Ultralife Corp: Form 10-Q for the period ended Sep 30, 2024

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; our reliance on certain key customers; reductions or delays in U.S. and foreign military spending; our efforts to develop new products or new commercial applications for our products; potential disruptions in our supply of raw materials and components; breaches in information systems security and other disruptions in our information technology systems; our ability to recruit and retain top management and key personnel; our resources being overwhelmed by our growth; the continued impact of COVID-19, or other pandemics that may arise, causing delays in the manufacture and delivery of our mission critical products to end customers; the unique risks associated with our China operations; fluctuations in the price of oil and the resulting impact on the demand for downhole drilling; possible future declines in demand for the products that use our batteries or communications systems; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; 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 entrance into new end-markets which could lead to additional financial exposure; negative publicity concerning Lithium-ion batteries; our ability to utilize our net operating loss carryforwards; our exposure to foreign currency fluctuations; possible impairments of our goodwill and other intangible assets; 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”; 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,” “foresee,” “could,” “likely,” 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, 2023.

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 developments in 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 document, 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. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. 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 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, 2023.

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®, Ultralife HiRate®, Ultralife Thin Cell®, Ultralife Batteries Inc.®, Lithium Power®, McDowell Research®, AMTITM, ABLETM, ACCUTRONICSTM, ACCUPROTM, ENTELLIONTM, SWE Southwest Electronic Energy GroupTM, SWE SEASAFETM, Excell Battery GroupTM and Criterion GaugeTM brands, among others. 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 in Item 1 of Part 1 of this Form 10-Q.)

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 $35,694 for the three-month period ended September 30, 2024, decreased by $3,794 or 9.6%, from $39,488 for the three-month period ended September 30, 2023, reflecting decreases in government/defense sales of 14.1% and commercial sales of 6.8%. Sales for our Battery & Energy Products segment increased 1.9% from $31,919 for the third quarter of 2023 to $32,529 for the third quarter of 2024, and sales for our Communications Systems segment decreased 58.2% from $7,569 to $3,165.

Gross profit was $8,682, or 24.3% of revenue, for the three-month period ended September 30, 2024, compared to $9,774, or 24.8% of revenue, for the same quarter a year ago. The 50-basis point decline primarily resulted from lower factory volume and the lower-margin product mix for our Communications Systems segment.

Operating expenses increased to $8,171 for the three-month period ended September 30, 2024, compared to $7,639 for the three-month period ended September 30, 2023. The increase of $532 or 7.0% was primarily attributable to investments in new product development, the addition of sales resources to support future growth, and the recognition of legal and other fees recognized in the period directly relating to the execution of a stock purchase agreement on September 27, 2024 to acquire Electrochem Solutions, Inc. Operating expenses represented 22.9% of revenues compared to 19.3% of revenues for the year-earlier period.

Operating income for the three-month period ended September 30, 2024 was $511, or 1.4% of revenues, compared to $2,135 or 5.4% of revenue for the year-earlier period. The decrease in operating income resulted from a 9.6% decline in revenues, the cost of our investments in new product development, the cost of additional sales resources to support future organic growth and expenses directly relating to the execution of a stock purchase agreement on September 27, 2024 to acquire Electrochem Solutions, Inc.

Net income attributable to Ultralife Corporation was $258 or $0.02 per share – basic and diluted on a GAAP basis, compared to $1,330 or $0.08 per share – basic and diluted for, the third quarter of 2023.

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 $1,919, or 5.4% of revenues, for the third quarter of 2024, compared to $3,480 or 8.8% of revenues, for the third quarter of 2023. See the section “Adjusted EBITDA” beginning on Page 23 for a reconciliation of adjusted EBITDA to net income attributable to Ultralife Corporation.

Our top priorities continue to be gross margin increases through focused initiatives on material deflation and lean productivity and growing our opportunity funnels and customer wins to continue fueling our growth. We remain optimistic that we are well positioned to sustain long-term profitable growth.

Results of Operations

Three-Month Periods Ended September 30, 2024 and September 30, 2023

Revenues. Consolidated revenues for the three-month period ended September 30, 2024 were $35,694, a decrease of $3,794, or 9.6%, from $39,488 for the three-month period ended September 30, 2023. Overall, government/defense sales decreased 14.1% and commercial sales decreased 6.8%.

Battery & Energy Products revenues increased $610, or 1.9%, from $31,919 for the three-month period ended September 30, 2023 to $32,529 for the three-month period ended September 30, 2024. The revenue growth was primarily attributable to an increase in government/defense sales of $2,244 or 28.9% reflecting strong demand from our U.S.-based global prime, partially offset by a decrease of $1,634 or 6.8% in commercial sales, The decline in commercial sales primarily resulted from a 12.4% decrease in medical battery sales and a 10.9% in industrial market sales, partially offset by a 1.5% increase in oil & gas market sales.

Communications Systems sales decreased $4,404, or 58.2%, from $7,569 for the three-month period ended September 30, 2023 to $3,165 for the three-month period ended September 30, 2024. The decrease was primarily attributable to large shipments in the 2023 period 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 which had been delayed from earlier periods due to supply chain disruptions and the timing of orders for the current year period.

Cost of Products Sold / Gross Profit. Cost of products sold totaled $27,012 for the quarter ended September 30, 2024, a decrease of $2,702, or 9.1%, from the $29,714 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 75.2% for the three-month period ended September 30, 2023 to 75.7% for the three-month period ended September 30, 2024. Correspondingly, consolidated gross margin decreased from 24.8% for the three-month period ended September 30, 2023, to 24.3% for the three-month period ended September 30, 2024, primarily reflecting lower factory volume and product mix for our Communications Systems segment.

For our Battery & Energy Products segment, gross profit for the third quarter of 2024 was $8,047, an increase of $319 or 4.1% from gross profit of $7,728 for the third quarter of 2023. Battery & Energy Products’ gross margin of 24.7% increased by 50-basis points from the 24.2% gross margin for the year-earlier period, primarily reflecting higher factory volume in our Newark, NY facility, partially offset by some inefficiencies resulting from delays in raw material components.

For our Communications Systems segment, gross profit for the third quarter of 2024 was $635 or 20.0% of revenues, compared to gross profit of $2,046 or 27.0% of revenues for the third quarter of 2023. The 700-basis point decrease in gross margin was primarily due to lower factory volume and unfavorable product mix as compared to the year-earlier period.

Operating Expenses. Operating expenses for the three-month period ended September 30, 2024 were $8,171, an increase of $532, or 7.0%, from the $7,639 for the three-month period ended September 30, 2023. The increase was primarily attributable to investments in new product development and the addition of experienced sales resources to drive organic sales growth and expenses directly relating to the execution of a stock purchase agreement on September 27, 2024 to acquire Electrochem Solutions, Inc. in the 2024 third quarter.

Overall, operating expenses were 22.9% of revenue for the quarter ended September 30, 2024 compared to 19.3% of revenue for the quarter ended September 30, 2023. Amortization expense associated with intangible assets related to our acquisitions was $229 for the third quarter of 2024 ($204 in selling, general and administrative expenses and $25 in research and development costs), compared to $227 for the third quarter of 2023 ($203 in selling, general, and administrative expenses and $24 in research and development costs). Research and development costs were $2,101 for the three-month period ended September 30, 2024, an increase of $232 or 12.4%, from $1,869 for the three-month period ended September 30, 2023. The increase is largely attributable to the timing of new product development in both of our businesses as we aggressively pursue both government/defense major programs and commercial opportunities. Selling, general, and administrative expenses were $6,070 for the three-month period ended September 30, 2024, an increase of $300 or 5.2% from $5,770 for the third quarter of 2023. The period over period increase was primarily attributable to the recognition of legal and other fees incurred directly relating to the execution of a stock purchase agreement on September 27, 2024 to acquire Electrochem Solutions, Inc. and additional sales resources to support future organic growth.

Other (Expense) Income. Other expense totaled $158 for the three-month period ended September 30, 2024, compared to $386 for the three-month period ended September 30, 2023. Interest and financing expense decreased $413, or 70.3%, from $586 for the third quarter of 2023 to $173 for the comparable period in 2024. The decrease is due to the continued paydown of debt in the third quarter of 2024. Miscellaneous income amounted to $15 for the third quarter of 2024 compared to $200 for the third quarter of 2023, primarily attributable to foreign exchange gains due to fluctuations in foreign currency exchange rates.

Income Taxes. The income tax provision for the 2024 third quarter was $74, compared to $446 for the third quarter of 2023. Our effective tax rate decreased to 21.0% for the third quarter of 2024 as compared to 25.5% for the third quarter of 2023, primarily attributable to the geographic mix of our operating results. The income tax provision for the third quarter of 2024 is comprised of a $173 current provision for taxes expected to be paid on income primarily from foreign jurisdictions and a deferred tax benefit of $99. For the comparable 2023 period, 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. 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 $258, or $0.02 per share – basic and diluted on a GAAP basis for the three-month period ended September 30, 2024, compared to $1,330, or $0.08 per share – basic and diluted, for the three-month period ended September 30, 2023. Adjusted EPS was $0.01 on a diluted basis for the third quarter of 2024, compared to $0.10 for the third quarter of 2023. Adjusted EPS excludes the provision (benefit) for deferred taxes of ($99) and $357 for the 2024 and 2023 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 26 for a reconciliation of adjusted EPS to EPS.

Weighted average shares outstanding used to compute diluted earnings per share increased from 16,303,139 for the third quarter of 2023 to 16,874,057 for the third quarter of 2024. The increase is attributable to stock option exercises since the third quarter of 2023 and a greater average stock price in the current quarter. Accordingly, dilutive shares of 249,082 were added to basic weighted average shares for the 2024 period compared to 65,275 for the 2023 period.

Nine-Month Periods Ended September 30, 2024 and September 30, 2023

Revenues. Consolidated revenues for the nine-month period ended September 30, 2024 were $120,604, an increase of $6,508, or 5.7%, over $114,096 for the nine-month period ended September 30, 2023. Overall, government/defense sales increased $5,507 or 13.5% and commercial sales increased $1,001 or 1.4%. 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 $9,951, or 10.6%, from $94,250 for the nine-month period ended September 30, 2023 to $104,201 for the nine-month period ended September 30, 2024. The increase was attributable to a $8,950 or 42.8% increase in government/defense sales and a $1,001 or 1.4% increase in commercial sales. The increase in government/defense sales primarily reflects continued strong demand from our largest U.S.-based global prime. The growth in commercial sales was driven by a $4,146 or 16.7% increase in medical sales due to continuing surging demand for our core medical battery products from global medical device OEM’s, partially offset by a decrease of $2,591 or 8.3% in oil & gas sales and a $550 or 3.2% decrease in industrial sales due primarily to general economic conditions.

Communications Systems revenues decreased $3,443, or 17.3%, from $19,846 for the nine-month period ended September 30, 2023 to $16,403 for the nine-month period ended September 30, 2024. This decrease 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 in 2023 and the timing of orders in 2024.

Cost of Products Sold / Gross Profit. Cost of products sold totaled $88,889 for the nine-month period ended September 30, 2024, an increase of $2,591, or 3.0%, from the $86,298 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 75.6% for the nine-month period ended September 30, 2023 to 73.7% for the nine-month period ended September 30, 2024. Correspondingly, consolidated gross margin increased from 24.4% for the nine-month period ended September 30, 2023, to 26.3% for the nine-month period ended September 30, 2024, primarily reflecting higher factory volume, level loading of production and improved price realization for our Battery & Energy Products Segment, tempered by lower volume experienced in our Communications Systems segment.

For our Battery & Energy Products segment, gross profit for the first nine months of 2024 was $26,986 an increase of $5,203 or 23.9% over gross profit of $21,783 for the comparable 2023 period. Battery & Energy Products’ gross margin of 25.9% increased by 90 basis points from the 25.0% gross margin for the year-earlier period, primarily reflecting higher factory volume, more level-loaded production driving utilization and price realization.

For our Communications Systems segment, gross profit for the first nine months of 2024 was $4,729 or 28.8% of revenues, compared to gross profit of $6,015 or 30.3% of revenues, for the comparable 2023 period. The decrease of 150 basis points was primarily due to lower factory volume and unfavorable product mix compared to last year’s nine-month period.

Operating Expenses. Operating expenses for the nine-month period ended September 30, 2024 were $23,224, an increase of $1,252 or 5.7% from the $21,972 for the nine-month period ended September 30, 2023. The increase is primarily attributable to commissions on higher sales, greater participation in trade shows, the addition of experienced sales resources, investments in new product development and the recognition of expenses directly relating to the signing of the stock purchase agreement on September 30th to acquire Electrochem Solutions, Inc. Both periods reflected continued tight control over discretionary spending.

Overall, operating expenses as a percentage of revenues were 19.3% for both the nine-month period ended September 30, 2024 and the nine-month period ended September 30, 2023. Amortization expense associated with intangible assets related to our acquisitions was $684 for the first nine months of 2024 ($609 in selling, general and administrative expenses and $75 in research and development costs), compared with $663 for the first nine months of 2023 ($591 in selling, general, and administrative expenses and $72 in research and development costs). Research and development costs were $5,854 for the nine-month period ended September 30, 2024, an increase of $175 or 3.1%, from $5,679 for the nine-months ended September 30, 2023. The increase reflects higher investments in new product development in both of our segments to drive organic sales growth. Selling, general, and administrative expenses were $17,370 for the 2024 nine-month period, an increase of $1,077 or 6.6% over the $16,293 for the year-earlier period, primarily reflecting commissions on higher sales, greater participation in trade shows, the addition of experienced sales resources and the recognition of expenses directly relating to the execution of a stock purchase agreement on September 27, 2024 to acquire Electrochem Solutions, Inc.

Other Income (Expense). Other expense totaled $685 for the nine-month period ended September 30, 2024, compared to other income of $178 for the nine-month period ended September 30, 2023. Other income (expense) for the 2024 period includes a preliminary payment of $235 from our insurance carrier pertaining to the cyberattack experienced by the Company in the first quarter of 2023, and other income for the 2023 period includes $1,544 attributable to an Employee Retention Credit (“ERC”) claimed by the Company under Section 2301 of the Coronavirus Aid, Relief and Economic Security Act. Interest and financing expense decreased $339 or 23.4% from $1,450 for the first nine months of 2023 to $1,111 for the comparable period in 2024. The decrease is primarily due to the reduction of our debt during the second and third quarters of 2024. Excluding the $235 gain attributable to insurance proceeds in 2024, miscellaneous income was $191, and excluding the $1,544 ERC gain in the 2023 period, miscellaneous income amounted to $84, primarily attributable to foreign exchange gains and loss due to fluctuations in foreign currency exchange rates.

Income Taxes. The income tax provision for the 2024 nine-month period was $1,630, compared to $1,688 for the 2023 nine-month period. Our effective tax rate decreased to 20.9% for the 2024 period as compared to 28.1% for the 2023 period, primarily attributable to the geographic mix of our operating results. The income tax provision for the first nine months of 2024 is comprised of a $335 current provision for taxes expected to be paid on income primarily in foreign jurisdictions, representing a cash-based effective tax rate of 4.3%, and a $1,295 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 2023 period, 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. 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 $6,118, or $0.37 per share – basic and diluted on a GAAP basis for the nine-month period ended September 30, 2024, compared to $4,324, or $0.27 per share – basic and diluted, for the nine-month period ended September 30, 2023. Adjusted EPS was $0.44 on a diluted basis for the 2024 period, compared to $0.34 for the 2023 period. Adjusted EPS excludes the provision for deferred taxes of $1,295 and $1,245 for the 2024 and 2023 periods, respectively, 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 26 for a reconciliation of adjusted EPS to EPS.

Weighted average shares outstanding used to compute diluted earnings per share increased from 16,174,341 for the first nine-months of 2023 to 16,742,120 for the first nine-months of 2024. The increase is attributable to stock option exercises since the third quarter of 2023 and a greater average stock price in the current period. Accordingly, diluted shares of 212,072 were added to basic weighted average shares outstanding in 2024 compared to 2,441 for the 2023 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 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, 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 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 income attributable to Ultralife Corporation.

Adjusted EBITDA is calculated as follows for the periods presented:

25

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:

26

Liquidity and Capital Resources

As of September 30, 2024, cash totaled $6,774, as compared to $10,278 at December 31, 2023. The decrease reflects a $17,712 reduction in our outstanding debt, largely offset by strong income and cash generation during the period.

For the nine-month period ended September 30, 2024, cash generated from operations was $13,590, as compared to $503 used in operations for the nine-month period ended September 30, 2023. For the 2024 period, cash generated from operations was comprised of net income of $6,176, plus non-cash items totaling $4,807 for depreciation, amortization, stock-based compensation, and deferred taxes, plus $2,607 attributable to reduced working capital.

Cash used in investing activities for the nine months ended September 30, 2024 was $1,326 for capital expenditures, primarily reflecting investments in equipment for new products transitioning to higher-volume manufacturing.

Cash used in financing activities for the nine months ended September 30, 2024 was $15,820, representing a $17,712 reduction in our outstanding debt and $68 in debt issuance costs paid during the period in connection with the Fourth Amendment Agreement, partially offset by $1,960 in cash generated from employee stock option exercise proceeds.

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 markets, on March 30, 2021, the Company filed a shelf registration statement on Form S-3 (File No. 333-254846) (the “Prior Registration Statement”) registering securities in an aggregate amount of $100,000,000. None of the $100,000,000 of registered securities were sold under the Prior Registration Statement (the “Unsold Securities”). Under the rules of the Securities and Exchange Commission (the “SEC”) the Prior Registration Statement was set to expire on April 2, 2024. Therefore, on March 29, 2024, the Company filed a new shelf registration statement on Form S-3 (File No. 333-278360) (the “New Registration Statement”) to replace the Prior Registration Statement. The New Registration Statement includes all $100,000,000 of the Unsold Securities registered on the Prior Registration Statement. During the grace period afforded by Rule 415(a)(5) under the Securities Act of 1933, as amended (the “Securities Act”), we may offer and sell the Unsold Securities under the Prior Registration Statement until the SEC declares the New Registration Statement effective. Pursuant to Rule 415(a)(6) under the Securities Act, the offering of the Unsold Securities under the Prior Registration Statement will be deemed terminated as of the date of effectiveness of the New Registration Statement. Upon the filing of an appropriate prospectus supplement or supplements under either the Prior Registration Statement, or upon its effectiveness the New Registration Statement, we may offer and sell our securities from time to time in one or more offerings, at our discretion. We intend to use the net proceeds resulting from any sales of these 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, 2024, the Company had $3,368 outstanding borrowings on the Revolving Credit Facility and $4,667 on the Term Loan Facility. The Company was in full compliance with all covenants under the Amended Credit Agreement as of September 30, 2024.

As of September 30, 2024, we have made commitments to purchase approximately $597 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 2023 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.

During the first nine months of 2024, 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.

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.