarily due to the timing of certain expected orders.

Cost of Products Sold / Gross Profit. Cost of products sold totaled $29,714 for the quarter ended September 30, 2023, an increase of $3,195, or 12.0%, from the $26,519 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 79.8% for the three-month period ended September 30, 2022 to 75.2% for the three-month period ended September 30, 2023. Correspondingly, consolidated gross margin increased from 20.2% for the three-month period ended September 30, 2022, to 24.8% for the three-month period ended September 30, 2023, primarily reflecting higher factory volume leading to greater cost absorption, efficiencies associated with improved level-loading of production and price realization.

For our Battery & Energy Products segment, gross profit for the third quarter of 2023 was $7,728, an increase of $2,383 or 44.6% from gross profit of $5,345 for the third quarter of 2022. Battery & Energy Products’ gross margin of 24.2% increased by 550-basis points from the 18.7% gross margin for the year-earlier period, primarily reflecting higher factory volume, efficiencies resulting from improved level-lading of production across the quarter and improved price realization.

For our Communications Systems segment, gross profit for the third quarter of 2023 was $2,046 or 27.0% of revenues, compared to gross profit of $1,370 or 29.5% of revenues for the third quarter of 2022. The 250-basis point decrease in gross margin was primarily due to inefficiencies caused by component delivery delays from certain vendors and sales product mix, partially offset by the higher factory volume.

Operating Expense. Overall, operating expenses were 19.3% of revenue for the quarter ended September 30, 2023, compared to 22.0% of revenue for the quarter ended September 30, 2022. Amortization expense associated with intangible assets related to our acquisitions was $227 for the third quarter of 2023 ($203 in selling, general and administrative expenses and $24 in research and development costs), compared with $318 for the third quarter of 2022 ($295 in selling, general, and administrative expenses and $23 in research and development costs). Research and development costs were $1,869 for the three-month period ended September 30, 2023, a decrease of $27 or 1.4%, from $1,896 for the three-months ended September 30, 2022. Selling, general, and administrative expenses were $5,770 for the three-month period ended September 30, 2023, an increase of $365 or 6.8% over the $5,405 for the three-month period ended September 30, 2022, primarily reflecting higher variable compensation, including Officer and Executive Team bonuses and salesforce commissions, and insurance costs.

Other (Expense) Income. Other expense totaled $386 for the three-month period ended September 30, 2023, compared to income totaling $254 for the three-month period ended September 30, 2022. Interest and financing expense increased $314, or 115.4%, from $272 for the third quarter of 2022 to $586 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. Miscellaneous income amounted to $200 for the third quarter of 2023 compared to $526 for the third quarter of 2022, primarily attributable to foreign exchange gains due to fluctuations in foreign currency exchange rates.

Income Taxes. The income tax provision for the 2023 third quarter was $446, compared to an income tax benefit of $90 for the third quarter of 2022. Our effective tax rate decreased to 25.5% for the third quarter of 2023 as compared to 27.1% for the third quarter of 2022, primarily attributable to the geographic mix of our operating results. The income tax provision for the third quarter of 2023 is comprised of an $89 current provision for taxes expected to be paid on income primarily in foreign jurisdictions, representing a cash-based effective tax rate of 5.1%, and a $357 deferred tax provision which primarily represents non-cash charges for U.S. taxes that we expect 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 $218 current tax provision and a $308 deferred tax benefit. The period over period change in the cash-based current tax provisions 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 (Loss) Attributable to Ultralife. Net income attributable to Ultralife was $1,330, or $0.08 per share – basic and diluted on a GAAP basis for the three-month period ended September 30, 2023, compared to a net loss of $239, or $0.01 per share – basic and diluted, for the three-month period ended September 30, 2022. Adjusted EPS was $0.10 on a diluted basis for the third quarter of 2023, compared to ($0.03) for the third quarter of 2022. Adjusted EPS excludes the provision (benefit) for deferred taxes of $357 and ($308) for the 2023 and 2022 periods, respectively, which primarily represent non-cash charges (benefits) for U.S. taxes that we expect will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” on Page 24 for a reconciliation of adjusted EPS to EPS.

Weighted average shares outstanding used to compute diluted earnings per share increased from 16,133,069 for the third quarter of 2022 to 16,303,139 for the third quarter of 2023. The increase is attributable to stock option exercises since the third quarter of 2022 and a greater average stock price in the current quarter. Accordingly, dilutive shares of 65,275 were added to basic weighted average shares for the 2023 period compared to none for the 2022 period due to the net loss for that period.

Nine-Month Periods Ended September 30, 2023 and September 30, 2022

Revenues. Consolidated revenues for the nine-month period ended September 30, 2023 were $114,096, an increase of $18,363, or 19.2%, over $95,733 for the nine-month period ended September 30, 2022. Overall, government/defense sales increased $15,198 or 59.4% and commercial sales increased $3,165 or 4.5%. 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 $6,377, or 7.3%, from $87,873 for the nine-month period ended September 30, 2022 to $94,250 for the nine-month period ended September 30, 2023. The increase was attributable to a $3,165 or 4.5% increase in commercial sales and a $3,212 or 18.1% increase in government/defense sales. The increase in commercial sales was driven by a $3,428 or 12.4% increase in oil & gas sales reflecting the rebound in the energy sector and a $3,085 or 14.2% 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 $3,348 or 16.2% 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 $11,986, or 152.5%, from $7,860 for the nine-month period ended September 30, 2022 to $19,846 for the nine-month period ended September 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 $86,298 for the nine-month period ended September 30, 2023, an increase of $11,884, or 16.0%, from the $74,414 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 77.7% for the nine-month period ended September 30, 2022 to 75.6% for the nine-month period ended September 30, 2023. Correspondingly, consolidated gross margin increased from 22.3% for the nine-month period ended September 30, 2022, to 24.4% for the nine-month period ended September 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 nine months of 2023 was $21,783 an increase of $2,566 or 13.4% over gross profit of $19,217 for the comparable 2022 period. Battery & Energy Products’ gross margin of 23.1% increased by 120 basis points from the 21.9% gross margin for the year-earlier period, primarily reflecting higher factory volume, more level-loaded production driving utilization and price realization, partially offset by 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.

For our Communications Systems segment, gross profit for the first nine months of 2023 was $6,015 or 30.3% of revenues, compared to gross profit of $2,102 or 26.7% 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 nine-month period.

Operating Expenses. Operating expenses for the nine-month period ended September 30, 2023 were $21,972, an increase of $565 or 2.6% from the $21,407 for the nine-month period ended September 30, 2022. The increase is primarily attributable to increased new product development investments, the recording of the $100 deductible on our cybersecurity insurance policy for expenses incurred associated with the January 2023 cyberattack and higher variable compensation, including Officer and Executive Team bonuses and salesforce commissions, and insurance costs. Both periods reflected continued tight control over discretionary spending.

Overall, operating expenses as a percentage of revenues were 19.3% for the nine-month period ended September 30, 2023, compared to 22.4% for the nine-month period ended September 30, 2022. Amortization expense associated with intangible assets related to our acquisitions was $663 for the first nine months of 2023 ($591 in selling, general and administrative expenses and $72 in research and development costs), compared with $969 for the first nine months of 2022 ($895 in selling, general, and administrative expenses and $74 in research and development costs). Research and development costs were $5,679 for the nine-month period ended September 30, 2023, an increase of $254 or 4.7%, from $5,425 for the nine-months ended September 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 $16,293 for the 2023 nine-month period, an increase of $311 or 1.9% over the $15,982 for the year-earlier period, primarily reflecting higher variable compensation, including Officer and Executive Team bonuses and salesforce commissions, and insurance costs.

Other Income (Expense). Other income totaled $178 for the nine-month period ended September 30, 2023, compared to other income of $22 for the nine-month period ended September 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 $867, or 148.7%, from $583 for the first nine months of 2022 to $1,450 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 amounted to $84 for the 2023 period compared to $605 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 nine-month period was $1,688, compared to an income tax benefit of $171 for the 2022 nine-month period. Our effective tax rate decreased to 28.1% for the 2023 period as compared to 259.1% for the 2022 period, primarily attributable to the magnitude of our income reported in the first nine-months of 2023, including the Employee Retention Credit, and the geographic mix of our operating results. The income tax provision for the first nine months of 2023 is comprised of a $443 current provision for taxes expected to be paid on income primarily in foreign jurisdictions, representing a cash-based effective tax rate of 7.4%, and an $1,245 deferred tax provision which primarily represents non-cash charges for U.S. taxes that we expect 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 $512 current tax provision and a $683 deferred tax benefit. The period over period change in the cash-based taxes 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 $4,324, or $0.27 per share – basic and diluted on a GAAP basis for the nine-month period ended September 30, 2023, compared to $105, or $0.01 per share – basic and diluted, for the nine-month period ended September 30, 2022. Adjusted EPS was $0.34 on a diluted basis for the 2023 period, compared to ($0.04) for the 2022 period. Adjusted EPS excludes the provision (benefit) for deferred taxes of $1,245 and ($683) for the 2023 and 2022 periods, respectively, which primarily represents non-cash charges (benefits) for U.S. taxes that we expect will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” on Page 24 for a reconciliation of adjusted EPS to EPS.

Weighted average shares outstanding used to compute diluted earnings per share decreased from 16,144,165 for the first nine-months of 2022 to 16,174,341 for the first nine-months of 2023. The increase is attributable to stock option exercises since the third quarter of 2022. Accordingly diluted shares of 2,441 were added to basic weighted average shares in 2023 compared to 22,203 for the 2022 period.

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 Corporation 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 Corporation.

Adjusted EBITDA is calculated as follows for the periods presented:

23

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 (loss) 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:

24

Liquidity and Capital Resources

As of September 30, 2023, cash totaled $9,301 (including restricted cash of $78), an increase of $3,588 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 nine-month period ended September 30, 2023, cash used in our operations was $503, as compared to $3,827 used in operations for the nine-month period ended September 30, 2022. For the 2023 period, cash provided by our operations was comprised of net income of $4,316 plus non-cash items totaling $4,662 for depreciation, amortization, stock-based compensation, and deferred taxes, largely offset by a $9,481 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 nine months ended September 30, 2023 was $1,547 for capital expenditures, primarily reflecting investments in equipment for new products transitioning to high-volume manufacturing.

Cash provided by financing activities for the nine months ended September 30, 2023 was $5,791, largely attributable to draws on our credit facility primarily attributable to advance purchases of certain critical raw materials, partially offset by principle payments on our term loan during the period, plus cash proceeds of $1,041 on stock option exercises under our stock-based compensation plans.

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 September 30, 2023, the Company had $19,580 outstanding borrowings on the Revolving Credit Facility and $6,667 on the Term Loan Facility. The Company was in full compliance with all covenants under the Credit Facilities as of September 30, 2023.

As of September 30, 2023, we had made commitments to purchase approximately $925 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 nine 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, other than as described in Note 1 to the consolidated financial statements in Item 1 of Part I of this Form 10-Q.

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.