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TO OUR SHAREHOLDERS
During 2016, we delivered results that once again demonstrated the operating leverage of our
business model with top-line growth. Strategically, we continued to make progress in
diversifying served markets, expanding our market and global reach organically and through
acquisition, and leveraging new product development.
Reflecting the strategic growth initiatives taken over the last several years and guided by our
“30-5-5-10=10” business model, we achieved revenue growth and bottom line profitability in
2016. On an 8% increase in revenue to $82.5 million, we grew operating profit 13% to $3.8
million and generated EPS growth of 28% to $0.23 compared to last year. While generating
EBITDA of $7.5 million and utilizing $11.8 million of cash to acquire Accutronics and
complete our share repurchase program, we ended 2016 with cash-on-hand of $10.7 million, a
current ratio of 4.4 and no debt, a testament to our ability to build liquidity and to fund growth
initiatives internally.
Battery & Energy Products (B&EP)
B&EP commercial sales increased by $7.5 million or 23% over 2015 reflecting our
acquisition of Accutronics and an increase in core medical sales, which helped to offset the
impact of the non-recurring, year-earlier surge for our 9 Volt batteries driven by some
legislative changes overseas for smoke detectors. Government and defense sales decreased
$8.0 million or 25% from 2015 due primarily to cutbacks in U.S. defense spending.
Accordingly, total Battery & Energy Products revenues decreased $0.5 million or
approximately 1% to $64.8 million for 2016. Commercial sales comprised 63% of total
B&EP sales for 2016 versus 51% in 2015. The increasingly diversified revenue mix, including
the higher value proposition medical sales, combined with strict cost control by the B&EP
team resulted in a 160 basis point improvement in gross margin to 30.2%.
Communications Systems
For our Communication Systems business, we remained deeply embedded in developing
major opportunities with the U.S. Department of Defense wherein our technical expertise is
helping to shape platform capabilities, increase communications consistency, and eliminate
legacy equipment programs by providing radio agnostic and cost effective solutions. This
positioning resulted in 2016 shipments through an OEM to the U.S. Army of $10.3 million for
initial and follow-on awards of our Vehicle Installed Power Enhanced Riflemen Appliqués,
leading to revenues increasing by $6.6 million or 59% to $17.7 million for 2016. Our team
remained focused on executing our new product development strategy, leveraging technology
advancements, solidifying our relationships with major global customers and utilizing our
strong position in the 20W amplifier space to further expand into integrated system solutions.
As a result, approximately 65% of Communications Systems’ 2016 sales came from products
less than three years old.
Going Forward
For 2017, disciplined execution of our business model and continued investment in market
and sales reach expansion and new product development position us well to realize additional
operating leverage, further diversify beyond our core U.S. government/defense business, and
achieve another year of profitable growth. We will also continue to pursue accretive
acquisitions and strategic partnership opportunities to more quickly gain scale, particular
market access or technology, new products, and/or skilled resources, as the case may be,
while adhering to our disciplined approach. Whereas commercial diversity has strengthened
our Company, driving revenue growth and improving profitability, our core military product
expertise remains intact, uniquely positioning us for taking advantage of any additional
revenue and operating leverage opportunities should there be an increase in U.S. government
defense spending.
For Battery & Energy Products, our approach remains to expand our market and sales reach
through diversification and further penetration of commercial markets, international
government defense markets, and from a broader range of U.S. government defense
customers, helping to lessen the impact of fluctuations that can occur in this business. We will
continue to focus on the medical, safety, security, internet of things, and asset tracking
markets and utilize our global platforms to drive revenue growth. This will include close
collaboration with our key customers to develop new products, and evolve existing products
through multi-generational product planning, to help them achieve their product performance
goals and expand competitive advantage. Our close customer interaction continues to be one
of our best opportunities to provide value and foster long-term customer relationships in 2017.
For Communications Systems, we continue to work with international business partners to
solidify our opportunity pipeline with new product development of next generation
technologies for our Special Operations Forces and OEM customers. Our new product
development activity is associated with integrated tactical communications systems, including
but not limited to next generation amplifier and vehicle adapter products. Multiple domestic
and international OEMs and program offices are evaluating existing products or are in
discussions for new capabilities to support radio programs with more complex waveforms and
system integration requirements. In addition, we will continue to grow revenues in our core
amplifier and everyday ancillary equipment products business by navigating the various U.S.
government and defense channels for tactical communications equipment. Given our strong
presence and alignment with our customers and current world events, we remain optimistic
about the revenue growth prospects for our Communication Systems business.
In closing, I would like to thank our employees for their 2016 accomplishments and
commitment toward executing our growth plans, our partners and customers for their
continued collaboration with us, and our shareholders for their continued support.
Michael D. Popielec
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
/ / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
16-1387013
(I.R.S. Employer
Identification No.)
2000 Technology Parkway, Newark, New York
(Address of principal executive offices)
14513
(Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.10 per share
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes…. No..X...
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes…. No..X...
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X… No….
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes..X… No….
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer …. Accelerated filer ...… Non-accelerated filer …. Smaller reporting company ..X...
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes…. No..X...
On June 26, 2016, the aggregate market value of the common stock held by non-affiliates as defined in Rule 405
under the Securities Act of 1933) of the registrant was approximately $46,435,667 (in whole dollars) based upon the
closing price for such common stock as reported on the NASDAQ Global Market on June 24, 2016.
As of February 8, 2017, the registrant had 15,363,658 shares of common stock outstanding, net of 4,015,752
treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held on
July 18, 2017 are specifically incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on
Form 10-K, except for the equity plan information required by Item 12 as set forth herein.
TABLE OF CONTENTS
ITEM
PAGE
PART I
1 Business ..................................................................................................................3
1A Risk Factors ............................................................................................................14
1B Unresolved Staff Comments ..................................................................................22
2 Properties ................................................................................................................22
3 Legal Proceedings ...................................................................................................23
4 Mine Safety Disclosures .........................................................................................23
PART II
5 Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ..............................................24
6 Selected Financial Data ..........................................................................................25
7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations ............................................................................................25
7A Quantitative and Qualitative Disclosures About Market Risk ............................35
8 Financial Statements and Supplementary Data ......................................................36
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................................................63
9A Controls and Procedures.........................................................................................63
9B Other Information ...................................................................................................63
PART III
10 Directors, Executive Officers and Corporate Governance ....................................64
11 Executive Compensation ........................................................................................64
12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ................................................................................64
13 Certain Relationships and Related Transactions, and Director Independence......64
14 Principal Accountant Fees and Services ................................................................64
PART IV
15 Exhibits, Financial Statement Schedules ...............................................................65
Signatures .....................................................................................................................68
Index to Exhibits...........................................................................................................69
PART I
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, our reliance on certain key customers; potential costs because of the warranties we supply with our products and
services; our efforts to develop new commercial applications for our products; possible future declines in demand for the
products that use our batteries or communications systems; the unique risks associated with our China operations; reduced
U.S. and foreign military spending including the uncertainty associated with government budget approvals; our inability to
comply with changes to the regulations for the shipment of our products; variability in our quarterly and annual results and
the price of our common stock; possible impairments of our goodwill and other intangible assets; possible breaches in
security and other disruptions; safety risks, including the risk of fire; negative publicity of Lithium-ion batteries; our
resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; potential
disruptions in our supply of raw materials and components; our exposure to foreign currency fluctuations; our customers’
demand falling short of volume expectations in our supply agreements; 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; our ability
to utilize our net operating loss carry-forwards; our ability to comply with government regulations regarding the use of
“conflict minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense
agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable
battery industries; and other risks and uncertainties, certain of which are beyond our control.
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 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. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” 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 “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
As used in this annual report, unless otherwise indicated, the terms “the Company”, “we”, “our” and “us” refer to
Ultralife Corporation (“Ultralife”) and includes our wholly-owned subsidiaries, ABLE New Energy Co., Limited and its
wholly-owned subsidiary ABLE New Energy Co., Ltd; Ultralife UK LTD and its wholly-owned subsidiary, Accutronics
Ltd; Ultralife Batteries (UK) Ltd.; and our majority-owned joint venture Ultralife Batteries India Private Limited.
Dollar amounts throughout this Form 10-K Annual Report are presented in thousands of dollars, except for per
share amounts.
ITEM 1. BUSINESS
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. 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 geographies, as well as seeking
opportunities to expand through acquisitions.
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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 international defense departments. We
enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®,
AMTI™, ABLE™, ACCUTRONICS™, ACCUPRO™, ENTELLION™ 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 11 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 report 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.
Battery & Energy Products
We manufacture and/or market a family of Lithium Manganese Dioxide (Li-MnO2), Lithium Manganese Dioxide
Carbon Monofluoride (Li-CFx/MnO2) hybrid and Lithium Thionyl Chloride (Li-SOCl2) non-rechargeable batteries
including 9-volt, HiRate® cylindrical, ThinCell®, and other form factors. Applications for our 9-volt batteries include:
smoke alarms, wireless security systems and intensive care monitors, among many other devices. Our HiRate® and
ThinCell® Lithium non-rechargeable batteries are sold primarily to the military and to OEMs in industrial markets for use in
a variety of applications including radios, emergency radio beacons, search and rescue transponders, pipeline inspection
gauges, portable medical devices and other specialty instruments and applications. Military applications for our non-
rechargeable HiRate® batteries include: man-pack and survival radios, night vision devices, targeting devices, chemical
agent monitors and thermal imaging equipment. Our Lithium Thionyl Chloride batteries, sold under our ABLE and
Ultralife brands as well as a private label brand, are used in a variety of applications including utility meters, wireless
security devices, electronic meters, automotive electronics and geothermal devices. We believe that the chemistry of
Lithium batteries provides significant advantages over other currently available non-rechargeable battery technologies.
These advantages include: higher energy density, lighter weight, longer operating time, longer shelf life and a wider
operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which provide stable
power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in
decreasing power output during discharge. While the price of our Lithium batteries is generally higher than alkaline
batteries, the increased energy per unit of weight and volume of our Lithium batteries allow for longer operating times and
less frequent battery replacements for our targeted applications.
We believe that our ability to design and produce lightweight, high-energy Lithium ion and Nickel Metal Hydride
(NiMH) rechargeable batteries and charging systems in a variety of custom sizes, shapes, and thicknesses offers substantial
benefits to our customers. We market Lithium ion and NiMH rechargeable batteries comprising cells manufactured by
qualified cell manufacturers. Our rechargeable products can be used in a wide variety of applications including
communications, medical and other portable electronic devices.
Within this segment, we also seek to fund the development of new products that we hope will advance our
technologies through contracts with both government agencies and private sector third parties.
We continue to obtain development contracts for intellectual property that we believe will enhance our efforts to
commercialize new products that we develop. Revenues in this segment that pertain to development or license contracts may
vary widely each year, depending upon the quantity and size of contracts obtained.
Revenues for this segment for the year ended December 31, 2016 were $64,753 and segment contribution (gross
profit) was $19,580.
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Communications Systems
Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems
and accessories to support military communications requirements, including RF amplifiers, power supplies, power cables,
connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated
communication systems for fixed or vehicle applications such as vehicle adapters, Vehicle Installed Power Enhanced
Rifleman Appliqué (“VIPER”) systems and SATCOM systems. All systems are packaged to meet specific customer
needs in rugged enclosures to allow for their use in extreme environments. We market these products to all branches of
the U.S. military and approved foreign defense organizations, as well as, U.S. and international prime defense contractors.
Revenues for this segment for the year ended December 31, 2016 were $17,707 and segment contribution (gross
profit) was $5,528.
Corporate
We allocate revenues and cost of sales between the above operating segments. The balance of income and expense,
including but not limited to research and development expenses, and selling, general and administrative expenses, are
reported as Corporate expenses.
There were no revenues for this category for the year ended December 31, 2016 and our corporate operating
expenses were $21,345.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the 2016
Consolidated Financial Statements and Notes thereto contained in this Annual Report on Form 10-K for additional
information on the expenses referred to above. For information relating to total assets by segment, revenues for the last two
years by segment, and contribution by segment for the last two years, see Note 11 in the Notes to Consolidated Financial
Statements.
History
Ultralife was formed as a Delaware corporation in December 1990. In March 1991, we acquired certain technology
and assets from Eastman Kodak Company ("Kodak") relating to its 9-volt Lithium Manganese Dioxide non-rechargeable
battery. In December 1992, we completed our initial public offering and became listed on NASDAQ.
In May 2006, we acquired ABLE New Energy Co., Ltd. (“ABLE”), an established manufacturer of Lithium
batteries located in Shenzhen, China, which broadened our product offering, including a wide range of Lithium Thionyl
Chloride and Lithium Manganese batteries, and provided additional exposure to new consumer markets.
In July 2006, we finalized the acquisition of substantially all the assets of McDowell Research, Ltd.
(“McDowell”), a manufacturer of military communications accessories located originally in Waco, Texas. We relocated
its operations to our Newark, New York facility during the second half of 2007, which enhanced our channels into the
military communications area and strengthened our presence in global defense markets. In January 2012, we relocated
these operations to our Virginia Beach, Virginia facility in order to gain operational efficiencies.
In March 2008, we formed a joint venture, named Ultralife Batteries India Private Limited (“India JV”), with our
distributor partner in India. The India JV assembles Ultralife power solution products and manages local sales and
marketing activities, serving commercial, government and defense customers throughout India. We have invested cash
into the India JV, as consideration for our 51% ownership stake in the India JV.
In March 2009, we acquired the tactical communications products business of Science Applications International
Corporation. The tactical communications products business (“AMTI”) designs, develops and manufactures tactical
communications products including: amplifiers, man-portable systems, cables, power solutions and ancillary
communications equipment, which are sold by Ultralife under the brand name AMTI. The acquisition strengthened our
communications systems business and provided us with direct entry into the handheld radio/amplifier market,
complementing Ultralife’s communications systems offerings.
In January 2016, we acquired Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-
under-Lyme, U.K., a leading independent designer and manufacturer of smart batteries and charger systems for high-
performance, feature-laden portable and handheld electronic devices. With a portfolio encompassing custom battery
5
design, development and manufacturing for OEM’s; standard smart batteries, chargers and accessories; and pre-
engineered batteries and power solutions for specific applications, Accutronics primarily serves the portable medical
device market throughout Europe. Medical applications include digital imaging, ventilators, anesthesia, endoscopy,
patient monitoring, cardio pulmonary care, oxygen concentration and aspiration. We acquired Accutronics to advance
our strategy of commercial revenue diversification, to expand our geographical penetration, and to achieve revenue
growth from new product development. We expect substantial sales synergies between Accutronics and our existing
commercial battery business as we cross-sell our existing products and acquired Accutronics’ products to our respective
customer bases.
Products, Services and Technology
Battery & Energy Products
A non-rechargeable battery is used until discharged and then replaced. The principal competing non-
rechargeable battery technologies are Carbon zinc, alkaline and Lithium. We manufacture a range of non-rechargeable
battery products based on Lithium Manganese Dioxide, Lithium Manganese Carbon Monofluoride hybrid, and Lithium
Thionyl Chloride technologies.
We believe that the chemistry of Lithium batteries provides significant advantages over currently available non-
rechargeable battery technologies, which include: lighter weight, longer operating time, longer shelf life, and a wider
operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which provide stable
power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in
decreasing power during discharge. While the prices for our Lithium batteries are generally higher than commercially
available alkaline batteries produced by others, we believe that the increased energy per unit of weight and volume of our
batteries will allow longer operating time and less frequent battery replacements for our targeted applications. As a result,
we believe that our non-rechargeable batteries are priced competitively with other battery technologies on a price per unit of
energy or volume basis.
Our non-rechargeable products include the following product configurations:
9-Volt Lithium Battery. Our 9-volt Lithium battery delivers a unique combination of the highest available energy
density and stable voltage, which results in a longer operating life for the battery and, accordingly, fewer battery
replacements. While our 9-volt battery price is generally higher than conventional 9-volt Carbon zinc and alkaline batteries,
we believe the enhanced operating performance and decreased costs associated with battery replacement make our 9-volt
battery more cost effective than conventional batteries on a cost per unit of energy or volume basis when used in a variety of
applications.
We market our 9-volt Lithium batteries to OEM, distributor and retail markets including industrial electronics,
safety and security, and medical. Typical applications include: smoke alarms, wireless alarm systems, bone growth
stimulators, telemetry devices, blood analyzers, ambulatory infusion pumps and parking meters. A significant portion of
the sales of our 9-volt battery is to major smoke alarm OEMs for use in their long-life smoke alarms. We also manufacture
our 9-volt Lithium battery under private labels for a variety of companies. Additionally, we sell our 9-volt battery to the
broader consumer market through national and regional retail chains and Internet retailers.
Our current 9-volt battery manufacturing capacity is adequate to meet forecasted customer demand over the next
three years.
Cylindrical Batteries. Featuring high energy, wide temperature range, long shelf life and operating life, our
cylindrical cells and batteries, based on Lithium Manganese Dioxide, Lithium Manganese Dioxide Carbon Monoflouride
hybrid and Lithium Thionyl Chloride technologies, represent some of the most advanced Lithium power sources currently
available. We market a wide range of cylindrical non-rechargeable Lithium cells and batteries in various sizes under both
the Ultralife HiRate and ABLE brands. These include: D, C, 5/4 C, 1/2 AA, 2/3 A and other sizes, which are sold
individually as well as packaged into multi-cell battery packs, including our leading BA-5390 military battery, an
alternative to the competing Li-SO2 BA-5590 battery, and one of the most widely used battery types in the U.S. armed
forces for portable applications. Our BA-5390 battery provides 50% to 100% more energy (mission time) than the BA-
5590, and it is used in approximately 60 military applications. With the introduction of our Lithium Carbon Monofluoride
hybrid chemistry, we now offer a D-cell that has 100% more energy than the competing Li-SO2 D-cell.
We market our line of Lithium cells and batteries to the OEM market for commercial, defense, medical, asset
tracking and search and rescue applications, among others. Significant commercial applications include pipeline
6
inspection equipment, automatic re-closers and oceanographic devices. Asset tracking applications include RFID (Radio
Frequency Identification) systems. Among the defense uses are manpack radios, night vision goggles, chemical agent
monitors and thermal imaging equipment. Medical applications include: AED’s (Automated External Defibrillators),
infusion pumps and telemetry systems. Search and rescue applications include: ELT’s (Emergency Locator Transmitters)
for aircraft and EPIRB’s (Emergency Position Indicating Radio Beacons) for ships.
Thin Cell Batteries. We manufacture a range of thin Lithium Manganese Dioxide batteries under the Thin Cell®
brand. Thin Cell batteries are flat, lightweight batteries providing a unique combination of high energy, long shelf life,
wide operating temperature range and very low profile. We are currently marketing these batteries to OEMs for
applications such as displays, wearable medical devices, toll passes, theft detection systems, and RFID devices.
In contrast to non-rechargeable batteries, after a rechargeable battery is discharged, it can be recharged and reused
many times. Generally, discharge and recharge cycles can be repeated hundreds or thousands of times in rechargeable
batteries, but the achievable number of cycles (cycle life) varies among technologies and is an important competitive factor.
All rechargeable batteries experience a small, but measurable, loss in energy with each cycle. The industry commonly
reports cycle life in the number of cycles a battery can achieve until 80% of the battery's initial energy capacity remains. In
the rechargeable battery market, the principal competing technologies are Nickel Cadmium, Nickel Metal Hydride and
Lithium ion (including Lithium polymer) batteries. Rechargeable batteries are used in many applications, such as military
radios, laptop computers, mobile telephones, portable medical devices, wearable devices and many other commercial,
defense and consumer products.
Three important performance characteristics of a rechargeable battery are design flexibility, energy density and
cycle life. Design flexibility refers to the ability of rechargeable batteries to be designed to fit a variety of shapes and sizes of
battery compartments. Thin profile batteries with prismatic geometry provide the design flexibility to fit the battery
compartments of today's electronic devices. Energy density refers to the total amount of electrical energy stored in a battery
divided by the battery’s weight and volume as measured in watt-hours per kilogram and watt-hours per liter, respectively.
High energy density batteries generally are longer lasting power sources providing longer operating time and necessitating
fewer battery recharges. High energy density and long achievable cycle life are important characteristics for comparing
rechargeable battery technologies. Greater energy density will permit the use of batteries of a given weight or volume for a
longer time period. Accordingly, greater energy density will enable the use of smaller and lighter batteries with energy
comparable to those currently marketed. Lithium ion batteries, by the nature of their electrochemical properties, are capable
of providing higher energy density than comparably sized batteries that utilize other chemistries and, therefore, tend to
consume less volume and weight for a given energy content. Long achievable cycle life, particularly in combination with
high energy density, is suitable for applications requiring frequent battery recharges, such as cellular telephones and laptop
computers, and allows the user to charge and recharge many times before noticing a difference in performance. We believe
that our lithium ion batteries generally have some of the highest energy density and longest cycle life available.
Lithium Ion Cells and Batteries. We market a variety of Lithium ion cells and rechargeable batteries comprising
cells manufactured by qualified cell manufacturers. These products are used in a wide variety of applications including
communications, medical and other portable electronic devices.
Battery Charging Systems and Accessories. To provide our customers with complete power system solutions, we
offer a wide range of rugged military and commercial battery charging systems and accessories including smart chargers,
multi-bay charging systems and a variety of cables.
Multi-Kilowatt Module. Our Multi-Kilowatt Module lithium ion battery system is a large format battery utilizable
for energy storage, battery back-up, and remote power applications. This product is a direct replacement of 2.5 kWh and
greater lead acid batteries in 24V or 48V applications. It can be connected in multiples to obtain higher-voltages and is
capable of over 3,000 cycles while maintaining 80% of its capacity.
Technology Contracts. Our technology contract activities involve the development of new products or the
enhancement of existing products through contracts with both government agencies and other private sector third parties.
Communications Systems
Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems
and accessories to support military communications systems, including RF amplifiers, power supplies, power cables,
connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated
communication systems for fixed or vehicle applications such as vehicle adapters and SATCOM systems. We package all
systems to meet specific customer needs in rugged enclosures to allow their use in extreme environments.
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We offer a wide range of military communications systems and accessories designed to enhance and extend the
operation of communications equipment such as vehicle-mounted, manpack and handheld transceivers. Our communications
products include the following product configurations:
RF Amplifiers. Our RF amplifiers include: 20, 50 and 75-watt amplifiers and 20-watt accessories and kits. These
amplifiers are used to extend the range of manpack and handheld tactical transceivers and can be used on mobile or fixed site
applications.
Integrated Systems. Our integrated systems include: vehicle mounted systems; SATCOM systems; rugged,
deployable case systems; multiband transceiver kits; enroute communications cases; and radio cases. These systems give
communications operators everything that is needed to provide reliable links to support C4ISR (Command, Control,
Communications, Computers and Information, Surveillance and Reconnaissance).
Power Systems. Our power systems include: universal AC/DC power supplies with battery backup for tactical
manpack and handheld transceivers; ROVER™ power supplies; interoperable power adapters and chargers; portable
power systems; tactical combat and AC to DC power supplies, among many others. We can provide power supplies for
virtually all tactical communications devices.
Communications and Electronics. Our communications and electronics services include the design, integration,
and fielding of portable, mobile and fixed-site communications systems.
Sales and Marketing
We employ a staff of sales and marketing personnel in North America, Europe and Asia. We sell our products and
services directly to commercial customers, including OEM’s, as well as government and defense agencies in the U.S. and
abroad and have contractual arrangements with sales agents who market our products on a commission basis in defined
territories. Every effort is made to adjust future prices accordingly, but the ability to adjust prices is generally based on
market conditions.
We also distribute some of our products through domestic and international distributors and retailers. Our sales are
generated primarily from customer purchase orders. We have several long-term contracts with the U.S. government and
other customers. These contracts do not commit the customers to specific purchase volumes, nor to specific timing of
purchase order releases, and they include fixed price agreements over various periods of time. In general we do not
believe our sales are seasonal, although we may sometimes experience seasonality for some of our military products based
on the timing of government fiscal budget expenditures.
A significant portion of our business comes from sales of products and services to the U.S. and foreign
governments through various contracts. These contracts are subject to procurement laws and regulations that specify policies
and procedures for acquiring goods and services. The regulations also contain guidelines for managing contracts after they
are awarded, including conditions under which contracts may be terminated, in whole or in part, at the government’s
convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or
administrative proceedings involving fines, penalties, suspension of payments, or suspension or debarment from government
contracting or subcontracting for a period of time.
During the year ended December 31, 2016 we had two major customers, both large defense primary contractors,
which individually comprised 13% and 12% of our revenues in 2016 and 2% and 23% of our revenues, respectively, in
2015. There were no other customers that comprised greater than 10% of our total revenues during these years.
In 2016, sales to U.S. and non-U.S. customers were approximately $45,094 and $37,366, respectively. In 2015,
sales to U.S. and non-U.S. customers were approximately $46,741 and $29,686, respectively. For more information relating
to revenues by country for the last two fiscal years and long-lived assets for the last two fiscal years by country of origin, see
Note 11 in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Battery & Energy Products
We target sales of our non-rechargeable products to manufacturers of security and safety equipment, medical
devices, search and rescue equipment, specialty instruments, point of sale equipment and metering applications, as well as
users of military equipment. Our strategy is to develop sales and marketing alliances with OEM’s and governmental
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agencies that utilize our batteries in their products, commit to cooperative research and development or marketing programs,
and recommend our products for design-in or replacement use in their products. We are addressing these markets through
direct contact by our sales and technical personnel, use of sales agents and stocking distributors, manufacturing under private
label, and promotional activities.
We seek to capture a significant market share for our products within our targeted OEM markets, which we believe,
if successful will result in increased product awareness and sales at the end-user or consumer level. We are also selling our
9-volt battery to the consumer market through retail distribution through a number of national retailers. Most military
procurements are done directly by the specific government organizations requiring products, based on a competitive bidding
process. Additionally, we are typically required to successfully meet contractual specifications and to pass various
qualifications testing for the products under contract by the military. An inability by us to pass these tests for our new
products in a timely fashion could have a material adverse effect on future growth prospects. When a government contract is
awarded, there is a government procedure that allows for unsuccessful companies to formally protest the award if they
believe they were unjustly treated in the government’s bid evaluation process. A prolonged delay in the resolution of a
protest, or a reversal of an award resulting from such a protest, could have a material adverse effect on our business, financial
condition and results of operations.
We market our products to defense organizations in the U.S. and other countries. These efforts have resulted in
our winning significant contracts. In September 2010, we were awarded a production contract by the Defense Logistics
Agency for up to five years, with a maximum total potential of $42,100, to provide our BA-5390 non-rechargeable
Lithium Manganese Dioxide batteries to the U.S. military. Production deliveries began in the first quarter of 2011.
Through the completion of the contract in September 2015, we shipped BA-5390 batteries totaling $10,000. Subsequent
to the completion of the contract, we continued to receive orders for BA-5390 batteries from the Defense Logistics
Agency that we shipped in 2015 and 2016, and that are included in our 2017 backlog. A subsequent contract has not been
awarded by the Defense Logistics Agency for BA -5390 batteries at this time.
We target sales of our Lithium ion rechargeable batteries and charging systems to OEM customers, as well as
distributors and resellers focused on our target markets. We respond to RFPs to design products for OEMs, and believe that
our design capabilities, product characteristics and solution integration will drive OEMs to incorporate our batteries into their
product offerings, resulting in revenue growth opportunities for us.
We continue to expand our marketing activities as part of our strategic plan to increase sales of our rechargeable
products for commercial, standby, defense and communications applications, as well as hand-held devices, wearable devices
and other electronic portable equipment. A key part of this expansion includes increasing our design and assembly
capabilities as well as building our network of distributors and value added distributors throughout the world.
At December 31, 2016 and 2015, our backlog related to Battery & Energy Products was approximately $23,100 and
$18,500, respectively. The increase in our backlog related to Battery & Energy Products is primarily due to our acquisition
of Accutronics, and higher demand for batteries from a large U.S.-based global defense contractor, government and defense
suppliers and a global medical products OEM. The 2016 backlog is related to orders that are expected to ship throughout
2017.
Communications Systems
We target sales of our communications systems, which include power solutions and accessories to support
communications systems such as RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers,
equipment mounts, case equipment and integrated communication systems, to military OEMs and U.S. and allied foreign
militaries. We sell our products directly and through authorized distributors to OEMs and to defense organizations in the
U.S. and internationally. We market our products to defense organizations and OEMs in the U.S. and internationally.
At December 31, 2016 and 2015, our backlog related to Communications Systems orders was approximately
$3,000 and $8,400, respectively. The 2016 backlog related to Communications Systems reflects orders from a large U.S.-
based global defense contractor. The 2015 backlog represents the award of an $8,200 order through an OEM for the U.S.
Army for our McDowell Research Corporation (“MRC”) product – Vehicle Installed Power Enhanced Rifleman Appliqué
(“VIPER”), as well as integrated systems supporting OEM’s. The 2015 backlog was shipped in 2016, and the 2016 backlog
is expected to ship in 2017.
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Patents, Trade Secrets and Trademarks
We rely on licenses of technology as well as our patented and unpatented proprietary information, know-how and
trade secrets to maintain and develop our competitive position. Despite our efforts to protect our proprietary information,
there can be no assurance that others will neither develop the same or similar information independently nor obtain access to
our proprietary information, know how and trade secrets. In addition, there can be no assurance that we would prevail if we
asserted our intellectual property rights against third parties, or that third parties will not successfully assert infringement
claims against us in the future. We believe, however, that our success depends more on the knowledge, ability, experience
and technological expertise of our employees, than on the legal protection that our patents and other proprietary rights may
or will afford.
We hold ten patents issued in the U.S., two patents issued in Mexico and one patent issued in the European Union,
and have three patents pending in the U.S, and Europe. We believe our patents protect technology that makes automated
production more cost-effective and protects important competitive features of our products. However, we do not consider our
business to be dependent on patent protection.
As part of our employment commencement process, our employees are required to enter into agreements providing
for confidentiality of certain information and the assignment of rights to inventions made by them while employed by us.
These agreements also contain certain noncompetition and non-solicitation provisions effective during the employment term
and for varying periods thereafter depending on position and location. There can be no assurance that we will be able to
enforce these agreements. All of our employees agree to abide by the terms of a Code of Ethics policy that provides for the
confidentiality of certain information received during the course of their employment. Nevertheless, the enforceability of
such agreements is subject to public policy limitations that vary from state to state so we cannot assure that they will be
enforceable in accordance with their terms, if at all.
Trademarks are an important aspect of our business. We sell our products under a number of trademarks, which
we own or use under license. The following are registered trademarks of ours: Ultralife(cid:163), Ultralife Thin Cell(cid:163), Ultralife
HiRate(cid:163), LithiumPower(cid:147), LithiumPower & Design(cid:147), SmartCircuit(cid:147), We Are Power(cid:147), AMTI(cid:147), ABLE(cid:149),
ACCUTRONICS®, ACCUPRO®, ENTELLION®, Intelligent Power Vault®, McDowell Research® and RPS(cid:147).
Manufacturing and Raw Materials
We manufacture our products from raw materials and component parts that we purchase. Our manufacturing
facilities in Newark, New York are ISO 9001:2008, ISO 14001, and ISO 13485 certified. Our manufacturing facilities in
Shenzhen, China are ISO 9001:2008, ISO 14001and ISO 13485 certified. Our manufacturing facilities in Virginia Beach,
Virginia are ISO 9001:2008 certified. Our manufacturing facilities in the United Kingdom are ISO 9001 and ISO 13485
certified.
We expect our future raw material purchases to fluctuate based on our knowledge regarding the timing of customer
orders, the related need to build inventory in anticipation of orders and actual shipment dates.
Battery & Energy Products
Our Newark, New York and Shenzhen, China facilities have the capacity to produce cylindrical cells, 9-volt
batteries, and thin cells. Capacity, however, is also affected by demand for particular products, and product mix changes can
produce bottlenecks in an individual operation, constraining overall capacity. We have acquired new machinery and
equipment in areas where production bottlenecks have resulted in the past and we believe that we have sufficient capacity in
these areas. We continually evaluate our requirements for additional capital equipment, and we believe that the planned
increases will be adequate to meet foreseeable customer demand.
Certain materials used in our products are available only from a single source or a limited number of sources.
Additionally, we may elect to develop relationships with a single or limited number of sources for materials that are
otherwise generally available. Although we believe that alternative sources are available to supply materials that could
replace materials we use and that, if necessary, we would be able to redesign our products to make use of an alternative
material, any interruption in our supply from any supplier that serves currently as our sole source could delay product
shipments and adversely affect our financial performance and relationships with our customers. Although we have
experienced interruptions of product deliveries by sole source suppliers, which have not had a material adverse effect on us,
we cannot assure that they would not have an adverse effect on us in the future. All other raw materials utilized by us are
readily available from many sources.
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We believe that the raw materials and components utilized for our rechargeable batteries are readily available from
many sources. Although we believe that alternative sources are available to supply materials and components that could
replace materials or components we use, any interruption in our supply from any supplier that serves currently as our sole
source could delay product shipments and adversely affect our financial performance and relationships with our customers.
Our Newark, New York facility has the capacity to produce significant volumes of rechargeable batteries, as this
operation generally assembles battery packs and chargers and is limited only by physical space and is not constrained by
manufacturing equipment capacity which can accommodate significant additional volumes of product. Similarly, our China
and United Kingdom facilities also have capacity to produce significant quantities beyond current volumes and are not
constrained by manufacturing equipment capacity.
The total carrying value of our Battery & Energy Products inventory, including raw materials, work in process and
finished goods, amounted to approximately $13,639 and $12,534 as of December 31, 2016 and 2015, respectively. The
year-over-year increase reflects the acquisition of Accutronics in January 2016.
Communications Systems
In general, we believe that the raw materials and components utilized by us for our communications accessories and
systems, including RF amplifiers, power supplies, cables, repeaters and integration kits, are available from many sources.
Although we believe that alternative sources are available to supply materials and components that could replace materials or
components we use, any interruption in our supply from any supplier that serves currently as our sole source could delay
product shipments and adversely affect our financial performance and relationships with our customers.
Our Virginia Beach, Virginia facility has the capacity to produce communications products and systems. This
operation generally assembles products and is limited only by physical space and is not constrained by manufacturing
equipment capacity.
The total carrying value of our Communications Systems inventory, including raw materials, work in process and
finished goods, amounted to approximately $9,817 and $11,280 as of December 31, 2016 and 2015, respectively. The year-
over-year decrease resulted from the fulfillment of the large VIPER award and improved inventory management in 2016.
Research and Development
We concentrate significant resources on research and development activities to improve our technological
capabilities and to design new products for customers’ applications. We conduct our research and development in Newark,
New York; Virginia Beach, Virginia; Tallahassee, Florida; Newcastle-under-Lyme, United Kingdom and Shenzhen, China.
During 2016 and 2015, we expended $6,155 and $6,112, respectively, on research and development, including $209 and
$509, respectively, on customer sponsored research and development activities, which are included in cost of goods sold.
We expect that research and development expenditures in the future will be fairly consistent with those in 2016, as we
anticipate that new product development initiatives will drive our growth. As in the past, we will continue to make funding
decisions for our research and development efforts based upon strategic demand for customer applications.
Battery & Energy Products
We continue to internally develop non-rechargeable cells and batteries with the goal of broadening our product
offering to our customers.
We continue to internally develop our rechargeable product portfolio, including batteries, battery management
systems, cables and charging systems, as our customers’ needs for portable power continue to grow and new technologies
become available.
The U.S. government sponsors research and development programs designed to improve the performance and
safety of existing battery systems and to develop new battery systems.
Communications Systems
We continue to internally develop a variety of communications accessories and systems for the global defense
market to meet the ever-changing demands of our customers.
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Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in our batteries may pose safety problems if improperly used, stored, or handled.
We have designed our batteries to minimize safety hazards both in manufacturing and use.
The transportation of non-rechargeable and rechargeable Lithium batteries is regulated in the U.S. by the
Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”), and internationally by
the International Civil Aviation Organization (“ICAO”) and corresponding International Air Transport Association
(“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (“IMDG”), and other
country specific regulations. These regulations are based on the United Nations Recommendations on the Transport of
Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship our products
pursuant to PHMSA, ICAO, IATA, IMDG and other country specific hazardous goods regulations. The regulations require
companies to meet certain testing, packaging, labeling, marking and shipping paper specifications for safety reasons. We
have not incurred, and do not expect to incur, any significant costs in order to comply with these regulations. We believe
we comply with all current U.S. and international regulations for the shipment of our products, and we intend and expect to
comply with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply
with these regulations. However, if we are unable to comply with any such new regulations, or if regulations are introduced
that limit our or our customers’ ability to transport our products in a cost-effective manner, this could have a material adverse
effect on our business, financial condition and results of operations.
The European Union’s Restriction of Hazardous Substances Directive (“the EU RoHS Directive”) places
restrictions on the use of certain hazardous substances in electrical and electronic equipment. All applicable products sold
in the European Union market must pass RoHS compliance. While this directive does not apply to batteries and does not
currently affect our defense products, should any changes occur in the directive that would affect our products, we intend
and expect to comply with any new regulations that are imposed. However, we cannot assure that the cost of complying with
such new regulations would not have a material adverse effect on us. Our commercial chargers are substantially in
compliance with the EU RoHS Directive.
The European Union’s Battery Directive "on batteries and accumulators and waste batteries and accumulators"
(the “EU Battery Directive”) is intended to cover all types of batteries regardless of their shape, volume, weight, material
composition or use. It is aimed at reducing mercury, cadmium, lead and other metals in the environment by minimizing
the use of these substances in batteries and by treating and re-using old batteries. The EU Battery Directive applies to all
types of batteries except those used to protect European Member States' security, for military purposes, or sent into space.
To achieve these objectives, the EU Battery Directive prohibits the marketing of some batteries containing hazardous
substances. It establishes schemes aimed at high level of collection and recycling of batteries with quantified collection
and recycling targets. The EU Battery Directive sets out minimum rules for producer responsibility and provisions with
regard to labeling of batteries and their removability from equipment. The EU Battery Directive requires product
markings for batteries and accumulators to provide information on capacity and to facilitate reuse and safe disposal. We
currently ship our products pursuant to the requirements of the EU Battery Directive.
This EU Battery Directive requires that producers or importers of particular classes of electrical goods are
financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. This
directive assigns levels of responsibility to companies doing business in European Union markets based on their relative
market share. This directive calls on each European Union member state to enact enabling legislation to implement the
directive. As additional European Union member states pass enabling legislation our compliance system should be
sufficient to meet such requirements. Our current estimated costs associated with our compliance with these directives
based on our current market share are not significant. However, we continue to evaluate the impact of these directives as
European Union member states implement guidance, and actual costs could differ from our current estimates.
China’s “Management Methods for Restricted Use of Hazardous Substances in Electrical and Electronic
Products” (“China RoHS 2”) provides a regulatory framework including hazardous substance restrictions similar to those
imposed by the EU RoHS Directive. China RoHS 2 applies to methods for the control and reduction of pollution and
other public hazards to the environment caused during the production, sale, and import of electrical and electronic
products (“EEP”) in China. The regulatory framework of China RoHS 2, also now references the updated marking and
labeling requirements under Standard SJ/T 11364-2014 (“Marking Standard”). The methods under China RoHS 2 only
apply to EEP placed in the marketplace in China. We believe our compliance system is sufficient to meet our
requirements under China RoHS 2. Our current estimated costs associated with our compliance with this regulation based
on our current market share are not significant. However, we continue to evaluate the impact of this regulation, and
actual costs could differ from our current estimates.
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National, state and local laws impose various environmental controls on the manufacture, transportation, storage,
use and disposal of batteries and of certain chemicals used in the manufacture of batteries. Although we believe that our
operations are in material compliance with current environmental regulations, there can be no assurance that changes in such
laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities, costs
and expenses. There can be no assurance that additional or modified regulations relating to the manufacture, transportation,
storage, use and disposal of materials used to manufacture our batteries or restricting disposal of batteries will not be
imposed or that such regulations will not have a material adverse effect on our business, financial condition and results of
operations. In 2016 and 2015, we spent approximately $117 and $155, respectively, on environmental compliance,
including costs to properly dispose of potentially hazardous waste.
Since non-rechargeable and rechargeable Lithium battery chemistries react adversely with water and water vapor,
certain of our manufacturing processes must be performed in a controlled environment with low relative humidity. Our
Newark, New York and Shenzhen, China facilities contain dry rooms or glove box equipment, as well as specialized air-
drying equipment.
In addition to the environmental regulations previously described, our products are subject to U.S. and
international laws and regulations governing international trade and exports including but not limited to the International
Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against
embargoed countries.
The ITAR is a set of United States government regulations that control the export and import of defense-related
articles and services on the United States Munitions List. These regulations implement the provisions of the Arms Export
Control Act, and are described in the Code of Federal Regulations. The Department of State Directorate of Defense Trade
Controls interprets and enforces ITAR. Its goal is to safeguard U.S. national security and further U.S. foreign policy
objectives.
The related EAR are enforced and interpreted by the Bureau of Industry and Security in the Commerce
Department. The Department of Defense is also involved in the review and approval process. Inspections in support of
import and export laws are performed at border crossings by Customs and Border Protection, an agency of the
Department of Homeland Security.
Products and services developed and manufactured in our foreign locations are subject to the export and import
controls of the nation in which the foreign location operates.
We believe we are in material compliance with these domestic and international export regulations. However,
failure of compliance could have a material adverse effect on our business through possible fines, denial of export
privileges, or loss of customers. Further, while we are not aware of any proposed changes to these regulations, any change
in the scope or enforcement of export or import regulations or related legislation could have a material adverse effect on
our business through increased costs of compliance or reduction in the international growth prospects available to us.
Our future estimated costs associated with our compliance with ITAR, EAR, and the foreign export and import
controls we are subject to based on our current sales volumes are not significant. However, we continue to evaluate the
impact of these regulations, and actual costs could differ from our current estimates.
Battery & Energy Products
Our non-rechargeable battery products incorporate Lithium metal, which reacts with water and may cause fires if
not handled properly. In the past, we have experienced fires that have temporarily interrupted certain manufacturing
operations. We believe that we have adequate fire suppression systems and insurance, including business interruption
insurance, to protect against the occurrence of fires and fire losses in our facilities.
Our 9-volt battery, among other sizes, is designed to conform to the dimensional and electrical standards of the
American National Standards Institute. Authorized certification bodies such as Underwriters Laboratories, Intertek and SGS
recognize several of our products.
Communications Systems
We are not currently aware of any regulatory requirements regarding the disposal of communications products.
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Corporate
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Section 1502 (the “Dodd-Frank
Act”) requires public companies to disclose whether tantalum, tin, gold and tungsten, commonly known as “conflict
minerals,” are necessary to the functionality or production of a product manufactured by a public company and if those
elements originated from armed groups in the Democratic Republic of Congo or adjoining countries. To comply with the
Dodd-Frank Act, as implemented by SEC rules, we are required to perform due diligence inquiries of our suppliers to
determine whether or not our products contain such minerals and from which countries and source (smelter) the minerals
were obtained. Our annual report on Form SD was filed by the statutory due date of June 1, 2016 for the 2015 calendar
year and we continue to implement appropriate measures with our suppliers in order to better ascertain the origin of the
conflict minerals in our products.
Competition
Competition in both the battery and communications systems markets is, and is expected to remain, intense. The
competition ranges from development stage companies to major domestic and international companies, many of which have
financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. We
compete against companies producing batteries as well as companies producing communications systems. We compete on
the basis of design flexibility, performance, price, reliability and customer support. There can be no assurance that our
technologies and products will not be rendered obsolete by developments in competing technologies or services that are
currently under development or that may be developed in the future or that our competitors will not market competing
products and services that obtain market acceptance more rapidly than ours.
Historically, although other entities may attempt to take advantage of the growth of the battery market, the Lithium
battery cell industry has certain technological and economic barriers to entry. The development of technology, equipment
and manufacturing techniques and the operation of a facility for the automated production of Lithium battery cells require
large capital expenditures, which may deter new entrants from commencing production. Through our experience in battery
cell manufacturing, we have also developed significant expertise in the non-rechargeable battery market, which we believe
would be difficult to reproduce without substantial time and expense.
Employees
As of December 31, 2016, we employed a total of 552 permanent and temporary employees: 35 in research and
development, 447 in production and 70 in sales and administration. None of our employees are represented by a labor union.
ITEM 1A. RISK FACTORS
Our business faces many risks. As such, prospective investors and shareholders should carefully consider and
evaluate all of the risk factors described below as well as other factors discussed in this Annual Report on Form 10-K and in
our other filings with the SEC. Any of these factors could adversely affect our business, financial condition and results of
operations. Additional risks and uncertainties that are not currently known to us or that are not currently believed by us to be
material may also harm our business operations and financial results. These risk factors may change from time to time and
may be amended, supplemented, or superseded by updates to the risk factors contained in periodic reports on Form 10-Q and
Form 10-K that we file with the SEC in the future.
A significant portion of our revenues is derived from certain key customers.
During the years ended December 31, 2016 and 2015, we had two major customers, both large defense primary
contractors, which together comprised 25% of our revenues in each year. Last year, one of those customers comprised 23%
of our sales. There were no other customers that comprised greater than 10% of our total revenues during these years. While
we consider our relationship with this prime contractor to be good, the reduction, delay or cancellation of orders from this
customer or this customer’s insolvency / inability to pay, for any reason, would reduce our revenue and operating income
and could materially and adversely affect our business, operating results and financial condition in other ways.
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We may incur significant costs because of the warranties we supply with our products and services.
With respect to our battery products, we typically offer warranties against any defects in manufacture or
workmanship for a period up to one year from the date of purchase. With respect to our communications systems products,
we now offer up to a three-year warranty. We provide for a reserve for these potential warranty expenses, which is based on
an analysis of historical warranty issues. There is no assurance that future warranty claims will be consistent with past
history, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves will
be sufficient. This could have a material adverse effect on our business, financial condition and results of operations.
Our efforts to develop new products or new commercial applications for our products could be prolonged or could fail.
Although we develop certain products for new commercial applications, we cannot assure that our products will be
accepted due to the highly competitive nature of the industry. There are many new product and technology entrants into the
marketplace, and we must continually reassess the market segments in which our products can be successful and seek to
engage customers in those segments that will adopt our products for use in their products. In addition, these companies must
be successful with their products in their markets for us to gain increased business. Increased competition, failure to gain
customer acceptance of products, the introduction of competitive technologies or failure of our customers in their markets
could have a further adverse effect on our business and reduce our revenue and operating income.
A decline in demand for products using our batteries or communications systems could reduce demand for our products
and/or our products could become obsolete.
A substantial portion of our business depends on the continued demand for products using our batteries and
communications systems sold by our customers, including original equipment manufacturers. Our success depends
significantly upon the success of those customers’ products in the marketplace. We are subject to many risks beyond our
control that influence the success or failure of a particular product or service offered by a customer, including:
competition faced by the customer in its particular industry,
(cid:120)
(cid:120) market acceptance of the customer’s product or service,
(cid:120)
(cid:120)
the engineering, sales, marketing and management capabilities of the customer,
technical challenges unrelated to our technology or products faced by the customer in developing its products
or services, and
the financial and other resources of the customer.
(cid:120)
The market for our products is characterized by changing technology and evolving industry standards, often
resulting in product obsolescence or short product lifecycles. Although we believe that our products utilize state-of-the-art
technology, there can be no assurance that competitors will not develop technologies or products that would render our
technologies and products obsolete or less marketable. Many of the companies with which we compete have substantially
greater resources than we do, and some have the capacity and volume of business to be able to produce their products more
efficiently than we can. In addition, these companies are developing or have developed products using a variety of
technologies that are expected to compete with our technologies. If these companies successfully market their products in a
manner that renders our technologies obsolete, this would reduce our revenue and operating income and could have other
material adverse effects on our business, financial condition and results of operations.
Our operations in China are subject to unique risks and uncertainties.
Our operating facility in China presents risks including, but not limited to, changes in local regulatory
requirements, changes in labor laws, local wage laws, environmental regulations, taxes and operating licenses,
compliance with U.S. regulatory requirements, including the Foreign Corrupt Practices Act, uncertainties as to application
and interpretation of local laws and enforcement of contract and intellectual property rights, currency restrictions,
currency exchange controls, fluctuations of currency, and currency revaluations, eminent domain claims, civil unrest,
power outages, water shortages, labor shortages, labor disputes, increase in labor costs, rapid changes in government,
economic and political policies, political or civil unrest, acts of terrorism, or the threat of boycotts, and other civil
disturbances that are outside of our control. Any such disruptions could depress our earnings and have other material
adverse effects on our business, financial condition and results of operations.
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For example, during 2014 the landlord for our China facility informed us that the local village government in
Shenzhen was exercising its right of eminent domain and that the lease for our facility would not be extended past its
expiration in October 2014 due to zoning changes. Accordingly, we developed and executed a plan which we completed
in 2015. Under the plan we found a replacement facility, entered into a five-year lease, negotiated compensation from the
local government for our forfeited leasehold improvements and moving expenses, refurbished the replacement facility to
meet our operational needs and relocated all of our operations and employees to the new facility. While this situation
was handled on time, on plan and with no known disruption to our business, there can be no assurances that other
situations posing such risks to the business will be successfully remediated to the same extent.
Reductions or delays in U.S. and foreign military spending could continue to have a material adverse effect on our
business, financial condition and results of operations.
A significant portion of our revenues is derived from contracts with the U.S. and foreign militaries or OEMs that
supply the U.S. and foreign militaries. In the years ended December 31, 2016 and 2015, approximately $41,600 or 50% and
$42,700 or 56%, respectively, of our revenues were comprised of sales made directly or indirectly to the U.S. and foreign
militaries.
While significant gains have been made in commercial markets with our Battery & Energy Products business, we
are still highly dependent on sales to U.S. Government customers. The amounts and percentages of our net revenue that
was derived from sales to U.S. Government customers, including the Department of Defense, whether directly or through
prime contractors, was approximately $33,600 or 41% in 2016 and $36,700 or 48% in 2015. Therefore, any significant
disruption or deterioration of our relationship with the U.S. Government or any prime defense contractor could still
significantly reduce our revenue. Our competitors continuously engage in efforts to expand their business relationships
with the U.S. Government and will continue these efforts in the future, and the U.S. Government may choose to use other
contractors or suppliers.
Budget and appropriations decisions made by the U.S. Government, including possible future sequestration periods or
other similar formulaic reductions in federal expenditures, are outside of our control and have long-term consequences for
our business. A continued decline in U.S. military expenditures could result in a reduction in the military’s demand for our
products, which could have a material adverse effect on our business, financial condition and results of operations
.
Any inability to comply with changes to the regulations for the shipment of our products could limit our ability to transport
our products to customers in a cost-effective manner and reduce our operating income and margins.
The transportation of Lithium batteries is regulated by the International Civil Aviation Organization (“ICAO”) and
corresponding International Air Transport Association (“IATA”) Dangerous Goods Regulations and the International
Maritime Dangerous Goods Code (“IMDG”) and in the U.S. by the Department of Transportation’s Pipeline and Hazardous
Materials Safety Administration (“PHMSA”). These regulations are based on the United Nations Recommendations on the
Transport of Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship
our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. These regulations require companies to
meet certain testing, packaging, labeling and shipping specifications for safety reasons. We have not incurred, and do not
expect to incur, any significant costs in order to comply with these regulations. We believe we comply with all current
U.S. and international regulations for the shipment of our products, and we intend and expect to comply with any new
regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations.
If we are unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to
transport our products to customers in a cost-effective manner, this could reduce our operating income and margins, and
have other material adverse effects on our business, financial condition and results of operations.
Our quarterly and annual results and the price of our common stock could fluctuate significantly.
Our future operating results may vary significantly from quarter-to-quarter and from year-to-year depending on
factors such as the timing and shipment of significant orders, new product introductions, major project wins, U.S. and
foreign government demand, delays in customer releases of purchase orders, delays in receiving raw materials from vendors,
the mix of distribution channels through which we sell our products and services and general economic conditions.
Frequently, a substantial portion of our revenue in each quarter is generated from orders booked and fulfilled during that
quarter. As a result, revenue levels are difficult to predict for each quarter. If revenue results are below expectations,
operating results will be adversely affected as we have a sizeable base of fixed overhead costs that do not fluctuate much
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with changes in revenue. Due to such variances in operating results, we have sometimes failed to meet, and in the future
may not meet, market expectations regarding our future operating results.
In addition to the uncertainties of quarterly and annual operating results, future announcements concerning us or our
competitors, including technological innovations or commercial products, litigation or public concerns as to the safety or
commercial value of one or more of our products may cause the market price of our common stock to fluctuate substantially
for reasons which may be unrelated to our operating results.
Any impairment of goodwill and indefinite-lived intangible assets, and other intangible assets, could negatively impact
our results of operations.
Our goodwill and indefinite-lived intangible assets are subject to an impairment test on an annual basis and are
also tested whenever events and circumstances indicate that goodwill and/or indefinite-lived intangible assets may be
impaired. Any excess goodwill and/or indefinite-lived intangible assets value resulting from the impairment test must be
written off in the period of determination. Intangible assets (other than goodwill and indefinite-lived intangible assets)
are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an
investment in a business which will require us to record goodwill based on the purchase price and the value of the
acquired tangible and intangible assets. We may subsequently experience unforeseen issues with such business which
adversely affect the anticipated results of the business or value of the intangible assets and trigger an evaluation of the
recoverability of the recorded goodwill and intangible assets for such business. There is a possibility that our goodwill
and other intangible assets, particularly in our Communications Systems business, could be impaired should there be a
significant change in our internal forecasts and other assumptions we use in our impairment analysis. Future
determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any
accelerated amortization of other intangible assets could have a negative impact, although not affecting cash, on our
results of operations and financial condition.
We have completed our annual impairment analysis for goodwill and indefinite-lived intangible assets, in accordance
with the applicable accounting guidance, and have concluded that we do not have any impairment of goodwill or
intangible assets for the year ended December 31, 2016. Our impairment analysis was primarily focused on the goodwill
and intangible assets pertaining to our Communications Systems business with particular emphasis on our McDowell
Research Corporation trademark which was partially impaired in 2015 and passed by a relatively narrow margin in 2016.
For the year ended December 31, 2015, we recorded a non-cash impairment amounting to $150 of our McDowell Research
Corporation trademark in our Communications Systems business. The non-cash impairment charge was caused by time
delays in the awarding by government and defense customers in recent years of certain large projects in our pipeline. The
aggregate goodwill and net book value of intangible assets amounted to $27,159 and $20,229 at December 31, 2016 and
2015, respectively. The year-over-year increase resulted from our acquisition of Accutronics in January 2016, which
comprised $7,259 of the year-end balance (goodwill of $3,824 and intangible assets of $3,435). For both years, our testing
took into account our large opportunity pipeline for Communications Systems products as well as the maturity of the
opportunities, and assumed the future award and estimated timing of certain major projects based on our knowledge of the
status of these projects and the probability of award at the current time. Until an award is actually consummated and
resulting purchase orders are issued, there are no guarantees that the underlying projects will contribute to revenues and
operating income to justify the level of goodwill and intangible assets on our balance sheet. Accordingly, we will continue
our practice of updating our analysis as warranted on an ongoing basis.
Breaches in security and other disruptions, could diminish our ability to generate revenues or contain costs and
negatively impact our business in other ways.
We face certain security threats, including threats to our information technology infrastructure, attempts to gain
access to our proprietary or classified information, and threats to physical and cyber security. Our information technology
networks and related systems are critical to the operation of our business and essential to our ability to successfully
perform day-to-day operations. The risks of a security breach, cyber attack, cyber intrusion, or disruption, particularly
through actions taken by computer hackers, foreign governments and cyber terrorists, have increased as the number,
intensity and sophistication of attempted attacks and intrusions from around the world have increased. Although we have
acquired and developed systems and processes designed to protect our proprietary or classified information, they may not
be sufficient and the failure to prevent these types of events could disrupt our operations, require significant management
attention and resources, and could negatively impact our reputation among our customers and the public, which could
have a negative impact on our financial condition, and weaken our results of operations and liquidity.
17
We are subject to certain safety risks, including the risk of fire, inherent in the manufacture, use and transportation of
Lithium batteries.
Due to the high energy inherent in Lithium batteries, our Lithium batteries can pose certain safety risks, including
the risk of fire. We incorporate procedures in research, development, product design, manufacturing processes and the
transportation of Lithium batteries that are intended to minimize safety risks, but we cannot assure that accidents will not
occur or that our products will not be subject to recall for safety concerns. Although we currently carry insurance policies
which cover loss of the plant and machinery, leasehold improvements, inventory and business interruption, any accident,
whether at the manufacturing facilities or from the use of the products, may result in significant production delays or claims
for damages resulting from injuries or death. While we maintain what we believe to be sufficient casualty liability coverage
to protect against such occurrences, these types of losses could reduce our operating income and have other material adverse
effects on our business, financial condition and results of operation.
Negative publicity of Lithium ion batteries may negatively impact the industries or markets we operate in.
We are unable to predict the impact, severity or duration of negative publicity related to fire / mishandling of
Lithium ion batteries or the environmental impact of their disposal, and how it may impact the industries or markets we
serve. Ongoing negative attention being given to Lithium ion batteries that are used in certain cellular phones or are
integrated into the power systems of new commercial aircraft and electric motor vehicles may have an impact on the Lithium
ion battery industry as a whole, regardless of the design or usage of those batteries. The residual effects of such events could
have an adverse effect on our business, financial condition, and results of operations.
Our growth and expansion strategy could strain or overwhelm our resources.
Rapid growth of our business could significantly strain management, operations and technical resources. If we are
successful in obtaining rapid market growth of our products, we will likely be required to deliver large volumes of quality
products to customers on a timely basis at a reasonable cost. For example, demand for our new or existing products
combined with our ability to penetrate new markets and geographies or secure a major project award, could strain the current
capacity of our manufacturing facilities and require additional capital resources, equipment and time to meet the required
demand. We cannot assure, however, that our business will grow rapidly or that our efforts to expand manufacturing and
quality control activities will be successful or that we will be able to satisfy commercial scale production requirements on a
timely and cost-effective basis.
We also may be required to continue to improve our operations, management and financial systems and controls in
order to remain competitive. The failure to manage growth and expansion effectively could have an adverse effect on our
business, financial condition, and results of operations.
The loss of top management and key personnel could significantly harm our business, and our ability to put in place a
succession plan and recruit experienced, competent management is critical to the success of the business.
The loss of top management and key personnel could significantly harm our business, and our ability to put in place
a succession plan and recruit experienced, competent management is critical to the success of our business. The continuity
of our officers and executive team is vital to the successful implementation of our business model and growth strategy
designed to deliver sustainable, consistent profitability. A top management priority has been the development and
implementation of a formal written succession plan to mitigate the risks associated with the loss of senior executives. There
is no guarantee that we will be successful in our efforts to effectively implement our succession plan.
Because of the specialized, technical nature of our business, we are highly dependent on certain members of our
management, sales, engineering and technical staffs. The loss of these employees could have a material adverse effect on
our business, financial condition and results of operations. Our ability to effectively pursue our business strategy will depend
upon, among other factors, the successful retention of our key personnel, recruitment of additional highly skilled and
experienced managerial, sales, engineering and technical personnel, and the integration of such personnel obtained through
business acquisitions. We cannot assure that we will be able to retain or recruit this type of personnel. An inability to hire
sufficient numbers of people or to find people with the desired skills could result in greater demands being placed on limited
management resources which could delay or impede the execution of our business plans and have other material adverse
effects on our business, financial condition and results of operations.
18
Our supply of raw materials and components could be disrupted.
Certain materials and components used in our products are available only from a single or a limited number of
suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or
increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for
materials and components that are otherwise generally available. Due to our involvement with supplying defense products to
the U.S. government, we could receive a government preference to continue to obtain critical supplies to meet military
production needs. However, if the government did not provide us with a government preference in such circumstances, the
difficulty in obtaining supplies could have a material adverse effect on our business, financial condition and results of
operations. We believe that alternative suppliers are available to supply materials and components that could replace
materials and components currently used and that, if necessary, we would be able to redesign our products to make use of
such alternatives. However, any interruption in the supply from any supplier that serves as a sole source could delay product
shipments and have a material adverse effect on our business, financial condition and results of operations. We have
experienced interruptions of product deliveries by sole source suppliers in the past, and we cannot guarantee that we will not
experience a material interruption of deliveries from sole source suppliers in the future. Of particular note is the increased
demand for Lithium-based cells from the electric vehicle manufacturers. While this has resulted in increased supply of such
cells, we continue to monitor our supply chain closely to ensure that any potential supply interruptions are minimized.
Additionally, we could face increasing pricing pressure from our suppliers dependent upon volume due to rising costs by
these suppliers that could be passed on to us in higher prices for our raw materials, which could increase our cost of business,
lower our margins and have other materially adverse effects on our business, financial condition and results of operations.
We are subject to foreign currency fluctuations.
We maintain manufacturing operations in North America, Europe and China, and we export products to various
countries. We purchase materials and sell our products in foreign currencies, and therefore currency fluctuations may impact
our pricing of products sold and materials purchased. While the percentage of our business with customers outside of the
U.S. slightly declined in 2015, sales to such customers still make up a significant percentage of our total revenues. For
example, in 2016, 45% our sales were to customers outside of the U.S. as compared to 39% in 2015. The recent
strengthening of the U.S. Dollar relative to our customers’ currencies could make our products relatively more expensive to
them, and may adversely affect our sales levels and reduce profitability. In addition, our United Kingdom and China
subsidiaries maintain their books in local currency and the translation of the subsidiary financial statements into U.S. dollars
for our consolidated financial statements could have an adverse effect on our consolidated financial results due to changes in
local currency value relative to the U.S. dollar. Accordingly, currency fluctuations could have a material adverse effect on
our business, financial condition and results of operations by increasing our expenses and reducing our income. Finally, we
maintain certain domestic U.S. cash balances denominated in foreign currencies, and the U.S. dollar equivalent of these
balances fluctuates with changes in the foreign exchange rates between these currencies and the U.S. dollar.
Our customers may not meet the volume expectations in our supply agreements.
We sell most of our products and services through supply agreements and contracts. While supply agreements and
contracts contain volume-based pricing based on expected volumes, we cannot assure that adjustments to reflect volume
shortfalls will be made under current industry practices because pricing is rarely adjusted retroactively when contract
volumes are not achieved. Every effort is made to adjust future prices accordingly, but our ability to adjust prices is
generally based on market conditions and we may not be able to adjust prices in various circumstances.
A finding that our proprietary and intellectual property rights are not enforceable or invalid could allow our competitors
and others to produce competing products based on our proprietary and intellectual property or limit our ability to continue
to manufacture and market our products.
We believe our success depends more on the knowledge, ability, experience and technological expertise of our
employees than on the legal protection of patents and other proprietary rights. However, we claim proprietary rights in
various unpatented technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes.
We cannot guarantee the degree of protection these various claims may or will afford, or that competitors will not
independently develop or patent technologies that are substantially equivalent or superior to our technology. We protect our
proprietary rights in our products and operations through contractual obligations, including nondisclosure agreements with
certain employees, customers, consultants and strategic partners. There can be no assurance as to the degree of protection
19
these contractual measures may or will afford. We have had patents issued and have patent applications pending in the U.S.
and elsewhere. We cannot assure (1) that patents will be issued from any of these pending applications, or that the claims
allowed under any issued patents will be sufficiently broad to protect our technology, (2) that any patents issued to us will
not be challenged, invalidated or circumvented, or (3) as to the degree or adequacy of protection any patents or patent
applications may or will afford. Further, if we are found to be infringing third party patents, we cannot assure that we will
not be subjected to significant damages or will be able to obtain licenses with respect to such patents on acceptable terms, if
at all. The failure to obtain necessary licenses could delay product shipments or the introduction of new products, and costly
attempts to design around such patents could foreclose the development, manufacture or sale of products.
We are subject to the contract rules and procedures of the U.S. and foreign governments. These rules and procedures create
significant risks and uncertainties for us that are not usually present in contracts with private parties.
We continue to develop battery products and communications systems to meet the needs of the U.S. and foreign
governments. We compete in solicitations for awards of contracts. The receipt of an award, however, does not always result
in the immediate release of an order and does not guarantee in any way any given volume of orders. Any delay of
solicitations or anticipated purchase orders by, or future failure of, the U.S. or foreign governments to purchase products
manufactured by us could have a material adverse effect on our business, financial condition and results of operations. In
these scenarios we are also typically required to successfully meet contractual specifications and to pass various
qualification-testing for the products under contract. Our inability to pass these tests in a timely fashion, as well as meet
delivery schedules for orders released under contract, could have a material adverse effect on our business, financial
condition and results of operations.
Additionally, when a U.S. government contract is awarded, there is a government procedure that permits
unsuccessful companies to formally protest such award if they believe they were unjustly treated in the evaluation process.
As a result of these protests, the government is precluded from proceeding under these contracts until the protests are
resolved. A prolonged delay in the resolution of a protest, or a reversal of an award resulting from such a protest could have
material adverse effects on our business, financial condition and results of operations.
We could be adversely affected by violations of the US Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act or
other anti-corruption laws.
The FCPA, U.K. Bribery Act and other anti-corruption laws generally prohibit companies and their
intermediaries from making improper payments (to foreign officials and otherwise) and require companies to keep
accurate books and records and maintain appropriate internal controls. Our training program and policies mandate
compliance with such laws. We operate in some parts of the world that have experienced governmental corruption to
some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and
practices. If we are found to be liable for violations of anti-corruption laws (either due to our own acts or our
inadvertence, or due to the acts or inadvertence of others, including employees of our third party partners or agents), we
could suffer from civil and criminal penalties or other sanctions, incur significant internal investigation costs and suffer
reputational harm.
Our ability to use our net operating loss carry-forwards in the future may be limited, which could increase our tax liabilities
and reduce our net income.
At December 31, 2016, we had approximately $72 million of U.S. and $13 million of U.K. net operating loss carry-
forwards (“NOLs”) and $2 million of U.S. tax credit carry-forwards available to offset future taxable income. We
continually assess the carrying value of this asset based on the relevant accounting standards. As of December 31, 2016, we
reflected a full valuation allowance against our deferred tax asset to the extent we are not able to be offset the asset by future
reversing temporary differences. As we continue to assess the realizability of our deferred tax assets, the amount of the
valuation allowance could be reduced. In addition, certain of our NOL carryforwards are subject to U.S. alternative
minimum tax such that carryforwards can offset only 90% of alternative minimum taxable income. Achieving our business
plan targets, particularly those relating to revenue and profitability, is integral to our assessment regarding the recoverability
of our net deferred tax asset.
20
Compliance with government regulations regarding the use of "conflict minerals" may result in increased costs and risks
to the company.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Act"), the SEC has
promulgated disclosure requirements regarding the use of certain minerals, which are mined from the Democratic
Republic of Congo and adjoining countries, known as conflict minerals. The disclosure rules were effective in May 2014.
We are required to perform due diligence inquiries of our supply chain and publicly disclose whether we manufacture (as
defined in the Act) any products that contain conflict minerals and could incur significant costs related to implementing a
process that will meet the mandates of the Act. Additionally, customers typically rely on us to provide critical data
regarding the parts they purchase, including conflict mineral information. Our material sourcing is broad-based and multi-
tiered, and we may not be able to easily verify the origins for conflict minerals used in the products we sell. We have
many suppliers and each provides conflict mineral information in a different manner, if at all. Accordingly, because the
supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of conflict
minerals used in our products. Additionally, customers may demand that the products they purchase be free of conflict
minerals. This may limit the number of suppliers that can provide products in sufficient quantities to meet customer
demand or at competitive prices.
The U.S. and foreign governments can audit our contracts with their respective defense and government agencies and, under
certain circumstances, can adjust the economic terms of those contracts.
A portion of our business comes from sales of products and services to the U.S. and foreign governments through
various contracts. These contracts are subject to procurement laws and regulations that lay out policies and procedures for
acquiring goods and services. The regulations also contain guidelines for managing contracts after they are awarded,
including conditions under which contracts may be terminated, in whole or in part, at the government’s convenience or for
default. Failure to comply with the procurement laws or regulations can result in civil, criminal or administrative
proceedings involving fines, penalties, suspension of payments, or suspension or disbarment from government contracting or
subcontracting for a period of time.
We may incur significant costs because of known and unknown environmental matters.
National, state and local laws impose various environmental controls on the manufacture, transportation, storage,
use and disposal of batteries and of certain chemicals used in the manufacture of batteries. We use and generate a variety of
chemicals and other hazardous by-products in our manufacturing operations. These environmental laws govern, among
other things, air emissions, wastewater discharges and the handling, storage and release of wastes and hazardous substances.
Such laws and regulations can be complex and are subject to change. Although we believe that our operations are in
substantial compliance with current environmental regulations and that, except as noted below, there are no environmental
conditions that will require material expenditures for clean up at our present or former facilities or at facilities to which we
have sent waste for disposal, there can be no assurance that changes in such laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future liabilities. There can be no assurance that additional or
modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture
our batteries or restricting disposal of batteries will not be imposed, or as to how these regulations will affect our customers
or us. Such changes in regulations could reduce our operating income and margins and have other material adverse effects
on our business, financial condition and results of operations. We could incur substantial costs as a result of violations of
environmental laws, including clean up costs, fines and sanctions and third-party property damage or personal injury claims.
Failure to comply with environmental requirements could also result in enforcement actions that materially limit or otherwise
affect the operations of the facilities involved. Under certain environmental laws, a current or previous owner or operator of
an environmentally contaminated site may be held liable for the entire cost of investigation, removal or remediation of
hazardous materials at such property. This liability could result whether or not the owner or operator knew of, or was
responsible for, the presence of any hazardous materials.
The EU RoHS Directive places restrictions on the use of certain hazardous substances in electrical and electronic
equipment. All applicable products sold in the European Union market after July 1, 2006 must comply with EU RoHS
Directive. While this directive does not apply to batteries and does not currently affect our defense products, should any
changes occur in the directive that would affect our products, we intend and expect to comply with any new regulations
that are imposed. Our commercial chargers are in compliance with this directive. Additional European Union directives,
entitled the Waste Electrical and Electronic Equipment (“WEEE”) Directive and the Directive "on batteries and
accumulators and waste batteries and accumulators", impose regulations affecting our non-defense products. These
directives require that producers or importers of particular classes of electrical goods are financially responsible for
21
specified collection, recycling, treatment and disposal of past and future covered products. These directives assign levels
of responsibility to companies doing business in European Union markets based on their relative market share. These
directives call on each European Union member state to enact enabling legislation to implement the directive. As
additional European Union member states pass enabling legislation our compliance system should be sufficient to meet
such requirements. Our current estimated costs associated with our compliance with these directives based on our current
market share are not significant. However, we continue to evaluate the impact of these directives as European Union
member states implement guidance, and actual costs could differ from our current estimates.
The EU Battery Directive is intended to cover all types of batteries regardless of their shape, volume, weight,
material composition or use. It is aimed at reducing mercury, cadmium, lead and other metals in the environment by
minimizing the use of these substances in batteries and by treating and re-using old batteries. This directive applies to all
types of batteries except those used to protect European Member States' security, for military purposes, or sent into
space. To achieve these objectives, the EU Battery Directive prohibits the marketing of some batteries containing
hazardous substances. It establishes processes aimed at high levels of collection and recycling of batteries with quantified
collection and recycling targets. The directive sets out minimum rules for producer responsibility and provisions with
regard to labeling of batteries and their removability from equipment. Product markings are required for batteries and
accumulators to provide information on capacity and to facilitate reuse and safe disposal. We currently ship our products
pursuant to the requirements of the directive. Our current estimated costs associated with our compliance with these
directives based on our current market share are not significant. However, we continue to evaluate the impact of these
directives as European Union member states implement guidance, and actual costs could differ from our current
estimates.
The China RoHS 2 directive provides a regulatory framework, including similar hazardous substance restrictions
as are imposed by the EU RoHS Directive, and applies to methods for the control and reduction of pollution and other
public hazards to the environment caused during the production, sale, and import of EEP in China affecting a broad range
of electronic products and parts. The regulatory framework of China RoHS 2, also now references the updated marking
and labeling requirements under Standard SJ/T 11364-2014 (“Marking Standard”). The methods under China RoHS 2
only apply to EEP placed in the marketplace in China. We believe our compliance system is sufficient to meet our
requirements under China RoHS 2. Our current estimated costs associated with our compliance with this regulation based
on our current market share are not significant. However, we continue to evaluate the impact of this regulation, and
actual costs could differ from our current estimates.
A number of domestic and international communities are prohibiting the landfill disposal of batteries and
requiring companies to make provisions for product recycling. Of particular note are the EU Batteries Directive and the
New York State Rechargeable Battery Recycling Law. We are committed to responsible product stewardship and
ongoing compliance with these and future statutes and regulations. The compliance costs associated with current
recycling statutes and regulations are not expected to be significant at this time. However, we continue to evaluate the
impact of these regulations, and actual costs could differ from our current estimates and additional laws could be enacted
by these and other states which entail greater costs of compliance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2016, we own two buildings in Newark, New York comprising approximately 250,000 square
feet, which serve operations primarily in the Battery & Energy Products operating segment. Our corporate headquarters are
located in our Newark, New York facility. We also lease approximately 97,000 square feet in two buildings on one campus
in Shenzhen, China and approximately 25,000 square feet in six buildings in a contiguous area in Newcastle-under-Lyme,
United Kingdom , which serve operations in the Battery & Energy Products operating segment. The Shenzhen, China
campus location includes a dormitory facility. We lease approximately 32,500 square feet in a facility in Virginia Beach,
Virginia, which serves operations in the Communications Systems operating segment. We also lease sales and
administrative offices, as well as manufacturing and production facilities, in India, which serve operations in the Battery &
Energy Products operating segment. Our research and development efforts for our Battery & Energy Products are conducted
at our Newark, New York, Newcastle-under-Lyme. United Kingdom and Shenzhen, China facilities, while our research and
development efforts for our Communications Systems products are conducted in Tallahassee, Florida and at our facility in
Virginia Beach, Virginia. We believe that our facilities are adequate and suitable for our current needs. However, we may
require additional manufacturing and administrative space if demand for our products and services grows.
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ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims that arise in the normal course of business. We believe that the
final disposition of such matters will not have a material adverse effect on our financial position, results of operations or cash
flows.
Dreamliner Litigation
In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines (“EA”) was damaged by
a fire while parked at London Heathrow Airport. We participated in and provided technical assistance in support of an
investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the
aircraft, as we are one of many downstream suppliers to that manufacturer. A final report was issued by the Air
Accidents Investigative Branch - - UK Civil Aviation regulatory authority, with findings indicating that the fire was
primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and
installed by another company.
A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard Lithium Manganese
Dioxide non-rechargeable D-cell. Ultralife has had this cell in production since 2001, with millions of units produced.
The cell is widely-used for global defense and commercial applications. This battery product has gone through rigorous
safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests and Criteria,
and is authorized for use in aerospace applications under Technical Standard Order C142.
On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft
manufacturer, concerning that 2013 fire. The suit was filed by EA in the Commercial Court, Queen’s Bench Division of
the High Court of Justice, London and seeks as damages $42,000 plus other unspecified amounts, including those for loss
of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable
providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers.
We are working with those insurers and their counsel to actively defend against this action, which is ongoing.
At this time, we believe that there is not a reasonable possibility that this incident will result in a material financial
exposure to the Company.
Arista Power Litigation
Since September 2011, we have been pursuing legal action against Arista Power, Inc. (“Arista”) and our former
employee, David Modeen, for, among other things, alleged breach of certain agreements, duties and obligations, including
misappropriation of our confidential information and trade secrets, tortious interference, and breach of contract. On
January 12, 2016, Arista filed for liquidation under Chapter 7 of the bankruptcy laws of the United States, without
accurately identifying our ongoing lawsuit against them. Although we have not withdrawn our lawsuit, nor has it been
dismissed, the Company did not submit a Proof of Claim in connection with Arista’s bankruptcy filing, nor does it intend
to actively pursue its claims against Arista at this time
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
23
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Ultralife’s common stock is listed on the NASDAQ Global Market under the symbol “ULBI.”
The following table sets forth the quarterly high and low closing sales prices of our common stock during 2015 and
2016:
2015:
Quarter ended March 29, 2015
Quarter ended June 28, 2015
Quarter ended September 27, 2015
Quarter ended December 31, 2015
2016:
Quarter ended March 27, 2016
Quarter ended June 26, 2016
Quarter ended September 25, 2016
Quarter ended December 31, 2016
Closing Sales Prices
Low
High
$3.99
$4.40
$5.45
$7.49
$6.51
$5.85
$5.05
$5.05
$3.00
$3.56
$3.90
$5.28
$4.95
$3.76
$3.95
$3.92
Holders
As of February 9, 2017, there were approximately 3,000 registered holders of record of our common stock.
Purchases of Equity Securities by the Issuer
On April 28, 2014, the Company’s Board of Directors approved a share repurchase program (the “Share
Repurchase Program”) which became effective on May 1, 2014 and under which the Company was authorized to
repurchase up to 1.8 million shares of its outstanding common stock over a period not to exceed twelve months. The
Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to be
repurchased under the program was increased to 3.4 million shares.
Share repurchases under this program were made in accordance with SEC Rule 10b-18 using a variety of
methods, which included open market purchases and block trades in compliance with applicable insider trading and other
securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under
10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’s discretion.
The Share Repurchase Program expired on June 2, 2016 and did not obligate the Company to repurchase any specific
number of shares.
In 2016, we repurchased a total of 156,092 shares of our common stock for an aggregate consideration of $630,
of which 149,904 shares were repurchased under the Share Repurchase Program for an aggregate amount (excluding fees
and commissions) of $603. In 2015, we repurchased a total of 2,258,929 shares of our common stock for an aggregate
consideration of $9,388, of which 2,225,437 shares were repurchased under the Share Repurchase Program for an
aggregate amount (excluding fees and commissions) of $9,162.
From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the
Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480.
24
The following table sets forth information regarding 2016 purchases of our common stock under this program:
Total
Number of
Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares
Purchased
As Part of
Publicly
Announced
Program
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the
Program
Total for 2016
149,904
$4.02
2,592,095
-
Dividends
We have never declared or paid any cash dividends on our capital stock. Pursuant to our current credit facility, we
are precluded from paying any dividends. We intend to retain earnings, if any, to finance future operations and expansion
and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future payment of dividends will
depend upon our financial condition, capital requirements and earnings, as well as upon other factors that our Board of
Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide this information.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-K.
The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of
Operations is presented in thousands of dollars, except for share and per share amounts. All figures presented below
represent results from continuing operations, 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, manufacture, install and maintain power and communications
systems including rechargeable and non-rechargeable batteries, communications and electronics systems and accessories and
custom engineered systems. 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 international defense
departments.
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 various other non-rechargeable
batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as
cables. The Communications Systems segment includes RF amplifiers, power supplies, cable and connector assemblies,
amplified speakers, equipment mounts, case equipment, integrated communication system kits 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.
25
We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint
ventures, which can broaden the scope of our products and services, expand operating and market opportunities and
provide the ability to enter new lines of business synergistic with our portfolio of offerings.
During 2014, we elected to terminate our lease for our U.K. service office and repair facility that was to have
expired in May 2018. The termination of this lease was effective as of January 31, 2015.
In January 2016, we acquired Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-
under-Lyme, U.K., a leading independent designer and manufacturer of smart batteries and charger systems for high-
performance, feature-laden portable and handheld electronic devices.
Currently, we do not experience significant seasonal sales trends in any of our operating segments, although
sales to the U.S. Defense Department and other international defense organizations can be sporadic based on the needs of
those particular customers.
Consolidated revenues increased by $6,033 or 7.9% to $82,460 for the year ended December 31, 2016 compared
to $76,427 for the year ended December 31, 2015. During 2016, we experienced revenue growth of 58.7% for our
Communications Systems business and a revenue decline of 0.8% for our Battery & Energy Products business. This 2016
performance reflected a $7,519 or 22.5% increase in sales to our commercial customers and a $1,486 or 3.5% decrease in
sales to our government and defense customers. The increase in commercial sales reflects our acquisition of Accutronics
in January 2016, which partially offset the year earlier sales demand for our 9-Volt batteries from large global smoke
detector OEM’s to comply with legislation and trends in a certain European Union country for products lasting ten years
and large shipments of batteries to service the metering and toll pass industries in China. Sales to medical customers in
the 2016 period increased by 47.4% over 2015 when excluding Accutronics and almost doubled when including
Accutronics. Medical sales comprised 26.5% of total sales in 2016 compared to 10.2% for 2016. The decrease in
government and defense sales primarily reflected lower demand from a large, global defense prime contractor for our
batteries and chargers and lower battery sales to the U.S. Defense of Defense partially offset by higher revenues from our
Communications Systems business driven by shipments of Vehicle Installed Power Enhanced Rifleman Appliqué
(“VIPER”) systems to fulfill contracts awarded in 2015 and 2016.
Gross margin decreased to 30.4% for the year ended December 31, 2016, as compared to 30.5% for the year
ended December 31, 2015. The 10 basis point decline was due primarily to product mix in our Communications Systems
business segment and a one-time adjustment to increase the opening inventory of Accutronics to fair market value in
accordance with purchase accounting.
Operating expenses increased by $1,359 or 6.8% to $21,345 during the year ended December 31, 2016,
compared to $19,986 during the year ended December 31, 2015. This increase was fully attributable to the acquisition of
Accutronics on January 13, 2016, which contributed operating expenses of $2,882 in 2016, including $203 of one-time
direct acquisition costs and $323 of intangible asset amortization. Excluding Accutronics results, operating expenses
decreased $1,523 or 7.6% due primarily to strict control over discretionary spending, while focusing on the development
of new products and revenue growth. Operating expenses as a percentage of revenues decreased from 26.2% in 2015 to
25.9% in 2016 due to the combination of higher revenues and lower expenses in 2016.
Net income attributable to Ultralife was $3,509, or $0.23 per basic share ($0.23 per diluted share) for the year
ended December 31, 2016, compared to $2,869 or $0.18 per basic share ($0.17 per diluted share) for the year ended
December 31, 2015.
Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision
(benefit) for income taxes, depreciation and amortization, plus/minus expenses/income that we do not consider reflective
of our continuing operations, amounted to $7,502 for the year ended December 31, 2016 compared to $6,966 for the prior
period. See the section “Adjusted EBITDA” beginning on page 30 for a reconciliation of Adjusted EBITDA to net
income attributable to Ultralife.
As a result of careful working capital management and cash generated from operations, our liquidity remains
solid with total cash of $10,706, a decrease of $3,827 from the cash position of $14,533 as of December 31, 2015. The
decrease reflects the January 2016 acquisition of Accutronics utilizing cash of $11,161 and the completion of our Share
Repurchase Program with the repurchase of 149,904 shares for $603, partially offset by our operating performance and
inventory reduction. We had no debt as of December 31, 2016 or December 31, 2015.
26
For the year, we achieved our stated goal of generating profitable growth, posting 13% operating income growth
on an 8% revenue increase. As we look ahead to 2017, an improving backlog and disciplined execution of our business
model while continuing to invest in market and sales reach expansion and new product development, positions us well to
further diversify beyond our core U.S. government/defense business and achieve another year of profitable growth.
Results of Operations
Year Ended December 31, 2016 Compared With the Year Ended December 31, 2015:
Year Ended December 31,
2016
2015
Increase/
(Decrease)
Revenues:
Battery & Energy Products
Communications Systems
Total
Cost of Products Sold:
Battery & Energy Products
Communications Systems
Total
Gross Profit:
Battery & Energy Products
Communications Systems
Total
Operating Expenses
Operating Income
Other Expense, Net
Income Before Taxes
Income Tax Provision
Net Income
Net Loss Attributable to Non-Controlling Interest
Net Income Attributable to Ultralife
Net Income Attributable to Ultralife Common Shares –
Basic
Net Income Attributable to Ultralife Common Shares –
Diluted
$64,753
17,707
82,460
45,173
12,179
57,352
19,580
5,528
25,108
21,345
3,763
(183)
3,580
98
3,482
27
$3,509
$0.23
$0.23
$65,272
11,155
76,427
46,574
6,537
53,111
18,698
4,618
23,316
19,986
3,330
(180)
3,150
310
2,840
29
$2,869
$0.18
$0.17
($519)
6,552
6,033
(1,401)
5,642
4,241
882
910
1,792
1,359
433
3
430
(212)
642
(2)
$640
$0.05
$0.06
Weighted Average Shares Outstanding –Basic
Weighted Average Shares Outstanding – Diluted
15,261,000
15,405,000
16,182,000
16,458,000
(921,000)
(1,053,000)
Revenues. Total revenues for the year ended December 31, 2016 amounted to $82,460, an increase of $6,033,
or 7.9% from the $76,427 reported for the year ended December 31, 2015.
Battery & Energy Products revenues decreased $519, or 0.8%, for the year ended December 31, 2016.
Commercial revenues of this business increased $7,519, or 22.5%, over 2015 and now comprise 62.6% of total segment
sales versus 51.1% last year. The year-over-year increase resulted from the inclusion of Accutronics sales in the amount
of $10,362 and an increase in core medical sales, which offset the year-earlier demand for our 9-Volt batteries from large
global smoke detector OEM’s to comply with legislation and trends in a certain European Union country for products
lasting ten years and large shipments of batteries to service the metering and toll pass industries in China. Government
and defense sales of this business decreased $8,038, or 25.2%, from 2015 and now comprise 36.6% of total segment sales
versus 48.9% last year. The year-over-year decline was due primarily to the lower battery and charger shipments to a
large international prime defense supplier and lower shipments of primary batteries to the U.S. Department of Defense in
2016.
Communications Systems revenues increased $6,552, or 58.7%, for the year ended December 31, 2016. The
increase resulted from fulfillment of orders through an OEM to the U.S. Army of the Vehicle Installed Power Enhanced
Riflemen Appliqué (“VIPER”) following our September 2015 award of an $8.2 million contract and an October 2016
follow-up award for $2.2 million. The shipments of VIPER systems more than offset a decrease in core product sales due
to closing and funding delays associated with some orders which are expected to ship in 2017.
27
Our order backlog at December 31, 2016 was approximately $26,200, a decrease of approximately $700 from the
backlog at December 31, 2015, which was $26,900. The decrease is primarily due to the award of an $8,200 order through
an OEM for the U.S. Army for our new MRC product – Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”) in
2015 that was shipped in 2016, which offset backorders associated with our acquisition of Accutronics, and higher demand
for batteries and power supplies from large U.S.-based global defense contractors and a global medical products OEM. Our
backlog at December 31, 2016 is expected to ship throughout 2017.
Cost of Products Sold and Gross Profit. Cost of products sold for the year ended December 31, 2016 increased
$4,241, or 8.0%, from the year ended December 31, 2015. Consolidated cost of products sold as a percentage of total
revenue increased from 69.5% for the year ended December 31, 2015 to 69.6% for the year ended December 31, 2016.
Correspondingly, consolidated gross margin was 30.4% for the year ended December 31, 2016, compared with 30.5% for
the year ended December 31, 2015. The 10 basis point decline in gross margin is due primarily to product mix impacting
the Communications Systems segment and a one-time adjustment to increase the opening inventory of Accutronics to fair
market value in accordance with purchase accounting.
For our Battery & Energy Products segment, the cost of products sold decreased $1,401 or 3.0%, from the year
ended December 31, 2015. Battery & Energy Products’ gross profit for 2016 was $19,580 or 30.2% of revenues, an
increase of $882 or 4.7% from gross profit of $18,698, or 28.6% of revenues, for 2015. As a result, Battery & Energy
Products’ gross margin as a percentage of revenues increased for the year ended December 31, 2016 by 160 basis points
over the prior year, reflecting favorable product mix including the higher overall gross margins recognized for
Accutronics high value proposition products.
For our Communications Systems segment, the cost of products sold increased by $5,642 or 86.3% from the year
ended December 31, 2015. Communications Systems’ gross profit for the year ended December 31, 2016 was $5,528 or
31.2% of revenues, an increase of $910 or 19.7% from gross profit of $4,618 or 41.4% of revenues, for the year ended
December 31, 2015. The 1,020 basis points decrease in gross margin as a percentage of revenue during 2016 is due to
sales product mix primarily related to the high volume initial VIPER award.
Operating Expenses. Total operating expenses for the year ended December 31, 2016 increased $1,359 or 6.8%
from the year ended December 31, 2015. This increase was primarily attributable to the acquisition of Accutronics on
January 13, 2016, which contributed operating expenses of $2,882 in 2016, including $203 of one-time direct acquisition
costs and $323 of intangible asset amortization. Excluding Accutronics results, operating expenses decreased $1,523 or
7.6% due primarily to strict control over non-revenue related discretionary spending, while focusing on the development
of new products and revenue growth.
Overall, operating expenses as a percentage of revenues were 25.9% for the year ended December 31, 2016
compared to 26.2% for the comparable 2015 period. Amortization expense associated with intangible assets related to
our acquisitions increased to $503, including $323 for Accutronics, for the year ended December 31, 2016 ($303 in
selling, general and administrative expenses and $200 in research and development costs), compared with $235 for the
year ended December 31, 2015 ($105 in selling, general, and administrative expenses and $130 in research and
development costs). Research and development costs were $5,946 in 2016, an increase of $343, or 6.1%, from $5,603
reported in 2015. The increase is comprised of $534 of research and development costs (including intangible asset
amortization of $106) incurred by Accutronics, partially offset by a decrease of $191 primarily representing discretionary
spending reductions. Selling, general, and administrative expenses increased $1,166 or 8.2%, from $14,233 for the year
ended December 31, 2015 to $15,399 for the year ended December 31, 2016. The increase is fully attributable to the
inclusion of Accutronics results and the one-time direct acquisition costs which contributed $2,348 (including intangible
asset amortization of $217) of selling, general and administrative expenses for the 2016 period, partially offset by
continued actions in the core businesses to reduce discretionary expenses. For 2015, we recorded a non-cash impairment
charge of $150 to reduce the book value of our McDowell Research Corporation trademark. The 2015 trademark
impairment charge was based on compliance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and
resulted from taking into account timing delays in the awarding by government/defense customers in recent years of
certain large projects in our Communications Systems pipeline.
Other Income (Expense). Other (expense) totaled ($183) for the year ended December 31, 2016 compared to
($180) for the year ended December 31, 2015. Interest and financing expense, net of interest income, increased $18 to
$263 for 2016 from $245 for 2015, as a result of one-time costs of $48 associated with the acquisition of Accutronics.
Miscellaneous income amounted to $80 for 2016 compared with $65 for 2015, primarily due to transactions impacted by
foreign currency fluctuation between the U. S. Dollar, Pound Sterling and the Euro.
28
Income Taxes. We recorded a tax provision of $98 for the year ended December 31, 2016 compared with a tax
provision of $310 for the year ended December 31, 2015. The December 31, 2016 provision is primarily due to the
income reported for our United Kingdom operations including Accutronics, state taxes and the recognition of deferred tax
liabilities generated from the amortization of goodwill and certain intangible assets for tax purposes that cannot be
predicted to reverse for book purposes during our loss carryforward periods. The December 31, 2015 provision is
primarily due to the income reported for our China and United Kingdom operations during the periods, the estimated
provision for U.S. federal alternative minimum tax liability, state taxes, and the recognition of deferred tax liabilities
generated from the amortization of goodwill and certain intangible assets for tax purposes that cannot be predicted to
reverse for book purposes during our loss carry-forward periods. The year-over-year decrease is primarily attributable to
the amounts and geographic mix of earnings and an excess accrual of income taxes from prior years. In 2015, the tax
provision was reduced by a deferred tax benefit amounting to $51 relating to our $150 impairment of a trademark. The
effective consolidated tax rates for the years ended December 31, 2016 and 2015 were as follows:
Income Before Income Taxes (a)
Income Tax Provision (b)
Effective Rate (b) / (a)
Years Ended December 31,
2016
$3,580
98
2.7%
2015
$3,150
310
9.8%
In 2016 and 2015, in the U.S. and certain operations in the U.K., we continue to report a valuation allowance for
our deferred tax assets we believe cannot be offset by reversing temporary differences because based on past history, it is
more likely than not that we would not utilize our U.S. and U.K. net operating losses (“NOLs”) that had accumulated over
time before their expiration. The recognition of a valuation allowance on our deferred tax assets resulted from our
evaluation of all available evidence, both positive and negative. The assessment of the realizability of the NOLs was
based on a number of factors including, our history of operating losses, the volatility of our earnings, our historical
operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty
of the general business climate. We concluded that these historical factors represent sufficient negative evidence and have
concluded that we should continue to have a full valuation allowance against our net deferred tax assets. (See Notes 1
and 9 in the Notes to Consolidated Financial Statements for additional information.)
In addition, certain of our NOL carry-forwards are subject to U.S. alternative minimum tax such that carry-
forwards can offset only 90% of alternative minimum taxable income. The use of our U.K. NOL carryforwards may be
limited due to the change in the U.K. operation during 2008 from a manufacturing and assembly center to primarily a
distribution and service center.
Net Income Attributable to Ultralife. Net income attributable to Ultralife and income attributable to Ultralife
common shareholders per diluted share was $3,509 and $0.23, respectively, for the year ended December 31, 2016,
compared to $2,869 and $0.17, respectively, for the year ended December 31, 2015 as a result of the reasons described
above. The 2016 period was impacted by the purchase accounting adjustments and non-recurring costs totaling $343
related to the acquisition of Accutronics, equivalent to $0.02 per share. Average common shares outstanding used to
compute diluted earnings per share decreased from 16,458,000 in the 2015 period to 15,405,000 in the 2016 period,
mainly due to the repurchase of shares under the Company’s Share Repurchase Program (see Note 3 to our Consolidated
Financial Statements) partially offset by stock option exercises.
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 net interest expense, provision (benefit) for income taxes, depreciation and amortization, plus/minus
expenses/income that we do not consider reflective of our ongoing operations. We use Adjusted EBITDA as a
supplemental measure to review and assess our operating performance and to enhance comparability between periods. We
also believe the use of Adjusted EBITDA facilitates investors’ use of operating performance comparisons from period to
period and company to company by backing out potential differences caused by variations in such items as capital
structures (affecting relative interest expense and stock-based compensation expense), the book amortization of intangible
assets (affecting relative amortization expense), the age and book value of facilities and equipment (affecting relative
29
depreciation expense) and other significant non-operating expenses or income. We also present Adjusted EBITDA
because we believe securities analysts, investors and other interested parties frequently use it as a measure of financial
performance. We reconcile Adjusted EBITDA to net income (loss) attributable to Ultralife, the most comparable
financial measure under U.S. GAAP.
We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with
U.S. GAAP financial measures such as income (loss) from operations. We believe that Adjusted EBITDA permits a
comparative assessment of our operating performance, relative to our performance based on our U.S. GAAP results,
while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation
to underlying operating performance, and of non-cash 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 U.S. GAAP, and is not a measure of operating income, operating
performance or liquidity presented in accordance with U.S. 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 U.S. GAAP. Some of these limitations include, but are not limited to, the following:
a. 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;
b. 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 does not reflect any cash requirements
for such replacements;
c. 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
d. 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 U.S. GAAP results and using Adjusted EBITDA
only on a supplemental basis. Adjusted EBITDA is calculated as follows for the periods presented:
Net Income Attributable to Ultralife
Add:
Interest Expense, Net
Income Tax Provision
Depreciation and Amortization of Financing Fees
Amortization of Intangible Assets
MRC Trademark Impairment
Stock-Based Compensation Expense
Non-Cash Purchase Accounting Adjustment
Loss on Asset Disposal and Other
Adjusted EBIDTA
Years ended December 31,
2016
$3,509
263
98
2,294
503
-
710
96
29
$7,502
2015
$2,869
245
310
2,472
235
150
571
-
114
$6,966
30
Liquidity and Capital Resources
Cash Flows and General Business Matters
As of December 31, 2016, cash totaled $10,706 (including restricted cash of $77), a decrease of $3,827 from the
beginning of the year primarily attributable to the Company’s acquisition of Accutronics. During the year ended December
31, 2016, we generated $7,653 of cash from operating activities as compared to $8,551 of cash for the year ended December
31, 2015, a decrease of $898. In 2016, the cash generated from operating activities was a result of our net income of $3,482
plus an add-back of $3,536 for non-cash expenses of depreciation, amortization, and stock-based compensation. Working
capital changes accounted for $635 of the operating cash generation, due mainly to a decrease in inventory, offset by an
increase is accounts receivable and a decline in our accounts payable and other liabilities. In 2015, the cash generated from
operating activities resulted from our net income of $2,840 plus an add-back of $3,542 for non-cash expenses of
depreciation, amortization, loss on disposal of equipment and improvements, and stock-based compensation. Working
capital changes accounted for $2,169 of the operating cash generation, due mainly to a decrease in inventory.
We used $11,011 in cash for investing activities during 2016 compared with $2,910 in cash used for investing
activities in 2015. The Company acquired Accutronics in 2016 utilizing cash of $11,161, which was partially offset by the
cash acquired from Accutronics of $1,304. Cash paid for capital expenditures totaled $1,219 and $2,910 in 2016 and 2015,
respectively. The year-over-year decrease in cash paid for capital expenditures was due primarily to the 2015 payment for
test equipment of pertaining to our Communications business that was installed in 2014. Restricted cash was reduced by
$65 and funded to operating cash in 2016 in accordance with the terms of an international 2015 contract.
We used $173 in cash for financing activities during 2016, compared to $8,868 in cash for financing activities
during 2015. We spent $607 to repurchase treasury stock under the Company’s Share Repurchase Program in 2016
compared to $9,388 in 2015, and we received $461 and $538 in 2016 and 2015, respectively, in funds from the issuance
of common stock in connection with the exercise of stock options by our employees. In 2016 and 2015, we used $27 and
$18, respectively, for tax withholdings related to stock-based awards.
Although we carry a full reserve for our deferred tax asset as of both December 31, 2016 and 2015, we continue
to have significant U.S. NOLs available to us to utilize as an offset to taxable income. As of December 31, 2015, none of
our U.S. NOLs have expired. See Note 9 in our Notes to the Consolidated Financial Statements for additional
information.
Inventory turnover for the year ended December 31, 2016 averaged 2.1 turns, identical to 2015.
As of December 31, 2016, we had made commitments to purchase approximately $504 of production machinery
and equipment, which we expect to fund through operating cash flows.
In January 2016, we acquired Accutronics Limited (“Accutronics”) as disclosed in Note 2 to our Consolidated
Financial Statements. The purchase price of £7,708 million (approximately $11.2 million) was funded out of our cash.
Based on operating cash flows and working capital management, including reductions in discretionary spending and
further reductions of inventory, a large portion of the cash used was restored over the course of 2016.
Debt and Lease Commitments
On May 24, 2013, we entered into a Revolving Credit, Guaranty and Security Agreement (the “Credit
Agreement”) and related security agreements with PNC Bank, National Association (“PNC”) to establish a $20 million
secured asset-based revolving credit facility that includes a $1 million letter of credit subfacility (the “Credit Facility”).
The Credit Agreement provides that the Credit Facility may be increased with PNC’s concurrence to $35 million prior to
the last six months of the term and expires on May 24, 2017. The Credit Facility replaces the prior credit facility with
RBS Business Capital, a division of RBS Asset Finance, Inc., which expired in accordance with its terms on May 15,
2013, with no debt outstanding.
Our available borrowing limit under the Credit Facility fluctuates from time to time based on a borrowing base
formula equal to the sum of up to 85% of eligible accounts receivable plus the least of (a) up to 65% of the eligible
inventory and eligible foreign in-transit inventory, (b) up to 85% of the appraised net orderly liquidation value of eligible
inventory and eligible foreign in-transit inventory, and (c) $7.5 million, in each case subject to the definitions in the
Credit Agreement and reserves required by PNC.
31
Interest is payable quarterly and will accrue on outstanding indebtedness under the Credit Agreement at the
alternate base rate, as defined in the Credit Agreement, plus the applicable margin or at the one, two or three month
LIBOR rate plus the applicable margin as selected by us from time to time and listed below.
Quarterly Average Undrawn
Borrowing Availability
Greater than $8,000,000
$5,000,000 up to $8,000,000
Less than $5,000,000
Applicable Margin for
Alternate Base Rate Loans
1.00%
1.25%
1.50%
Applicable Margin for
LIBOR Rate Loans
2.00%
2.25%
2.50%
We must pay a fee on the Credit Facility’s unused availability of 0.375% per annum and customary letter of
credit fees in addition to various collateral monitoring and related fees and expenses.
In addition to customary affirmative and negative covenants, we must maintain a fixed charge coverage ratio as
defined in the Credit Agreement of 1:15 to 1:00 tested quarterly for the four-quarters then ended. For the years ended
December 31, 2016 and 2015, we were in compliance with all covenants. The Credit Facility is secured by substantially
all our assets.
Any outstanding advances must be repaid upon expiration of the term of the Credit Facility. Payments must be
made during the term to the extent outstanding advances exceed the maximum amount then permitted to be drawn as
advances under the Credit Facility and from the proceeds of certain transactions. Upon the occurrence of an event of
default, the outstanding obligations may be accelerated and PNC will have other customary remedies.
As of December 31, 2016, we had no amount outstanding under the Credit Facility, an applicable interest rate of
4.5% on borrowings below $1,000, borrowing capacity of $9,549 in addition to our unrestricted cash on hand of $10,629,
and no outstanding letters of credit related to the Credit Facility.
See Note 6 in the Notes to Consolidated Financial Statements for additional information.
Other Matters
With respect to our battery products, we typically offer warranties against any defects due to product
manufacture or workmanship for up to one year from the date of purchase. With respect to our communications
accessory products, we typically offer a three-year warranty. We provide for a reserve for these potential warranty
expenses, which is based on an analysis of historical warranty issues. There is no assurance that future warranty claims
will be consistent with past history, and in the event we experience a significant increase in warranty claims, there is no
assurance that our reserves would be sufficient. This could have a material adverse effect on our business, financial
condition and results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these
financial statements requires management to make estimates and assumptions that affect amounts reported therein. The
estimates and assumptions that require management’s most difficult, subjective or complex judgments are described below.
Revenue Recognition:
Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When
products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are
recognized on date of delivery. We make a provision at the time the revenue is recognized for warranty costs
expected to be incurred. Customers, including distributors, do not have a general right of return on products
shipped.
32
Technology Contracts – We recognize revenue using the proportional method, measured by the percentage of
actual costs incurred to date to the total estimated costs to complete the contract. Elements of cost include direct
material, labor and overhead. If a loss on a contract is estimated, the full amount of the loss is recognized
immediately. We allocate costs to all technology contracts based upon actual costs incurred including an allocation
of certain research and development costs incurred.
Deferred Revenue - For each source of revenues, we defer recognition if: (i) evidence of an agreement does not
exist, (ii) delivery or service has not occurred, (iii) the selling price is not fixed or determinable, or (iv)
collectability is not reasonably assured.
Valuation of Inventory:
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (“FIFO”)
method. Our inventory includes raw materials, work in process and finished goods. We record provisions for
excess, obsolete or slow moving inventory based on changes in customer demand, technology developments or
other economic factors. The factors that contribute to inventory valuation risks are our purchasing practices,
material and product obsolescence, accuracy of sales and production forecasts, introduction of new products,
product lifecycles, product support and foreign regulations governing hazardous materials (see Item 1A – Risk
Factors for further information on foreign regulations). We manage our exposure to inventory valuation risks by
maintaining safety stocks, minimum purchase lots, managing product end-of-life issues brought on by aging
components or new product introductions, and by utilizing certain inventory minimization strategies such as
vendor-managed inventories. We believe that the accounting estimate related to valuation of inventories is a
"critical accounting estimate" because it is susceptible to changes from period-to-period due to the requirement for
management to make estimates relative to each of the underlying factors ranging from purchasing, to sales, to
production, to after-sale support. If actual demand, market conditions or product lifecycles are adversely different
from those estimated by management, inventory adjustments to lower market values would result in a reduction to
the carrying value of inventory, an increase in inventory write-offs and a decrease in gross margins.
Warranties:
We maintain provisions related to normal warranty claims by customers. We evaluate these reserves quarterly
based on actual experience with warranty claims to date and our assessment of additional claims in the future. There
is no assurance that future warranty claims will be consistent with past history, and in the event we experience a
significant increase in warranty claims, there is no assurance that our reserves would be sufficient.
Impairment of Long-Lived Assets:
We regularly assess all of our long-lived assets for impairment when events or circumstances indicate their carrying
amounts may not be recoverable. This is accomplished by comparing the expected undiscounted future cash flows
of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows
be less than the carrying value, a write-down would be required, measured as the difference between the carrying
value and the fair value of the asset. Fair value is estimated either through the assistance of an independent
valuation or as the present value of expected discounted future cash flows. The discount rate used by us in our
evaluation is an industry-based weighted average cost of capital. If the expected undiscounted future cash flows
exceed the respective carrying amount as of the date of assessment, no impairment charge is recognized.
Environmental Issues:
Environmental expenditures, if any, that relate to current operations, are generally expensed. Remediation costs that
relate to an existing condition caused by past operations are accrued when it is probable that these costs will be
incurred and can be reasonably estimated.
Goodwill and Other Intangible Assets:
The purchase price paid to effect an acquisition is allocated to the acquired tangible and intangible assets and
liabilities at fair value. We do not amortize goodwill and intangible assets with indefinite lives, but instead
evaluate these assets for impairment at least annually, or when events indicate that impairment exists. We
amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being
utilized over their weighted-average estimated useful life.
The impairment analysis of goodwill consists first of a review of various qualitative factors of the identified
reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its
carrying amount, including goodwill. This review includes, but is not limited to, an evaluation of the
macroeconomic, industry or market, and cost factors relevant to the reporting unit as well as financial
33
performance and entity or reporting unit events that may affect the value of the reporting unit. If this review
leads to the determination that it is more likely than not that the fair value of the reporting unit is greater than its
carrying amount, further impairment testing is not required. However, if this review cannot support a conclusion
that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, or at our
discretion, quantitative impairment steps are performed. Similarly, the analysis for indefinite-lived intangible
assets consists of a review of various qualitative factors to determine if it is more likely than not that the
indefinite-lived intangible asset is not impaired. If we conclude that it is more likely than not that we cannot
support that the indefinite-lived asset is not impaired, or at our discretion, quantitative impairment steps are
performed.
The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with
the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting
unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount of
impairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a comparison
of the fair value of the intangible assets with their carrying amounts. If the carrying value of the intangible assets
exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. We determine the
fair value of the reporting unit for goodwill impairment testing based on a discounted cash flow model. We
determine the fair value of our intangibles assets with indefinite lives (trademarks) through the relief from
royalty valuation approach.
We conducted our annual impairment analysis for goodwill and intangible assets with indefinite lives as of
December 31, 2016. For 2016, we identified four goodwill reporting units for analysis. We performed a
quantitative analysis on these reporting units as of December 31, 2016. This testing indicated no impairment.
For 2016, we identified four trademarks for analysis. We performed annual quantitative tests on each of these
trademarks, and the testing indicated no impairment in 2016. While our testing indicated that the McDowell
Research Corporation trademark is not impaired in 2016, it passed by a relatively narrow margin of 15% over the
carrying value and is most susceptible to variances in sales from current projections. In 2015, we determined that
an impairment of $150 was required to reduce the carrying value of our McDowell Research Corporation trademark
for our Communications Systems business to its estimated fair value.
There is a possibility that our goodwill and other intangible assets, particularly in our Communications Systems
business, could be impaired in the future should there be a significant change in our internal forecasts and other
assumptions we use in our impairment analysis.
Stock-Based Compensation:
We recognize compensation cost relating to share-based payment transactions in our financial statements. The cost
is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the
employee’s requisite service period (generally the vesting period of the equity award). We calculate expected
volatility for stock options by taking an average of historical volatility over the past five years and a computation of
implied volatility. The computation of expected term was determined based on historical experience of similar
awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest
rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of
grant. If required, our market based awards are valued using a Monte Carlo simulation.
Income Taxes:
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that may be in effect when the differences are expected to
reverse.
In 2016 and 2015, in the U.S. and certain operations in the U.K., we continued to report a valuation allowance for
our deferred tax assets that we believe cannot be offset by reversing temporary differences because based on past
history, it is more likely than not that we would not be able to utilize our U.S. and U.K. net operating losses
(“NOLs”) that have accumulated over time. The recognition of a valuation allowance on our deferred tax assets
resulted from our evaluation of all available evidence, both positive and negative. The assessment of the
realizability of the NOLs was based on a number of factors including our history of net operating losses, the
volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings
for future periods and the continued uncertainty of the general business climate. We concluded that these historical
34
factors represent sufficient negative evidence and have concluded that we should continue to record a full valuation
allowance at December 31, 2016. We currently carry a deferred tax asset in China that we have determined does
not require a valuation allowance as we are more likely than not to fully utilize the NOL in China. We continually
assess the carrying value of this asset based on relevant accounting standards.
Business Combinations:
We account for businesses acquired using the acquisition method of accounting. Under this method, all acquisition-
related costs are expensed as incurred. The underlying net assets are recorded at their respective acquisition-date
fair values. As part of this process, we identify and attribute values and estimated lives to property and equipment
and intangible assets acquired. These determinations involve significant estimates and assumptions, including those
with respect to future cash flows, discount rates and asset lives, and therefore require considerable judgment. These
determinations affect the amount of depreciation and amortization expense recognized in future periods. The results
of operations of acquired businesses are included in the consolidated statements of income and comprehensive
income beginning on the respective business's acquisition date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
35
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) are included in this Report beginning on page 39.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2016 and 2015
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and
2015
Notes to Consolidated Financial Statements
Page
37
39
40
41
42
43
36
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Ultralife Corporation
We have audited the accompanying consolidated balance sheet of Ultralife Corporation and subsidiaries as of December
31, 2016, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash
flows for the year then ended (collectively, the financial statements). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Ultralife Corporation and subsidiaries as of December 31, 2016, and the results of their operations and their
cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
February 9, 2017
37
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ultralife Corporation
We have audited the accompanying consolidated balance sheet of Ultralife Corporation as of December 31, 2015, and the related
consolidated statement of income and comprehensive income, shareholders’ equity, and cash flows for the year ended December
31, 2015. Ultralife Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Ultralife Corporation as of December 31, 2015, and the results of its operations and its cash flows for the year ended December
31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Bonadio & Co., LLP
Pittsford, New York
March 2, 2016
38
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
December 31,
2016
2015
Current Assets:
Cash
Restricted Cash
Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $277 and $300, Respectively
Inventories, Net
Prepaid Expenses and Other Current Assets
Due from Insurance Company
Deferred Income Taxes
Total Current Assets
Property, Equipment and Improvements, Net
Goodwill
Other Intangible Assets, Net
Security Deposits and Other Non-Current Assets
Total Assets
Current Liabilities:
Accounts Payable
Accrued Compensation and Related Benefits
Accrued Expenses and Other Current Liabilities
Income Taxes Payable
Total Current Liabilities
Deferred Income Taxes
Other Non-Current Liabilities
Total Liabilities
Commitments and Contingencies (Note 7)
Shareholders' Equity:
LIABILITIES AND SHAREHOLDERS' EQUITY
$10,629
77
13,179
23,456
2,079
0
94
49,514
7,999
19,965
7,194
72
$84,744
$7,292
1,258
2,606
172
11,328
5,538
18
16,884
$14,393
140
11,430
23,814
1,900
177
92
51,946
9,038
16,283
3,946
309
$81,522
$6,494
2,377
1,749
227
10,847
4,631
28
15,506
Preferred Stock – Par Value $.10 Per Share; Authorized 1,000,000 Shares; None Issued
-
-
Common Stock – Par Value $.10 Per Share; Authorized 40,000,000 Shares;
Issued – 19,324,723 Shares and 19,181,815 Shares, Respectively;
Outstanding – 15,308,971 Shares and 15,322,155 Shares, Respectively
Capital in Excess of Par Value
Accumulated Deficit
Accumulated Other Comprehensive Loss
Treasury Stock - at Cost; 4,015,752 Shares and 3,859,660 Shares at December 31, 2016 and 2015, respectively
Total Ultralife Corporation Equity
Non-Controlling Interest
Total Shareholders’ Equity
1,932
178,163
(90,542)
(3,080)
(18,443)
68,030
(170)
67,860
1,918
177,007
(94,051)
(907)
(17,808)
66,159
(143)
66,016
Total Liabilities and Shareholders' Equity
$84,744
$81,522
The accompanying notes are an integral part of these consolidated financial statements.
39
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in Thousands, Except Per Share Amounts)
Year Ended December 31,
Revenues
Cost of Products Sold
Gross Profit
Operating Expenses:
Research and Development
Selling, General and Administrative
Intangible Asset Impairment
Total Operating Expenses
Operating Income
Other (Expense) Income:
Interest Income
Interest and Financing Expense
Miscellaneous
Income Before Income Taxes
Income Tax Provision
Net income
Net Loss Attributable to Non-Controlling Interest
Net Income Attributable to Ultralife Corporation
Other Comprehensive Loss:
Foreign Currency Translation Adjustments
Comprehensive Income Attributable to Ultralife Corporation
Net Income Per Share Attributable to Ultralife Corporation Common
Shareholders – Basic:
Net Income Per Share Attributable to Ultralife Corporation Common
Shareholders – Diluted:
Weighted Average Shares Outstanding – Basic
Weighted Average Shares Outstanding – Diluted
2016
$82,460
57,352
25,108
5,946
15,399
0
21,345
3,763
0
(263)
80
3,580
98
3,482
27
3,509
(2,173)
$1,336
$.23
$.23
15,261
15,405
2015
$76,427
53,111
23,316
5,603
14,233
150
19,986
3,330
3
(248)
65
3,150
310
2,840
29
2,869
(440)
$2,429
$.18
$.17
16,182
16,458
The accompanying notes are an integral part of these consolidated financial statements.
40
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in Thousands)
Common Stock
Number of
Shares
Amount
Capital
in Excess
of Par
Value
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Treasury
Stock
Non-
Controlling
Interest
Total
18,941,544
$1,894
$175,940
$(467)
$(96,920)
$(8,420)
$(114)
$71,913
102,334
137,937
10
14
(28)
524
489
82
(9,388)
(440)
2,869
(29)
(9,388)
(18)
538
489
82
(440)
2,840
19,181,815
$1,918
$177,007
$(907)
$(94,051)
$(17,808)
$(143)
$66,016
15,900
127,008
2
12
(2)
448
676
34
(635)
(2,173)
3,509
(27)
(635)
-
460
676
34
(2,173)
3,482
19,324,723
$1,932
$178,163
$(3,080)
$(90,542)
$(18,443)
$(170)
$67,860
Balance –
December 31, 2014
Purchases of Stock
Vesting of Restricted Shares
Stock Option Exercises
Stock-Based Compensation -
Stock Options
Restricted Stock
Foreign Currency Translation
Adjustments
Net Income
Balance –
December 31, 2015
Purchases of Stock
Vesting of Restricted Shares
Stock Option Exercises
Stock-Based Compensation -
Stock Options
Restricted Stock
Foreign Currency Translation
Adjustments
Net Income
Balance –
December 31, 2016
The accompanying notes are an integral part of these consolidated financial statements.
41
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation
Amortization of Intangible Assets
Amortization of Financing Fees
Intangible asset impairment
Stock-Based Compensation
Loss on Long-Lived Asset Disposals
Deferred Income Tax Expense
Provision for allowance for doubtful accounts
Changes in operating assets and liabilities:
Accounts Receivable
Inventories
Prepaid Expenses and Other Assets
Income taxes receivable and payable
Accounts Payable and Other Liabilities
Net Cash Provided by Operating Activities
INVESTING ACTIVITIES:
Acquisition of Accutronics, Net of Cash Acquired
Cash Paid for Property, Equipment and Improvements
Change in Restricted Cash
Net Cash Used in Investing Activities
FINANCING ACTIVITIES:
Cash Paid to Repurchase Treasury Stock
Proceeds from Debt Borrowings
Payments of Debt Borrowings
Proceeds from Exercise of Stock Options
Tax Withholdings on Stock-Based Awards
Net Cash Used in Financing Activities
Effect of Exchange Rate Changes on Cash
DECREASE IN CASH
Cash, Beginning of Year
Cash, End of Year
Supplemental Cash Flow Information:
Construction in Process in Accounts Payable
Income Taxes Paid
Interest Paid
The accompanying notes are an integral part of these consolidated financial statements.
42
Years ended December 31,
2016
2015
$3,482
$2,840
2,223
503
71
-
710
29
135
(24)
(667)
1,981
730
(158)
(1,362)
7,653
(9,857)
(1,219)
65
(11,011)
(607)
3,030
(3,030)
460
(28)
(175)
(231)
(3,764)
14,393
$10,629
$83
273
179
2,401
235
71
150
571
114
183
(22)
(217)
2,101
(757)
158
723
8,551
-
(2,910)
-
(2,910)
(9,388)
-
-
538
(18)
(8,868)
(91)
(3,318)
17,711
$14,393
$ -
52
150
ULTRALIFE CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 - Summary of Operations and Significant Accounting Policies
a. Description of Business
As used in this annual report, unless otherwise indicated, the terms “we”, “our” and “us” refer to Ultralife
Corporation (“Ultralife”) and includes our wholly-owned subsidiaries, ABLE New Energy Co., Limited and its wholly-
owned subsidiary ABLE New Energy Co.; Ltd; Ultralife UK LTD and its wholly-owned subsidiary, Accutronics Ltd;
Ultralife Batteries (UK) Ltd.; and our majority-owned joint venture Ultralife Batteries India Private Limited.
We offer products and services ranging from power solutions to communications and electronics systems.
Through our engineering and collaborative approach to problem solving, we serve government, defense and commercial
customers across the globe. We design, manufacture, install and maintain power and communications systems including:
rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories,
and custom engineered systems. 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 international
defense departments.
b.
Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States (“GAAP”) and include the accounts of Ultralife Corporation, our wholly-owned subsidiaries, Ultralife
Batteries (UK) Ltd., Ultralife UK LTD, and its wholly-owned subsidiary Accutronics Ltd, ABLE New Energy Co., Limited,
and its wholly-owned subsidiary ABLE New Energy Co., Ltd. (“ABLE” collectively), and our majority-owned subsidiary
Ultralife Batteries India Private Limited (“India JV”). Intercompany accounts and transactions have been eliminated in
consolidation.
c.
Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year
end and the reported amounts of revenues and expenses during the reporting period. Key areas affected by estimates
include: (a) carrying value of goodwill and intangible assets; (b) reserves for deferred tax assets, excess and obsolete
inventory, warranties, and bad debts; (c) valuation of assets acquired and liabilities assumed in business combinations; (d)
various expense accruals; and (e) stock-based compensation. Our actual results could differ from these estimates.
d.
Reclassifications
Certain items previously reported in specific financial statement captions are reclassified to conform to the current
presentation. There were no material reclassifications for the years ended December 31, 2016 and 2015.
e.
Cash
these accounts and believe we are not exposed to any significant risk with respect to cash.
Our cash balances may at times exceed federally insured limits. We have not experienced any losses in
f.
Accounts Receivable and Allowance for Doubtful Accounts
We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and
generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for
doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding
longer than contractual payment terms are considered past due and are reviewed individually for collectability. We
maintain reserves for potential credit losses based upon our loss history and specific receivables aging analysis.
Receivable balances are written off when collection is deemed unlikely. Allowance for doubtful accounts was $277 and
$300 for the years ended December 31, 2016 and 2015, respectively.
43
g.
Inventories
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method.
We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology
developments or other economic factors.
h.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives. Estimated useful lives are as follows (in years):
Buildings
Machinery and Equipment
Furniture and Fixtures
Computer Hardware and Software
Leasehold Improvements
10 – 20
5 – 10
3 – 10
3 – 5
Lesser of useful life or lease term
Betterments, renewals and extraordinary repairs that extend the life of the assets are capitalized. Other repairs and
maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is recognized in operating income.
i.
Long-Lived Assets, Goodwill and Intangibles
We assess all of our long-lived assets for impairment when events or circumstances indicate that their carrying
amounts may not be recoverable. For property, plant and equipment and amortizable intangible assets, this is accomplished
by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of
assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured
as the difference between the carrying value and the fair value of the asset. Fair value is estimated as the present value of
expected discounted future cash flows. The discount rate used by us in our evaluation is an industry-based weighted average
cost of capital. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of
assessment, no impairment is recognized. We did not record any impairments of property, plant and equipment or
amortizable intangible assets in the years ended December 31, 2016 or 2015.
We do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets for
impairment as of December 31, and on an interim basis when events or circumstances indicate that impairment may exist.
We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being
recognized as expense over their weighted-average estimated useful lives.
The impairment analysis of goodwill consists first of a review of various qualitative factors of the identified
reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying
amount, including goodwill. This review includes, but is not limited to, an evaluation of the macroeconomic, industry or
market, and cost factors relevant to the reporting unit as well as financial performance and entity or reporting unit events
that may affect the value of the reporting unit. If this review leads to the determination that it is more likely than not that
the fair value of the reporting unit is greater than its carrying amount, further impairment testing is not required. However,
if this review cannot support such a conclusion or we determine to do so at our discretion, we will perform quantitative
impairment steps. Similarly, the analysis for indefinite-lived intangible assets consists of review of various qualitative
factors to determine if it is more likely than not that the indefinite-lived intangible asset is not impaired. If such a
conclusion cannot be supported or at our discretion, we will perform quantitative impairment steps.
The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with
the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its
fair value, a second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible
assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss
is recognized in an amount equal to that excess. We determine the fair value of the reporting unit for goodwill
impairment testing based on a discounted cash flow model. We determine the fair value of our intangibles assets with
indefinite lives (trademarks) through the relief from royalty valuation approach.
44
No impairments of long-lived intangible assets were recorded in the year ended December 31, 2016. While our
testing indicated that the McDowell Research Corporation trademark is not impaired in 2016, it passed by a relatively narrow
margin and is most susceptible to variances in sales from current projections. Due to time delays in the awarding by
government/defense customers in recent years of certain large projects in our Communications Systems segment, we
recorded a partial impairment of our McDowell Research, Ltd. trademark in the year ended December 31, 2015. This
impairment amounted to $150.
Future amortization expense of amortizable intangible assets will be approximately $405, $373, $352, $340 and
$321 for the fiscal years ending December 31, 2017 through 2021, respectively.
j.
Translation of Foreign Currency
The financial statements of our foreign subsidiaries are translated from the functional currency into U.S. dollar
equivalents, with translation adjustments recorded as the sole component of accumulated other comprehensive loss on the
balance sheets. Exchange gains and (losses) relate to foreign currency transactions and balances denominated in currencies
other than the functional currency included in net income for the years ended December 31, 2016 and 2015 were $86 and
$48, respectively.
k.
Revenue Recognition
Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When
products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are
recognized on the date of delivery. We will make a provision at the time the revenue is recognized for warranty costs
expected to be incurred. Customers, including distributors, do not have a general right of return on products shipped.
Deferred Revenue – For each source of revenues, we defer recognition if: (i) evidence of an agreement does not
exist,( ii) delivery or service has not occurred, (iii) the selling price is not fixed or determinable, or (iv) collectability is
not reasonably assured.
l.
Warranty Reserves
We estimate future costs associated with expected product failure rates, material usage and service costs in the
development of our warranty obligations. Warranty reserves, included in other current liabilities and other long-term
liabilities as applicable on our Consolidated Balance Sheets, are based on historical experience of warranty claims. In the
event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded.
m.
Shipping and Handling Costs
Costs incurred by us related to shipping and handling are included in cost of products sold. Amounts charged to
customers pertaining to these costs are reflected as revenue.
n.
Advertising Expenses
Advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the
accompanying Consolidated Statements of Income and Comprehensive Income. Such expenses amounted to $32 and $59
for the years ended December 31, 2016 and 2015, respectively.
o.
Research and Development
Research and development expenditures are charged to operations as incurred. The majority of research and
development expenses pertain to salaries and benefits, developmental supplies, depreciation and other contracted services.
During 2016 and 2015, we expended $6,155 and $6,112, respectively, on research and development, including $209 and
$509, respectively, on customer sponsored research and development activities, which are included in cost of goods sold. We
recognized $209 and $509 of revenue relating to these activities during 2016 and 2015, respectively.
45
p.
Environmental Costs
Environmental expenditures that relate to current operations are expensed. Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be
reasonably estimated.
q.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will
not be realized. As of December 31, 2016, we continued to recognize a valuation allowance in the U.S. and certain U.K.
operations on our net deferred tax assets to the extent that temporary tax differences and the U.S. and U.K. net operating
loss and tax credit carry-forwards resulting in the deferred tax asset are not able to be offset by future reversing temporary
differences. The assessment of the realizability of the U.S. NOL was based on a number of historical factors including, our
history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to
accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of the end of
2016. We concluded that these historical factors represent sufficient negative evidence and have concluded that we should
record a full valuation allowance against these net deferred tax assets. We also recorded a full valuation allowance on our
net deferred tax asset for the year ended December 31, 2015.
r.
Concentration Related to Customers and Suppliers
During the year ended December 31, 2016, we had two major customers, both large defense primary contractors,
which together comprised 25% of our revenues. During the year ended December 31, 2015, one of those customers
comprised 23% of our sales. There were no other customers that comprised greater than 10% of our total revenues during
these years.
Currently, we do not experience significant seasonal trends in our revenues. Since a significant portion of our
revenues are based on purchases from U.S. and allied country defense departments, the timing of our sales could be
impacted by delays in the government budget process and the decisions to deploy resources to support military purchases
of our products.
We generally do not distribute our products to a concentrated geographical area nor is there a significant
concentration of credit risks arising from individuals or groups of customers engaged in similar activities, or who have
similar economic characteristics. While direct and indirect sales to the U.S. Department of Defense have been substantial
during 2016 and 2015, we do not consider this customer to be a significant credit risk. We do not normally obtain collateral
on trade accounts receivable.
Certain materials and components used in our products are available only from a single or a limited number of
suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or
increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for
materials and components that are otherwise generally available. Although we believe that alternative suppliers are available
to supply materials and components that could replace materials and components currently used and that, if necessary, we
would be able to redesign our products to make use of such alternatives, any interruption in the supply from any supplier that
serves as a sole source could delay product shipments and have a material adverse effect on our business, financial condition
and results of operations. We have experienced interruptions of product deliveries by sole source suppliers in the past.
s.
Fair Value Measurements and Disclosures
Fair value is defined as the price that would be received for an asset or the exit price that would be paid to
transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on
the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to
measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is
available and significant to the fair value measurement:
46
Level 1:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities.
Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or that we corroborate
with observable market data for substantially the full term of the related assets or liabilities.
Unobservable inputs supported by little or no market activity that are significant to the fair value of
the assets or liabilities.
The fair value of financial instruments approximated their carrying values at December 31, 2016 and 2015. The
fair value of cash, trade accounts receivable, trade accounts payable, and accrued liabilities approximates carrying value
due to the short-term nature of these instruments.
t.
Earnings Per Share
Basic earnings per share is computed by dividing net income or loss attributable to Ultralife Corporation by the
weighted average number of common shares outstanding for the period. Diluted earnings per share calculations reflect
the assumed exercise and conversion of dilutive employee stock options and unvested restricted stock, if any, applying the
treasury stock method. Diluted earnings per share in 2016 include 1,238,804 outstanding in-the-money stock options that
add 135,458 shares to the number of shares outstanding, and include 15,900 restricted stock units that add 9,538 shares
outstanding. Diluted earnings per share in 2015 include 1,312,282 outstanding in-the-money stock options that add
260,318 shares to the number of shares outstanding, and include 32,800 restricted stock units which add 15,385 shares
outstanding.
Diluted earnings per share calculations exclude the effect of approximately 1,332,281 and 945,687 employee
stock options in 2016 and 2015, respectively, as such options have an exercise price in excess of the weighted average
market price of the Company’s common stock.
u.
Stock-Based Compensation
We have various stock-based employee compensation plans that are described more fully in Note 8. The
compensation cost relating to share-based payment transactions is measured at the grant date, based on the estimated fair
value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of
the equity award).
v.
Segment Reporting
We have two operating segments – Battery & Energy Products, and Communications Systems. The basis for
determining our operating segments is the manner in which financial information is used in monitoring our operations.
Management operates and organizes itself according to business units that comprise unique products and services across
geographic locations.
w.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.
2014-09 (Topic 606) “Revenue from Contracts with Customer” related to revenue from contracts with customers. Under
this standard, revenue is recognized when promised goods or services are transferred to customers in an amount that
reflects the consideration that is expected to be received for those goods or services. The updated standard will replace
most existing revenue recognition guidance under GAAP and permits the use of either the retrospective or cumulative
effect transition method. Topic 606 is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period. We do not expect the adoption of Topic 606 to have a material impact on our
Consolidated Financial Statements. We do not anticipate early adoption of the standard.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Simplifying the Measurement of
Inventory," which simplifies the subsequent measurement of inventory by using only the lower of cost and net realizable
value. This standard is effective for fiscal years and interim periods within those years beginning after December 15,
2016, and must be applied on a retrospective basis. The adoption of this standard is not expected to have a material impact
on our Consolidated Financial Statements.
47
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, “Income Taxes, Balance Sheet
Classification of Deferred Taxes” which requires that deferred tax assets and liabilities be classified as noncurrent in a
classified statement of financial position. The new standard is effective for annual periods beginning after December 15,
2016, and interim periods within that reporting period. The guidance under this new standard may be applied either
prospectively or retrospectively to all periods presented. We will apply the standard retrospectively beginning in the first
quarter 2017.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” requires that lessees
recognize a right-to-use asset and related lease liability for all significant financing and operating leases not considered
short-term leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The
guidance is effective for years beginning after December 15, 2018 and early adoption is permitted. The Company has not
yet determined the impact of this new standard on our Consolidated Financial Statements, but believes it may be
significant. We have not yet determined whether we will adopt the standard in advance of its required effective date.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock
Compensation (Topic 718)” Improvements to Employee Share-Based Payment Accounting” which involves several
aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures and
classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15,
2016, and interim periods within those periods. We will adopt this standard effective January 1, 2017. We do not expect
this standard to have a material impact on our Consolidated Financial Statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Income Taxes (Topic 740),
Intra-Entity Transfers of Assets Other Than Inventory”. The new guidance requires that entities recognize the income tax
consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the
asset is sold to an outside party. The guidance is effective for annual reporting periods beginning after December 15,
2017, including interim periods within those annual reporting periods. Early adoption is permitted. The new guidance
requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as
of the beginning of the period of adoption. The company will adopt effective January 1, 2018 and is currently evaluating
the impact this guidance will have on our Consolidated Financial Statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic
230), Classification of Certain Cash Receipts and Cash Payments”. The new guidance makes eight targeted changes to
how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that
elects early adoption must adopt all of the amendments in the same period. The new guidance requires adoption on a
retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the
amendments prospectively as of the earliest date practicable. The company will adopt January 1, 2018 and is currently
evaluating the impact this guidance will have on our Consolidated Financial Statements.
Note 2 – Acquisition
On January 13, 2016, Ultralife UK Limited (the “Merger Subsidiary”), a U.K. corporation and a wholly-owned
subsidiary of Ultralife Corporation (the “Company”), completed the acquisition of all of the outstanding ordinary shares
of Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., from Intrinsic Equity
Limited, Catapult Growth Fund Limited Partnership, MJF Pension Trustees Limited, Robert Andrew Phillips and Michael
Allen (collectively, the “Sellers”). There are no material relationships between the Company or Merger Subsidiary and
any of the Sellers, other than pertaining to this acquisition. Accutronics is a leading independent designer and
manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic
devices and is classified in the Battery & Energy Products segment. The acquisition of Accutronics advances our strategy
of commercial revenue diversification and expands our geographic reach within European OEM’s. With industry experts
predicting mid-to-high single digit growth in the global medical batteries market, this strategic investment positions
Ultralife well for further penetration of and growing revenue streams from an attractive commercial market.
The acquisition was completed pursuant to the terms of the Share Purchase Agreement dated January 13, 2016
by and among the Merger Subsidiary and the Sellers. The Merger Subsidiary paid at the time of closing an aggregate
purchase price of £7,575 ($10,976) in cash, and in exchange the Merger Subsidiary received all of the outstanding shares
48
of Accutronics ordinary stock. Monies to fund the purchase price were advanced to the Merger Subsidiary from the
Company’s general corporate funds.
The purchase price was subject to adjustment based on the difference between actual and estimated amounts of
working capital of Accutronics as well as the amount of net cash of Accutronics. The adjustment resulted in a final
payment to the Sellers in the amount of £133 on February 24, 2016, bringing the total aggregate purchase price to £7,708
($11,161).
The purchase price allocation was determined in accordance with the accounting treatment of a business
combination in Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations. Under the
guidance, the fair value of the consideration was determined and the assets acquired and liabilities assumed have been
recorded at their fair values at the date of the acquisition. The excess of the consideration paid over the estimated fair
values has been recorded as goodwill.
The allocation of purchase price to the assets acquired and liabilities assumed at the date of the acquisition is
presented in the table below (in thousands). Management is responsible for determining the fair value of the tangible and
intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered a number of
factors, including reference to an analysis performed under FASB ASC Topic 805 solely for the purpose of allocating the
purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of
management’s assumptions, which would not reflect unanticipated events and circumstances that occur. The originally
reported purchase price allocation has been updated based on information obtained about facts and circumstances that
existed as of the acquisition date. As a result, adjustments were made which reduced identifiable intangible assets and
property, plant and equipment by $402 and $99, respectively, and increased prepaids and other current assets, inventory,
deferred income taxes on intangible assets and goodwill by $291, $75, $113 and $104, respectively.
$1,304
Cash
1,344
Accounts Receivable
2,167
Inventory
584
Prepaids and Other Current Assets
269
Property, Plant & Equipment
4,374
Identifiable Intangible Assets
4,487
Goodwill
(1,009)
Accounts Payable
(1,136)
Accrued Expenses
(111)
Income Taxes Payable
(209)
Non-Current Liabilities
Deferred Income Taxes
(74)
Deferred Income Taxes on Intangible Assets (829)
Total Consideration
$11,161
The goodwill included in the Company’s purchase price allocation presented above represents the value of
Accutronics assembled and trained workforce, the incremental value that Accutronics engineering and technology will bring
to the Company and the revenue growth expected to occur over time attributable to increased market penetration from future
new products and customers. The goodwill acquired in connection with the acquisition is not deductible for income tax
purposes.
The identifiable intangible assets included in the Company’s purchase price allocation represent customer contracts
and relationships of $2,821, intellectual property of $1,132 and trade name of $421 that are amortized straight-line over a
period ranging from 10 to 15 years.
During the year ended December 31, 2016, direct acquisition costs of $251 and increased cost of sales related to
purchase accounting adjustments of $96 for inventory acquired were recorded in the Company’s Consolidated Statement of
Income and Comprehensive Income. Accutronics contributed revenue of $10,362 and operating income of $436 during
the twelve-month period ended December, 2016, reflecting the purchase accounting adjustments and non-recurring costs
directly related to the acquisition.
49
Set forth below is the unaudited pro forma results of the Company and Accutronics for the twelve-month period
ended December 31, 2015 as if the acquisition occurred as of January 1, 2015 along with the reported results for the twelve-
month period ended December 31, 2016 which includes the consolidation of Accutronics. The results of Accutronics were
not material for the period from January 1, 2016 to the acquisition date. The unaudited pro forma results include purchase
accounting adjustments to reflect the restatement of inventory to estimated fair value and the resulting increase in cost of
sales for the sale of the inventory during this twelve-month period, direct acquisition costs and the amortization of intangible
assets resulting from the purchase price allocation.
Revenue
Operating Income
Net Income Attributable to Ultralife Corporation
Earnings Per Share:
Basic
Diluted
Twelve-Months Ended
Dec. 31, 2015
Dec. 31, 2016
$89,534
$3,858
$3,258
$82,460
$3,763
$3,509
$.20
$.20
$.23
$.23
The unaudited pro forma results do not reflect the realization of any expected cost savings or other synergies from
the acquisition of Accutronics as a result of restructuring activities, other cost savings initiatives or sales synergies following
the completion of the business combination. Accordingly, these unaudited pro forma results are presented for informational
purposes only and are not necessarily indicative of what the actual results of operations of the combined Company would
have been if the acquisition had occurred at the beginning of the 2015 period presented, nor are they indicative of future
results of operations.
Note 3 – Share Repurchase Program
On April 28, 2014, the Company’s Board of Directors approved a share repurchase program (the “Share
Repurchase Program”) which became effective on May 1, 2014 and under which the Company was authorized to
repurchase up to 1.8 million shares of its outstanding common stock over a period not to exceed twelve months. The
Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to be
repurchased under the program was increased to 3.4 million shares.
Share repurchases under this program were made in accordance with SEC Rule 10b-18 using a variety of
methods, which included open market purchases and block trades in compliance with applicable insider trading and other
securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under
10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’s discretion.
The Share Repurchase Program expired on June 2, 2016 and did not obligate the Company to repurchase any specific
number of shares.
In 2016, we repurchased a total of 156,092 shares of our common stock for an aggregate consideration of $630,
of which 149,904 shares were repurchased under the Share Repurchase Program for an aggregate amount (excluding fees
and commissions) of $603. In 2015, we repurchased a total of 2,258,929 shares of our common stock for an aggregate
consideration of $9,388, of which 2,225,437 shares were repurchased under the Share Repurchase Program for an
aggregate amount (excluding fees and commissions) of $9,162.
From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the
Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480.
50
Note 4 - Supplemental Balance Sheet Information
a.
Inventory, Net
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method.
The composition of inventories, net was:
Raw Materials
Work in Process
Finished Products
Total
December 31,
2016
$14,482
986
7,988
$23,456
2015
$11,602
1,560
10,652
$23,814
The December 31, 2016 inventories include $1,443 for Accutronics, which was acquired on January 13, 2016.
b.
Property, Plant and Equipment
Major classes of property, plant and equipment consisted of the following:
Land
Buildings and Leasehold Improvements
Machinery and Equipment
Furniture and Fixtures
Computer Hardware and Software
Construction in Progress
Less – Accumulated Depreciation
Total
December 31,
2016
$123
7,757
49,722
1,947
5,223
421
65,193
(57,194)
$7,999
2015
$123
7,490
49,609
1,974
4,585
745
64,526
(55,488)
$9,038
Estimated costs to complete construction-in-progress as of December 31, 2016 and 2015 were approximately $170
and $180, respectively.
Depreciation expense was $2,223 and $2,401 for the years ended December 31, 2016 and 2015, respectively.
c.
Impairment of Goodwill, Intangible Assets and Long-Lived Assets
We elected to forego the qualitative assessment for our four identified reporting units and conducted a
quantitative assessment. The fair value for our reporting units subjected to this quantitative test could not be determined
using readily available quoted Level 1 inputs or Level 2 inputs that were observable in active markets. Therefore, we
used an income approach to estimate the fair value of the reporting units, using Level 3 inputs. To estimate the fair value
of the reporting units, we used significant estimates and judgments, including an assessment of our future revenue
prospects, particularly government/defense opportunities, as well as our estimates of the probabilities of the opportunities
being funded, awarded, and awarded to us. Other key estimates and factors used in the valuation model included revenue
growth rates and profit margins based on internal forecasts, as well as industry and market based terminal growth rates,
inputs to the weighted-average cost of capital used to discount future cash flows, and earnings multiples. As a result of
the goodwill impairment tests performed during 2016 and 2015, we determined that an impairment was not required.
Similarly, for our four other indefinite-lived intangible assets (trademarks), we elected to forego the qualitative
assessment and proceeded to perform quantitative assessments. The fair value for our indefinite-lived intangible assets
subjected to this quantitative test could not be determined using readily available quoted Level 1 inputs or Level 2 inputs
that were observable in active markets. Therefore, we used a relief from royalty approach, to estimate the fair value of
the indefinite-lived intangible assets, using Level 3 inputs. This method also required us to use significant estimates and
judgmental factors. The key estimates and factors used in the valuation model included revenue growth rates, as well as
51
industry and market based terminal growth rates, inputs to the weighted-average cost of capital used to discount future
cash flows, and determined royalty rates from market data. As a result of the impairment tests performed during 2016, we
determined that no impairments were required. As a result of the impairment tests performed during 2015, we determined
that an impairment amounting to $150 was required to reduce the carrying value of one Communications Systems
business trademark to its estimated fair value.
There is a possibility that our goodwill and other intangible assets, particularly in our Communications Systems
business, could be impaired should there be a significant change in our internal forecasts and other assumptions we use in
our impairment analysis.
d.
Goodwill
The following table summarizes the goodwill activity by segment for the years ended December 31, 2016 and
2015:
Balance – January 1, 2015
Effect of Foreign Currency Translation
Balance – December 31, 2015
Acquisition of Accutronics
Effect of Foreign Currency Translation
Balance – December 31, 2016
e.
Other Intangible Assets
The composition of intangible assets was:
Trademarks
Customer Relationships
Patents and Technology
Distributor Relationships
Trade Name
Total Other Intangible Assets
Trademarks
Patents and Technology
Customer Relationships
Distributor Relationships
Total Other Intangible Assets
Battery &
Energy
Products
$4,914
(124)
4,790
4,487
(805)
$8,472
Communi-
cations
Systems
$11,493
-
11,493
-
-
$11,493
December 31, 2016
Accumulated
Amortization
$ -
3,975
4,417
368
36
$8,796
Cost
$3,404
6,395
5,455
377
359
$15,990
December 31, 2015
Accumulated
Amortization
$ -
4,217
3,716
355
$8,288
Cost
$3,411
4,482
3,971
370
$12,234
Total
$16,407
(124)
16,283
4,487
(805)
$19,965
Net
$3,404
2,420
1,038
9
323
$7,194
Net
$3,411
265
255
15
$3,946
52
Amortization of intangible assets was included in the following financial statement captions:
Research and Development Expense
Selling, General and Administrative Expense
Total
Year ended December 31,
2016
$200
303
$503
2015
$130
105
$235
Except for the impairment charge recorded against a Communications Systems trademark in 2015, the change in
the cost value of total intangible assets is a result of the acquisition of Accutronics on January 13, 2016 and the effect of
foreign currency exchange rate fluctuations.
Note 5 - Operating Leases
We lease various buildings, machinery, land, automobiles and office equipment. Rental expenses for all operating
leases were approximately $668 and $672 for the years ended December 31, 2016 and 2015, respectively. Future minimum
lease payments under non-cancelable operating leases as of December 31, 2016 are as follows:
2017
$660
2018
$558
2019
$416
2020
$100
2021
$-
Note 6 - Debt
Credit Facilities
We are party to a Revolving Credit, Guaranty and Security Agreement (the “Credit Agreement”) and related
security agreements with PNC Bank, National Association (“PNC”) that provides us a $20 million secured asset-based
revolving credit facility that includes a $1 million letter of credit subfacility (the “Credit Facility”). The Credit
Agreement expires on May 24, 2017.
On April 30, 2014, the Company and PNC entered into an amendment (the “Amendment”) to the Credit
Agreement. The Amendment permits the Company to commence the Share Repurchase Program described in Note 3,
provided that (a) the Company is not in default under the Credit Agreement, (b) the Company’s undrawn availability
under the Credit Agreement is at least $6 million both prior to and immediately following any repurchase, (c) the
Company’s undrawn availability under the Credit Agreement plus domestic unrestricted cash is at least $8 million both
prior to and immediately following any repurchase, and (d) the Company uses its unrestricted cash for such repurchases
and does not request advances against the Credit Agreement for such purposes. On October 28, 2014, the Company and
PNC entered into a second amendment to the Credit Agreement which modifies the definition of EBITDA in the Credit
Agreement to include non-cash stock-based compensation expense.
On April 29, 2015, the Company and PNC entered into a third amendment to the Credit agreement which
permitted the Company to extend the Share Repurchase Program to April 30, 2016. On June 15, 2015, the Company and
PNC entered into a fourth amendment to the Credit Agreement that permitted the expansion of the Share Repurchase
Program described in Note 3 and the extension of this program to June 2, 2016. Finally, on January 13, 2016, Company
and PNC entered into a fifth amendment to the Credit Agreement which permitted the Company’s acquisition of
Accutronics Ltd. as described in Note 2 above.
Our available borrowing limit under the Credit Facility fluctuates from time to time based on a borrowing base
formula equal to the sum of up to 85% of eligible accounts receivable plus the least of (a) up to 65% of the eligible
inventory and eligible foreign in-transit inventory, (b) up to 85% of the appraised net orderly liquidation value of eligible
inventory and eligible foreign in-transit inventory, and (c) $7.5 million, in each case subject to the definitions in the
Credit Agreement and reserves required by PNC.
Interest is payable quarterly and will accrue on outstanding indebtedness under the Credit Agreement at the
alternate base rate, as defined in the Credit Agreement, plus the applicable margin or at the one, two or three month
LIBOR rate plus the applicable margin as selected by us from time to time and listed below.
53
Quarterly Average Undrawn
Borrowing Availability
Greater than $8,000,000
$5,000,000 up to $8,000,000
Less than $5,000,000
Applicable Margin for
Alternate Base Rate Loans
1.00%
1.25%
1.50%
Applicable Margin for
LIBOR Rate Loans
2.00%
2.25%
2.50%
We must pay a fee on the Credit Facility’s unused availability of 0.375% per annum and customary letter of
credit fees in addition to various collateral monitoring and related fees and expenses.
In addition to customary affirmative and negative covenants, we must maintain a fixed charge coverage ratio as
defined in the Credit Agreement of 1.15 to 1.00, tested quarterly for the four-quarters then ended. As of December 31,
2016 we were in compliance with all covenants. The Credit Facility is secured by substantially all our assets.
Any outstanding advances must be repaid upon expiration of the term of the Credit Facility. Payments must be
made during the term to the extent outstanding advances exceed the maximum amount then permitted to be drawn as
advances under the Credit Facility and from the proceeds of certain transactions. Upon the occurrence of an event of
default, the outstanding obligations may be accelerated and PNC will have other customary remedies.
As of December 31, 2016, we had no outstanding balance under the Credit Facility, an applicable interest rate of
4.5%, borrowing capacity of $9,549 in addition to our unrestricted cash on hand of $10,629, and no outstanding letters of
credit related to the Credit Facility.
Note 7 - Commitments and Contingencies
a.
Indemnity
Our organizational documents provide that our directors or officers will be reimbursed for all expenses, to the
fullest extent permitted by law arising out of their performance.
b.
Purchase Commitments
As of December 31, 2016, we have made commitments to purchase approximately $504 of production machinery
and equipment.
c.
China
Our operating facility in China presents risks including, but not limited to, changes in local regulatory
requirements, including changes in labor laws, local wage laws, environmental regulations, taxes and operating licenses,
compliance with U.S. regulatory requirements, including the Foreign Corrupt Practices Act, uncertainties as to application
and interpretation of local laws and enforcement of contract and intellectual property rights, eminent domain claims, labor
disputes, rapid changes in government, economic and political policies, and other various contingencies that are outside of
our control. Any such event could depress our earnings and have other material adverse effects on our business, financial
condition and results of operations.
d.
Employment Contracts
We have an employment contract with Michael D. Popielec, our President and Chief Executive Officer, which
remains in effect until terminated by either party. This agreement provides for a base salary, as adjusted for increases at the
discretion of our Board of Directors, and includes incentive bonuses based upon attainment of specified quantitative and
qualitative performance goals. This agreement also provides for severance payments in the event of specified events of
termination of employment. In addition, this agreement provides for a lump sum payment in the event of termination of
employment in connection with a change in control.
As part of our employment commencement process, employees are required to enter into agreements providing for
confidentiality of certain information and the assignment of rights to inventions made by them while employed by us. These
agreements also contain certain non-competition and non-solicitation provisions effective during the employment term and
for varying periods thereafter depending on position and location. There can be no assurance that we will be able to enforce
these agreements. All of our employees agree to abide by the terms of a Code of Ethics policy that provides for the
confidentiality of certain information received during the course of their employment.
54
e.
Product Warranties
We estimate future costs associated with expected product failure rates, material usage and service costs in the
development of our warranty obligations. Warranty reserves are based on historical experience of warranty claims and
generally will be estimated as a percentage of sales over the warranty period. In the event the actual results of these items
differ from the estimates, an adjustment to the warranty obligation would be recorded. Changes in our product warranty
liability during the years ended December 31, 2016 and 2015 were as follows:
Balance, January 1
Provision (reversal) for warranties issued
Settlements made
Balance, December 31
f.
Legal Matters –
2016
$192
39
(59)
$172
2015
$376
(90)
(94)
$192
We are subject to legal proceedings and claims that arise in the normal course of business. We believe that the
final disposition of such matters will not have a material adverse effect on our financial position, results of operations or cash
flows.
Dreamliner Litigation
In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines (“EA”) was damaged by
a fire while parked at London Heathrow Airport. We participated in and provided technical assistance in support of an
investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the
aircraft, as we are one of many downstream suppliers to that manufacturer. A final report was issued by the Air
Accidents Investigative Branch - - UK Civil Aviation regulatory authority, with findings indicating that the fire was
primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and
installed by another company.
A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard Lithium Manganese
Dioxide non-rechargeable D-cell. Ultralife has had this cell in production since 2001, with millions of units produced.
The cell is widely-used for global defense and commercial applications. This battery product has gone through rigorous
safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests and Criteria,
and is authorized for use in aerospace applications under Technical Standard Order C142.
On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft
manufacturer, concerning that 2013 fire. The suit was filed by EA in the Commercial Court, Queen’s Bench Division of
the High Court of Justice, London and seeks as damages $42,000 plus other unspecified amounts, including those for loss
of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable
providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers.
We are working with those insurers and their counsel to actively defend against this action, which is ongoing.
At this time, we believe that there is not a reasonable possibility that this incident will result in a material financial
exposure to the Company.
Arista Power Litigation
Since September 2011, we have been pursuing legal action against Arista Power, Inc. (“Arista”) and our former
employee, David Modeen, for, among other things, alleged breach of certain agreements, duties and obligations, including
misappropriation of our confidential information and trade secrets, tortious interference, and breach of contract. On
January 12, 2016, Arista filed for liquidation under Chapter 7 of the bankruptcy laws of the United States, without
accurately identifying our ongoing lawsuit against them. Although we have not withdrawn our lawsuit, nor has it been
dismissed, the Company did not submit a Proof of Claim in connection with Arista’s bankruptcy filing, nor does it intend
to actively pursue its claims against Arista at this time.
55
Note 8 - Shareholders' Equity
a.
Stock-Based Compensation Expense
We recorded non-cash stock compensation expense in each period as follows:
Stock Options
Restricted Stock Grants
Total
These are more fully discussed as follows:
b.
Stock Options
2016
$676
34
$710
2015
$489
82
$571
We have various stock-based employee compensation plans, for which compensation cost is recognized in the
financial statements. The cost is measured at the grant date, based on the fair value of the award, and is recognized as an
expense over the employee’s requisite service period (generally the vesting period of the equity award).
Our shareholders have approved various equity-based plans that permit the grant of stock options, restricted stock
and other equity-based awards. In addition, our shareholders have approved the grant of stock options outside of these plans.
In June 2004, our shareholders adopted the 2004 Long-Term Incentive Plan (“2004 LTIP”) pursuant to which we
were authorized to issue up to 750,000 shares of common stock and grant stock options, restricted stock awards, stock
appreciation rights and other stock-based awards. Through shareholder approved amendments to the LTIP in 2006, 2008,
2011, and 2013, the total number of shares authorized under the LTIP was increased to 2,900,000.
In June 2014, our shareholders approved the 2014 Long-Term Incentive Plan (“2014 LTIP”) as the successor plan
to the 2004 LTIP that expired on June 10, 2014. Under the 2014 LTIP, a total of 1,750,000 shares of Common Stock will
be available for grant of awards. However, of the total number of shares of common stock available for awards under the
2014 LTIP, no more than 800,000 shares of Common Stock may be used for awards other than stock options and stock
appreciation rights. Grants under the 2014 LTIP may be awarded through June 2, 2024.
Stock options granted under the LTIPs are either Incentive Stock Options (“ISOs”) or Non-Qualified Stock Options
(“NQSOs”). Key employees are eligible to receive ISOs and NQSOs; however, directors and consultants are eligible to
receive only NQSOs. Most ISOs vest over a three- year period and expire on the seventh anniversary of the grant date. All
NQSOs issued to non-employee directors vest immediately and expire on the seventh anniversary of the grant date. As of
December 31, 2016, there were 1,243,697 stock options outstanding under the 2004 LTIP and 679,884 stock options
outstanding under the 2014 LTIP.
On December 30, 2010, pursuant to the terms of his employment agreement, we granted our President and Chief
Executive Officer, Michael D. Popielec, options to purchase shares of common stock under the 2004 LTIP as follows: (i)
50,000 shares at $6.42, vesting in annual increments of 12,500 shares over a four-year period commencing December 30,
2011; (ii) 250,000 shares at $6.42, vesting in annual increments of 62,500 shares over a four-year period commencing
December 30, 2011; (iii) 200,000 shares at $10.00, with vesting to begin on the date the stock reaches a closing price of
$10.00 per share for 15 trading days within a 30-day trading period, with such vesting in annual increments of 50,000 shares
over the four anniversary dates of that date; and (iv) 200,000 shares at $15.00, with vesting to begin on the date the stock
reaches a closing price of $15.00 per share for 15 trading days within a 30-day trading period, with such vesting in annual
increments of 50,000 shares over the four anniversary dates of that date. All such options in items (i) and (ii) shall expire on
December 30, 2017. All such options in items (iii) and (iv) shall expire as of the later of December 30, 2017 and five years
after the initial vesting commences, but in no event later than December 30, 2020. The market-based conditions for the stock
options in items (iii) and (iv) had not been met as of December 31, 2016. The options set forth in items (ii), (iii) and (iv)
were subject to shareholder approval of an amendment to the 2004 LTIP, which approval was obtained on June 7, 2011.
On January 3, 2011, pursuant to the terms of his employment agreement, we granted our President and Chief
Executive Officer, Michael D. Popielec, an option to purchase 50,000 shares of common stock at $6.58 under the 2004
LTIP. The option vested in annual increments of 12,500 shares over a four-year period commencing December 30, 2011.
The option expires on December 30, 2017.
56
As of December 31, 2016, there was $505 of total unrecognized compensation costs related to outstanding stock
options, which we expect to recognize over a weighted average period of 1.1 years.
We use the Black-Scholes option-pricing model to estimate fair value of stock-based awards. The following
weighted average assumptions were used to value options granted during the years ended December 31, 2016 and 2015:
Risk-free interest rate
Volatility factor
Dividends
Weighted average expected life (years)
Forfeiture rate
Years Ended December 31,
2016
1.36%
48.20%
0.00%
4.83
10.0%
2015
0.72%
48.54%
0.00%
4.15
13.8%
We used a Monte Carlo simulation option-pricing model to estimate the fair value of market performance stock-
based awards, of which there were no new awards in the years ended December 31, 2016 or 2015.
We calculate expected volatility for stock options by taking an average of historical volatility over the expected
term. The computation of expected term was determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within
the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. Forfeiture rates are
calculated by dividing unvested shares forfeited by beginning shares outstanding. The pre-vesting forfeiture rate is
calculated yearly and is determined using a historical twelve-quarter rolling average of the forfeiture rates.
The following tables summarize data for the stock options issued by us:
Year Ended December 31, 2016
Weighted
Average
Exercise
Price
Per Share
$6.30
4.69
3.86
6.09
$6.22
Number
of Shares
2,257,969
369,550
(152,789)
(151,149)
2,323,581
2,192,138
$6.31
$5.05
Shares under Option – January 1
Options Granted
Options Exercised
Options Forfeited or Expired
Shares under option – December 31
Vested and Expected to Vest -
December 31
Options Exercisable – December 31
1,302,390
Year Ended December 31, 2015
Shares under Option – January 1
Options Granted
Options Exercised
Options Forfeited or Expired
Shares under option – December 31
Weighted
Average
Remaining
Contractual
Term
3.31
2.98
1.92
Number
of Shares
2,056,122
411,250
(137,937)
(71,466)
2,257,969
Aggregate
Intrinsic
Value
$1,101
$1,006
$669
Weighted
Average
Exercise
Price
Per Share
$6.66
4.68
3.90
11.86
$6.30
Options Exercisable – December 31
1,255,736
$5.22
57
The following table represents additional information about stock options outstanding at December 31, 2016:
Option Outstanding
Options Exercisable
Number of
Outstanding
Options –
December
31, 2016
608,200
686,548
628,833
400,000
Weighted-
Average
Remaining
Contractual
Life
3.68
3.62
2.17
4.00
Weighted-
Average
Exercise
Price
$3.76
$4.40
$6.58
$12.50
Range of
Exercise Prices
$3.22 - $3.99
$4.00 - $4.99
$5.00 - $9.99
$10.00 - $15.00
Number of
Options
Exercisable
at
December
31, 2016
394,218
396,006
512,166
-
Weighted-
Average
Exercise
Price
$3.75
4.45
6.52
-
$3.22 - $15.00
2,323,581
3.31
$6.22
1,302,390
$5.05
The weighted average fair value of options granted during the years ended December 31, 2016 and 2015 was $2.01
and $2.32, respectively. The total intrinsic value of options (which is the amount by which the stock price exceeded the
exercise price of the options on the date of exercise) exercised during the years ended December 31, 2016 and 2015 was
$149 and $364, respectively.
Cash received from option exercises under our stock-based compensation plans for the years ended December 31,
2016 and 2015 was $460 and $538, respectively. There were no excess tax benefits realized in accumulated paid-in capital
on exercised options for the years ended December 31, 2016 and 2015.
c.
Restricted Stock Awards
During 2014, we awarded 49,200 restricted stock units under the 2014 LTIP to certain key employees. These
units vest over three years and we estimated their weighted average grant date fair value to be $3.24 per share. $34 and
$82 of expense was recorded in 2016 and 2015, respectively, relating to these units. In September 2016, 15,900 shares of
the awarded restricted stock vested and the Company repurchased 4,131 shares to satisfy the statutory tax withholding on
shares vested for certain employees.
At December 31, 2016, there was $11 of unrecognized compensation expense related to restricted stock grants.
d.
Reserved Shares
We have reserved 901,700 shares of common stock under the various stock option plans, warrants and restricted
stock awards as of December 31, 2016.
Note 9 - Income Taxes
Our income tax provision consists of:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total income tax provision
58
Years Ended December 31,
2016
$(70)
20
13
(37)
220
-
(85)
135
$98
2015
$4
15
111
130
169
-
11
180
$310
The deferred income tax provision is primarily due to the recognition of deferred tax liabilities relating to
goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carry-forward
periods offset by the deferred tax benefit of the amortization of certain intangible assets of Accutronics (U.K.). The
current income tax provision is primarily due to the income reported for Accutronics (U.K.) while the remaining expense
is primarily due to state taxes. The benefit associated with the current income tax provision is primarily related to an
excess accrual of income taxes in prior years. In 2015, the deferred provision was reduced by a deferred tax benefit
amounting to $51 relating to our $150 impairment of a trademark.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of our
deferred tax liabilities and assets are as follows:
Deferred Tax Liabilities:
Property, Plant and Equipment
Intangible Assets
Total Deferred Tax Liabilities
Deferred Tax Assets:
Property, Plant and Equipment
Net Operating Loss Carry-Forwards
Tax Credit Carry-Forwards
Intangible Assets
Accrued Expenses, Reserves and Other
Total Deferred Tax Assets
Valuation Allowance for Deferred Tax Assets
Net Deferred Tax Assets
Years Ended December 31,
2016
$-
5,471
5,471
77
27,127
1,704
2,923
1,527
33,358
(33,331)
27
2015
$-
4,631
4,631
288
27,283
1,596
3,391
2,127
34,685
(34,593)
92
Net Deferred Tax Liabilities
$5,444
$4,539
Net deferred tax liabilities are comprised of the following balance sheet amounts:
Current Deferred Tax Assets
Non-Current Deferred Tax Liabilities
Years Ended December 31,
2016
2015
$94
(5,538)
$(5,444)
$ 92
(4,631)
$(4,539)
The valuation allowance for deferred tax assets decreased by $1,262 and increased by $6,642 in the years ended
December 31, 2016 and 2015, respectively. The 2016 decrease in the valuation allowance was due to the reduction of
deferred tax assets due to the Company’s pretax income in 2016. The 2015 increase in the valuation allowance included an
increase of $7,296 relating to the release of our unrecognized tax benefit during 2015 (see below). Excluding the effect of
the release of the unrecognized tax benefit during 2015, the valuation allowance would have decreased by $654.
In 2016 and 2015, in the U.S. and certain operations in the U.K., we continue to report a valuation allowance for
our deferred tax assets that cannot be offset by reversing temporary differences. We continue to conclude that, based on
historical factors, it is more likely than not that we will not fully utilize our U.S. and U.K. NOLs that have accumulated over
time. The recognition of a valuation allowance on our deferred tax assets results from our evaluation of all available
evidence, both positive and negative. The assessment of the realizability of the NOLs is based on a number of factors
including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical
inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of
the end of 2016. We believe that these historical factors represent negative evidence sufficient to conclude that we should
record a full valuation allowance against our deferred tax assets. In both 2016 and 2015, we have not recorded a valuation
allowance against our other foreign deferred tax assets as we believe that it is more likely than not that they will be realized.
We continually assess the carrying value of this asset based on relevant accounting standards.
59
As of December 31, 2016, we have domestic and foreign NOLs totaling approximately $70,976 and $12,760,
respectively, and domestic tax credits of approximately $1,704, available to reduce future taxable income. Included in our
NOL carry-forward are foreign loss carry-forwards of approximately $12,760, nearly all of which can be carried forward
indefinitely. The domestic NOL carry-forward of $70,976 expires beginning in 2019, through 2034. The domestic NOL
carry-forward includes approximately $3,223 for which a benefit will be recorded in capital in excess of par value when
realized.
At December 31, 2016, the undistributed earnings of the Company’s foreign operations were indefinitely reinvested
in those operations.
For financial reporting purposes, income (loss) from continuing operations before income taxes is as follows:
United States
Foreign
Years Ended December 31,
2016
$2,803
777
$3,580
2015
$2,582
568
$3,150
The provision for income taxes differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate to income (loss) from continuing operations before income taxes as follows:
Statutory Income Tax Rate
(Increase) Decrease in Tax Provision Resulting From:
Equity Compensation
Income Tax Credits
Foreign Tax Rates
Release of Unrecognized Tax Benefits
Valuation Allowance
Excess Accrual
Other
Effective Income Tax Rate
Years Ended December 31,
2016
34.0%
9.6
(6.2)
(2.2)
-
(30)
(5.2)
2.7
2.7%
2015
34.0%
2.2
(4.5)
(2.2)
(231.6)
210.9
-
1.0
9.8%
Accounting for Uncertainty in Income Taxes
Our unrecognized tax benefits related to uncertain tax positions at December 31, 2014 related to Federal and
various state jurisdictions. We recorded the release of uncertain tax positions in 2015 relating to the conclusion of a federal
tax examination, resulting in a $21.4 million increase in the amount of our reported domestic NOL carry-forward. The
following table summarizes the activity related to our unrecognized tax benefits:
Balance – beginning of year
Increases related to current year tax positions
Increases related to prior year tax positions
Decreases related to prior year tax positions
Expiration of statute of limitations for assessment of taxes
Settlements of examinations
Balance – end of year
Years Ended December 31,
2016
$-
-
-
-
-
-
$ -
2015
$7,296
-
-
-
-
(7,296)
$-
The total unrecognized tax benefit balances at January 1, 2015 of $7,296 was comprised of tax benefits that, if
recognized, would result in a deferred tax asset and a corresponding increase in our valuation allowance. As a result,
because the benefit would be offset by an increase in the valuation allowance, there would be no net effect on our
effective tax rate or income tax provision. We recorded the release of this unrecognized tax benefit amount during 2015
60
upon the conclusion of a of a federal tax examination, resulting in a $21.4 million increase in the amount of our reported
domestic NOL carry-forward. There were no unrecognized tax benefits at December 31, 2016.
We are not required to accrue interest and penalties as the unrecognized tax benefits have been recorded as a
decrease in our NOL. Interest and penalties would begin to accrue in the period in which the NOLs related to the
uncertain tax positions are utilized. We do not expect our unrecognized tax benefits to change significantly over the next
twelve months.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state
and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions.
Our U.S. tax matters for the years 2001 through 2016 remain subject to examination by the Internal Revenue Service
(“IRS”) due to our NOL carry-forwards. Our U.S. tax matters for the years 2001 through 2016 remain subject to
examination by various state and local tax jurisdictions due to our NOL carry-forwards. Our tax matters for the years
2009 through 2016 remain subject to examination by the respective foreign tax jurisdiction authorities.
Note 10 - 401(k) Retirement Benefit Plan
We maintain a defined contribution 401(k) plan covering substantially all employees. Employees can contribute a
portion of their salary or wages as prescribed under Section 401(k) of the Internal Revenue Code and, subject to certain
limitations, we may, at the discretion of our Board of Directors, authorize an employer contribution based on a portion of the
employees' contributions. Since January 2010, we have matched 50% on the first 4% contributed by an employee, or a
maximum of 2% of the employee’s income. For 2016 and 2015, we contributed $191 and $201, respectively, to the 401(k)
plan.
Note 11 - Business Segment Information
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The
Battery & Energy Products segment includes: Lithium 9-volt, cylindrical and various other non-rechargeable batteries, in
addition
The
to rechargeable batteries, uninterruptable power supplies, charging systems and accessories.
Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified
speakers, equipment mounts, case equipment, integrated communication system kits 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.
Battery &
Energy
Products
$64,753
19,580
Communications
Systems
$17,707
5,528
2016:
Revenue
Segment Contribution
Interest Expense, Net
Miscellaneous
Income Tax Provision
Non-Controlling Interest
Net Income Attributable to
Ultralife
Total Assets
Capital Expenditures
Goodwill
Depreciation and Amortization
of Intangible Assets
Stock-Based Compensation
$39,691
852
8,472
2,042
403
$32,021
158
11,493
541
110
61
Corporate
$-
(21,345)
(263)
80
(98)
27
$13,032
367
143
197
Total
$82,460
3,763
(263)
80
(98)
27
$3,509
$84,744
1,377
19,965
2,726
710
Battery &
Energy
Products
$65,272
18,698
Communications
Systems
$11,155
4,618
2015:
Revenue
Segment Contribution
Interest Expense, Net
Miscellaneous
Income Tax Provision
Non-Controlling Interest
Net Loss Attributable to
Ultralife
Total Assets
Capital Expenditures
Goodwill
Depreciation and Amortization
of Intangible Assets
Intangible Asset Impairment
Stock-Based Compensation
$35,295
355
4,790
1,625
46
U.S. and Non-U.S. Revenue Information1:
2016:
Battery & Energy Products
Communications Systems
Total
2015:
Battery & Energy Products
Communications Systems
Total
$28,849
973
11,493
98
150
3
Total
Revenue
$64,753
17,707
$82,460
Total
Revenue
$65,272
11,155
$76,427
Corporate
$-
(19,986)
(245)
65
(310)
29
$17,378
562
984
522
United
States
$29,587
15,507
45,094
55%
United
States
$37,106
9,635
$46,741
61%
Total
$76,427
3,330
(245)
65
(310)
29
$2,869
$81,522
1,890
16,283
2,707
150
571
Non-United
States
$35,166
2,200
$37,366
45%
Non-United
States
$28,166
1,520
$29,686
39%
1
Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects
Long-lived assets (including goodwill and intangible assets) held outside the U.S., principally in the United Kingdom and
China, were $11,652 and $4,748 at December 31, 2016 and 2015, respectively.
Commercial and Government/Defense Revenue Information:
2016:
Battery & Energy Products
Communications Systems
Total
2015:
Battery & Energy Products
Communications Systems
Total
Total
Revenue
$64,753
17,707
$82,460
Total
Revenue
$65,272
11,155
$76,427
62
Commercial
$40,886
-
$40,886
50%
Commercial
$33,367
-
$33,367
44%
Government/
Defense
$23,867
17,707
$41,574
50%
Government/
Defense
$31,905
11,155
$43,060
56%
Note 12 – Due from Insurance Company
In June 2011, we experienced a fire that damaged certain inventory and machinery and equipment at our facility in
China. The fire occurred after business hours and was fully extinguished quickly with no injuries, and the plant was back in
full operation shortly thereafter with no significant disruption in supply or service to customers. We maintain adequate
insurance coverage for this operation.
The total amount of the loss pertaining to assets and the related expenses was approximately $1,589, including damaged
inventory, business interruption and lost profits. We have pursued a claim against our insurance policy, with the majority of
our insurance claim related to the recovery of damaged inventory. We had received payments in June 2012 and April 2013
totaling approximately $1,286 as a partial payment on our insurance claim, which resulted in no gain or loss being
recognized. Since the filing of the claim and through June 26, 2016, we reflected a receivable from the insurance company
of $177, net of our deductible of approximately $126, representing additional proceeds expected to be received. On
September 6, 2016, our claim was finalized with the insurance company resulting in a $55 loss included in our 2016 results.
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 Rule 13a-15(e)) as of the end of the period covered by this
annual 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 Controls 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 fourth quarter of
the fiscal year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting – Our management team is responsible
for establishing and maintaining adequate internal control over our financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations of internal control systems, our internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on our assessment, we
concluded that, as of December 31, 2016, our internal control over financial reporting was effective based on those criteria.
ITEM 9B. OTHER INFORMATION
None.
63
PART III
The information required by Part III, other than as set forth in Item 12, and each of the following items is omitted
from this report and will be presented in our definitive proxy statement (“Proxy Statement”) to be filed pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report, in connection with our 2017
Annual Meeting of Shareholders, which information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled "Election of Directors", "Executive Officers", "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Corporate Governance" in the Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation", “Directors Compensation”, “Employment Arrangements” and
"Compensation and Management Committee " in the Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The section entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of
Management” in the Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a)
(c)
2,323,581
$6.22
901,700
-
2,323,581
-
$6.22
-
901,700
Plan Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
See Note 8 in Notes to Consolidated Financial Statements for additional information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The section entitled "Corporate Governance - General" in the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section entitled "Proposal to Ratify the Selection of Independent Registered Accounting Firm - Principal
Accountant Fees and Services" in the Proxy Statement is incorporated herein by reference.
64
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
Documents filed as part of this report:
1. Financial Statements
The financial statements and schedules required by this Item 15 are set forth in Part II, Item 8 of this
report.
(b)
Exhibits. The following exhibits are filed as a part of this report:
Description of Document
Incorporated By Reference from:
Exhibit
Index
2.1
2.2
3.1
3.2
4.1
Stock Purchase Agreement by and
between BCF Solutions, Inc. and
Ultralife Corporation
Stock Purchase Agreement Relating to
Accutronics Limited by and between
Robert Andrew Phillips and Others and
Ultralife Corporation
Restated Certificate of Incorporation
Amended and Restated By-laws
Specimen Stock Certificate
10.1*
Technology Transfer Agreement
relating to Lithium Batteries
10.2*
10.3*
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
Technology Transfer Agreement
relating to Lithium Batteries
Amendment to the Agreement relating
to rechargeable batteries
Ultralife Corporation 2014 Long-Term
Incentive Plan
Ultralife Batteries, Inc. Amended and
Restated 2004 Long-Term Incentive
Plan
Amendment No. 1 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
Amendment No. 2 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
Amendment No. 3 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
Employment Agreement between the
Registrant and Peter F. Comerford
10.10†
Employment Agreement between the
Registrant and Michael D. Popielec
65
Exhibit 2.1 of the Form 10-Q for the
quarter ended September 30, 2012, filed
November 8, 2012
Exhibit 2.2 of the Form 10-K for the year
ended December 31, 2015, filed March 2,
2016
Exhibit 3.1 of the Form 10-K for the year
ended December 31, 2008, filed March 13,
2009
Exhibit 3.2 of the Form 8-K filed
December 9, 2011
Exhibit 4.1 of the Form 10-K for the year
ended December 31, 2008, filed March 13,
2009
Exhibit 10.19 of our Registration Statement
on Form S-1 filed on October 7, 1994, File
No. 33-84888 (the “1994 Registration
Statement”)
Exhibit 10.20 of the 1994 Registration
Statement
Exhibit 10.24 of our Form 10-K for the
fiscal year ended June 30, 1996 (this
Exhibit may be found in SEC File No. 0-
20852)
Appendix A to our Definitive Proxy
Statement filed on April 21, 2014
Exhibit 99.2 of our Registration Statement
on Form S-8 filed on July 26, 2004, File
No. 333-117662
Exhibit 99.3 of our Registration Statement
on Form S-8 filed August 18, 2006, File
No. 333-136737
Exhibit 99.4 of our Registration Statement
on Form S-8 filed November 13, 2008, File
No. 333-155349
Exhibit 99.5 of our Registration Statement
on Form S-8 filed November 13, 2008, File
No. 333-155349
Exhibit 10.30 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.40 of the Form 10-K for the
year ended December 31, 2010, filed
10.11†
10.12
10.13†
10.14†
10.15
10.16†
10.17†
10.18†
10.19
10.20
10.21
10.22
10.23
21
23.1
dated December 6, 2010
Revised definition of “Change in
Control” for Ultralife Corporation
Amended and Restated 2004 Long-
Term Incentive Plan
Settlement Agreement between the
Registrant and the United States of
America dated June 1, 2011
Amendment No. 4 to Ultralife
Corporation Amended and Restated
2004 Long-Term Incentive Plan
Amendment No. 5 to Ultralife
Corporation Amended and Restated
2004 Long-Term Incentive Plan
Revolving Credit, Guaranty, and
Security Agreement between Ultralife
Corporation and PNC Bank, National
Association, dated May 24, 2013
Retirement and Consulting Agreement,
Release and Waiver of All Claims,
between Ultralife Corporation and
Peter F. Comerford, dated May 28,2013
Restricted Stock Unit Agreement
between Ultralife Corporation and
Michael D. Popielec. Dated June 4,
2013
Amended No. 6. to Ultralife
Corporation Amended and Restated
2004 Long-Term Incentive Plan
Amendment No. 1, dated April 30,
2014, to the Revolving Credit,
Guaranty, and Security Agreement
between Ultralife Corporation and PNC
Bank, National Association, dated May
24, 2013
Amendment No. 2, dated October 28,
2014, to the Revolving Credit,
Guaranty, and Security Agreement
between Ultralife Corporation and PNC
Bank, National Association, dated May
24, 2013
Amendment No. 3, dated April 30,
2015, to the Revolving Credit,
Guaranty, and Security Agreement
between Ultralife Corporation and PNC
Bank, National Association, dated May
24, 2013
Amendment No. 4, dated June 5, 2015,
to the Revolving Credit, Guaranty, and
Security Agreement between Ultralife
Corporation and PNC Bank, National
Association, dated May 24, 2013
Amendment No. 5, dated January 13,
2016, to the Revolving Credit,
Guaranty, and Security Agreement
between Ultralife Corporation and PNC
Bank, National Association, dated May
24, 2013
Subsidiaries
Consent of Freed Maxick CPAs, P.C.
66
March 15, 2011
Exhibit 10.1 of the Form 8-K filed on May
26, 2011
Exhibit 10.1 of the Form 8-K filed on June
2, 2011
Exhibit 4.5 of the Registration Statement
on Form S-8 filed on January 30, 2012,
File No. 333-179235
Exhibit 10.1 of the Form 8-K filed on May
26, 2011
Exhibit 10.1 of the Form 10-Q for the
quarter ended June 30, 2013, filed August
9, 2013
Exhibit 10.1 of the Form 10-Q for the
quarter ended June 30, 2013, filed August
9, 2013
Exhibit 10.1 of the Form 10-Q for the
quarter ended June 30, 2013, filed August
9, 2013
Appendix A of Form DEF 14A filed on
April 22, 2013
Exhibit 10.1 of the Form 10-Q for the
quarter ended March 30, 2014, filed May 9,
2014
Exhibit 10.1 of the Form 10-Q for the
quarter ended September 28, 2014, filed
November 3, 2014
Exhibit 10.1 of the Form 8-K filed on April
30, 2015
Exhibit 10.1 of the Form 8-K filed on June
5, 2015
Exhibit 10.1 of the Form 8-K filed on
January 20, 2016
Filed herewith
Filed herewith
Consent of Bonadio & Co., LLP
23.2
CEO 302 Certifications
31.1
CFO 302 Certifications
31.2
906 Certifications
32
100.INS
XBRL Instance Document
100.SCH XBRL Taxonomy Extension Schema
Document
100.CAL XBRL Taxonomy Calculation
Linkbase Document
100.LAB XBRL Taxonomy Label Linkbase
Document
100.PRE XBRL Taxonomy Presentation
Linkbase Document
100.DEF XBRL Taxonomy Definition
Document
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
* Confidential treatment has been granted as to certain portions of this exhibit.
† Management contract or compensatory plan or arrangement.
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 9, 2017
ULTRALIFE CORPORATION
/s/ Michael D. Popielec
Michael D. Popielec
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: February 9, 2017
Date: February 9, 2017
Date: February 9, 2017
Date: February 9, 2017
Date: February 9, 2017
Date: February 9, 2017
Date: February 9, 2017
/s/ Michael D. Popielec
Michael D. Popielec
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
/s/Steven M. Anderson
Steven M. Anderson (Director)
/s/ Thomas L. Saeli
Thomas L. Saeli (Director)
/s/ Robert W. Shaw II
Robert W. Shaw II (Director)
/s/ Ranjit C. Singh
Ranjit C. Singh (Director)
/s/ Bradford T. Whitmore
Bradford T. Whitmore (Director)
68
Index to Exhibits
21
23.1
23.2
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Subsidiaries
Consent of Freed Maxick CPAs, P.C.
Consent of Bonadio & Co., LLP
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Definition Document
69
SUBSIDIARIES
Exhibit 21
We have a 100% ownership interest in Ultralife Batteries (UK) LTD, incorporated in the United Kingdom.
We have a 100% ownership interest in ABLE New Energy Co., Limited, incorporated in Hong Kong, which has a 100%
ownership interest in ABLE New Energy Co., Ltd, incorporated in the People’s Republic of China.
We have a 100% ownership interest in Ultralife Energy Services Corporation, incorporated in Florida.
We have a 51% ownership interest in Ultralife Batteries India Private Limited, incorporated in India.
Through our ownership interest in Ultralife UK LTD, we have a 100% controlling interest in Accutronics, Ltd., also
incorporated in the United Kingdom
70
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-117662, 333-
136737, 333-155349, 333-179235 and 333-203037) of our report dated February 9, 2017 on the consolidated financial
statements of Ultralife Corporation for the year ended December 31, 2016, which appear in this Form 10-K.
Exhibit 23.1
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
February 9, 2017
71
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-117662, 333-
136737, 333-155349, 333-179235 and 333-203037) of our report dated March 2, 2016 on the consolidated financial
statements of Ultralife Corporation for the year ended December 31, 2015, which appear in this Form 10-K.
Exhibit 23.2
/s/ Bonadio & Co., LLP
Pittsford, New York
February 9, 2017
72
I, Michael D. Popielec, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Ultralife Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 9, 2017
/s/ Michael D. Popielec
Michael D. Popielec
President and Chief Executive Officer
73
I, Philip A. Fain, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Ultralife Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 9, 2017
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
74
Section 1350 Certification
Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”),
Michael D. Popielec and Philip A. Fain, the President and Chief Executive Officer and Chief Financial Officer and
Treasurer, respectively, of Ultralife Corporation, certify that (i) the Annual Report on Form 10-K for the year ended
December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of
operations of Ultralife Corporation.
A signed original of this written statement required by Section 906 has been provided to Ultralife Corporation and will be
retained by Ultralife Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Date: February 9, 2017
Date: February 9, 2017
/s/ Michael D. Popielec
Michael D. Popielec
President and Chief Executive Officer
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be
deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This
certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Exchange Act, except to the extent that we specifically incorporate this certification by reference.
75
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
/ / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
16-1387013
(I.R.S. Employer
Identification No.)
2000 Technology Parkway, Newark, New York
(Address of principal executive offices)
14513
(Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.10 per share
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes…. No..X...
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes…. No..X...
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X… No….
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes..X… No….
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer …. Accelerated filer ...… Non-accelerated filer …. Smaller reporting company ..X...
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act). Yes…. No..X...
On June 26, 2016, the aggregate market value of the common stock held by non-affiliates as defined in Rule 405
under the Securities Act of 1933) of the registrant was approximately $46,435,667 (in whole dollars) based upon the
closing price for such common stock as reported on the NASDAQ Global Market on June 24, 2016.
1
As of April 27, 2017, the registrant had 15,490,305 shares of common stock outstanding, net of 4,015,752
treasury shares.
None.
DOCUMENTS INCORPORATED BY REFERENCE
2
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (Amendment No. 1) amends our Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 (Original Filing), filed with the U.S. Securities and Exchange Commission (SEC) on
February 9, 2017 (Original Filing Date). The sole purpose of this Amendment No. 1 is to include the information required
by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in
reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be
incorporated in the Form 10-K by reference from our definitive proxy statement if such statement is filed no later than
120 days after our fiscal year-end. We are filing this Amendment to include Part III information in our Form 10-K
because we will not file a definitive proxy statement containing such information within 120 days after the end of the
fiscal year covered by the Original Filing. We plan on filing our definitive proxy statement on or about June 1, 2017 as
we are holding our 2017 Annual Shareholders’ Meeting (“the Meeting”) on July 18, 2017. The reference on the cover of
the Original Filing to the incorporation by reference to portions of our definitive proxy statement into Part III of the
Original Filing is hereby deleted.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), Part III, Items
10 through 14 and Part IV, Item 15 of the Original Filing are hereby amended and restated in their entirety. This
Amendment No. 1 does not amend, modify, or otherwise update any other information in the Original Filing.
Accordingly, this Amendment should be read in conjunction with the Original Filing. In addition, this Amendment No. 1
does not reflect events that may have occurred subsequent to the Original Filing Date.
Pursuant to Rule 12b-15 under the Exchange Act, this Amendment No. 1 also contains new certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, which are attached hereto. Because no financial statements are included
in this Amendment No. 1 and this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307
and 308 of Regulation S-K, paragraphs 3, 4, and 5 of the certifications have been omitted.
Unless expressly indicated or the context requires otherwise, the terms “the Company”, “we”, “our”, and “us” in this
document refer to Ultralife Corporation (“Ultralife”), a Delaware corporation, and, where appropriate, its subsidiaries.
3
TABLE OF CONTENTS
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Signatures
Index to Exhibits
5
11
18
20
21
22
23
24
4
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Our directors are elected to serve until the next annual meeting of shareholders and until his or her successor shall have been
duly elected and qualified. Certain information with respect to our directors is presented below.
Name
Age
Present Principal Occupation, Employment History and Expertise
Steven M. Anderson
60
Michael D. Popielec
55
Brigadier General (Ret.) Anderson has been a director of the Company since
April 13, 2010. General (Ret.) Anderson has served as the Afghanistan
Country Manager for Fluor Corporation since April 2016, managing the US
Army LOGCAP (Logistics Civil Augmentation Program) providing
contingency support to US forces in the Afghanistan combat zone. He has
served as an owner and Chief Marketing Officer from January 2013 to March
2016 and Senior VP from February 2011 through December 2012 of Relyant,
LLC, a service-disabled veteran-owned small business and global provider of
construction, environmental, energy and logistics services. General (Ret.)
Anderson, a career military officer who retired from active duty in November
2009, served for five years as a general officer in the US Army, including 15
months as the senior US and coalition logistician in Iraq in support of
Operation Iraqi Freedom. From 2004 to 2006, General (Ret.) Anderson
served as the senior US logistician in Korea (Deputy C-4 for the United
Nations Command/Combined Forces Command and J4, United States Forces
Korea) and spearheaded the development of Camp Humphreys, the combined
and US headquarters facility in Central Korea. He served in various
command positions including Commander, Division Support Command, 2nd
Infantry Division, Korea (2000-02), and Commander, 725th Main Support
Battalion, 25th Infantry Division (Light), Schofield Barracks, Hawaii (1995-
97). In his final military assignment, he served for two years on the Army
Staff in the Pentagon as the Director, Operations and Logistics Readiness,
Office of the Army Deputy Chief of Staff, G4 (logistics). General (Ret.)
Anderson is a 1978 graduate of the US Military Academy at West Point and
earned a Masters of Science degree in Operations Research and Systems
Analysis Engineering at the Naval Postgraduate School in 1987. In 2014, he
was inducted into the US Army Ordnance Hall of Fame and elected to the
board of directors of the National Association of Ordnance Contractors
(NAOC). General (Ret.) Anderson has been nominated for re-election to our
Board of Directors because of his general knowledge of the US military and
particularly his knowledge of its procurement processes and policies. The
military and prime defense contractors are important customer bases of the
Company.
Mr. Popielec has served as our President and Chief Executive Officer and as a
director of the Company since December 30, 2010. Mr. Popielec has 30
years experience in growing domestic and international industrial businesses.
Prior to joining us, Mr. Popielec operated his own management consulting
business in 2009 to 2010 and was Group President, Applied Technologies in
2008 and 2009 and Group President, Diversified Components from 2005 to
2007 at Carlisle Companies, Inc., a $2.5 billion diversified global
manufacturer. Prior to that, from 2003 to 2005, he held various positions,
including Chief Operating Officer, Americas, for Danka Business Systems,
PLC. From 1985 to 2002, Mr. Popielec held positions of increasing
responsibility at General Electric Company, culminating in his serving as a
GE corporate officer and as President and Chief Executive Officer of GE
Power Controls, the European arm of GE Industrial Systems. Mr. Popielec
5
Name
Age
Present Principal Occupation, Employment History and Expertise
Thomas L. Saeli
60
Robert W. Shaw II
60
has a B.S. in Mechanical Engineering from Michigan State University. Mr.
Popielec has been nominated for re-election to our Board of Directors
because of his operations expertise and his experience in growing domestic
and international industrial businesses.
Mr. Saeli has been a director of the Company since March 5, 2010. Since
2011, Mr. Saeli has served as the Chief Executive Officer and a director of
John R. Burt Enterprises, a diversified manufacturer of primarily commercial
and industrial roofing systems. Prior to that, Mr. Saeli was a business
consultant to international corporate clients on matters involving business
development strategies, acquisitions and operations. He previously served as
Chief Executive Officer and a member of the board of directors of Noble
International, Ltd., an automotive supplier of engineered laser-welded and
roll-formed metal products, from March 2006 through April 13, 2009 when
he resigned those positions. Noble International, Ltd. filed voluntary relief
under Chapter 11 of the U.S. Bankruptcy Code on April 15, 2009. From
1998 through 2006, Mr. Saeli served as Vice President of Corporate
Development for Lear Corporation, an automotive supplier of seating, interior
and electronic products. Over the past five years, Mr. Saeli has served on
various boards of privately held profit and nonprofit organizations. Mr. Saeli
has a BA in Economics from Hamilton College, and an MBA in Finance and
Accounting from Columbia University’s Graduate School of Business. Mr.
Saeli has been nominated for re-election to our Board of Directors because of
his manufacturing, corporate development, mergers and acquisitions and
finance experience. Mr. Saeli also qualifies as an audit committee financial
expert under applicable SEC rules.
Mr. Shaw has been a director of the Company since June 8, 2010. Currently
he is on the board of directors of the American Queen Steamboat Company,
one of the largest overnight US cruise ship companies, and for Pratt Miller,
Inc., a large engineering company for automotive racing and defense
businesses. Additionally he is a senior advisor to HMS Global Maritime, a
marine operator for domestic ferry companies and the US government and for
Hornblower NY Ferry Fleet, the $400M start-up of New York City’s fleet of
fast ferries. Mr. Shaw has served as the president of the largest dining and
excursion boat operators in the United States, with over 100 vessels. He has
been president of a large mechanical contracting company specializing in the
federal government and healthcare markets. Mr. Shaw served in the US
Marine Corps as an infantry Captain, has a MBA degree from Harvard
University and an engineering degree from Cornell University. Mr. Shaw has
been nominated for re-election to our Board of Directors because of his
management expertise and experience as an executive officer.
6
Name
Age
Present Principal Occupation, Employment History and Expertise
Ranjit C. Singh
64
Bradford T. Whitmore
59
Mr. Singh has been a director of the Company since August 2000, and served
as Chair of our Board of Directors from December 2001 to June 2007. Mr.
Singh is currently the Chief Executive Officer of CSR Consulting Group,
which provides business and technology consulting services, a position that
he has held since 2008. He previously served as President and Chief
Executive Officer of Aptara, a content outsourcing services company, from
February 2003 until July 2008. From February 2002 to February 2003, Mr.
Singh served as President and Chief Executive Officer of Reliacast Inc., a
video streaming software and services company. Prior to that, he was
President and Chief Operating Officer of ContentGuard, which develops and
markets digital property rights software. Before joining ContentGuard earlier
in 2000, Mr. Singh worked for Xerox as a corporate Senior Vice President
with various responsibilities related to its software businesses. Mr. Singh
joined Xerox in 1997, having been employed by Citibank where he was Vice
President of Global Distributed Computing. Mr. Singh has been nominated
for re-election to our Board of Directors because of his experience as an
executive of growing technology-based companies, his familiarity with
international operations and his expertise in mergers and acquisitions.
Mr. Whitmore has been a director of the Company since June 2007 and Chair
of our Board of Directors since March 2010. Since 1985, he has been the
Managing Partner of Grace Brothers, Ltd., an investment firm that holds
approximately 3% of the outstanding shares of our common stock. Mr.
Whitmore and Grace Brothers, Ltd. collectively hold or claim beneficial
ownership of over slightly more than 34% of the outstanding shares of our
common stock. Over the past five years, Mr. Whitmore has served as a
director of several privately held companies in which Grace Brothers, Ltd.
and its affiliates held investments as well as not-for-profit organizations. Mr.
Whitmore has been nominated for re-election to our Board of Directors
because of his corporate development expertise and significant expertise in
corporate financial matters.
Executive Officers
Our executive officers are appointed annually by our Board of Directors at its first meeting following the annual meeting
of shareholders. Our executive officers for fiscal 2016 were:
(cid:120) Michael D. Popielec, President and Chief Executive Officer
(cid:120) Philip A. Fain, Chief Financial Officer, Treasurer and Secretary
Other than for Mr. Popielec, whose information is set forth with the other directors standing for election, certain information
with respect to Philip A. Fain, our other executive officer, is presented below.
Name
Age
Present Principal Occupation and Employment History
Philip A. Fain
62 Mr. Fain was named Chief Financial Officer in November 2009, Treasurer in
December 2009 and Corporate Secretary in April 2013. He previously served
as Vice President of Business Development, having joined us in February
2008. Prior to joining us, he was Managing Partner of CXO on the GO, LLC, a
management-consulting firm, which he co-founded in November 2003 and
which we retained in connection with our acquisition activity. Prior to founding
CXO on the GO, LLC, Mr. Fain served as Vice President of Finance - RayBan
7
Name
Age
Present Principal Occupation and Employment History
Sunoptics for Luxottica, SpA. Prior to the acquisition of Bausch & Lomb’s
global eyewear business by Luxottica, Mr. Fain served as Bausch & Lomb’s
Senior Vice President Finance - Global Eyewear from 1997 to 1999 and as
Vice President and Controller for the US Sunglass business from 1993 to 1996.
In these roles, he led the process to acquire some of the World’s most sought
after sunglass companies and brands for Bausch & Lomb. From 1983 to 1993,
Mr. Fain served in various positions with Bausch & Lomb including executive
positions in corporate accounting, finance and audit. Mr. Fain began his career
as a CPA and consultant with Arthur Andersen & Co. in 1977. He received his
B.A. in Economics from the University of Rochester and an MBA from the
William E. Simon Graduate School of Business Administration of the
University of Rochester.
Corporate Governance
General
Pursuant to the General Corporation Law of the State of Delaware, the state in which we were organized, and our By-laws,
our business, property and affairs are managed under the direction of our Board of Directors. Members of our Board of
Directors are kept informed of Company business through regular discussions with our President and Chief Executive
Officer and our Chief Financial Officer, Treasurer and Secretary, by reviewing materials provided to them by the Company’s
management and by participating in meetings of the Board and its committees.
Our Board of Directors has determined that all but one of our directors, Michael D. Popielec, who serves as our President
and Chief Executive Officer, are “independent” for purposes of NASDAQ listing standards applicable to the Corporate
Development and Governance Committee and the Compensation and Management Committee. In addition, our Board of
Directors has determined that all but two of our Directors, Michael D. Popielec and Bradford T. Whitmore, our Board Chair,
are independent for purposes of NASDAQ listing standards applicable to the Audit and Finance Committee. We believe that
the segregation of the roles of Board Chair from that of the President and Chief Executive Officer ensures better overall
governance of our Company and provides meaningful checks and balances regarding our overall performance. This
structure allows our President and Chief Executive Officer to focus on our business while the Board Chair leads our Board of
Directors in establishing corporate policy and enhancing our governance structure and practices.
Our Board of Directors has three standing committees: an Audit and Finance Committee, a Corporate Development and
Governance Committee, and a Compensation and Management Committee. During 2016, our Board of Directors held six
meetings and the committees of our Board of Directors held a total of eighteen meetings. During 2016, Bradford T.
Whitmore served as our Board Chair. As Board Chair, Mr. Whitmore served as a non-voting ex-officio member of all of our
Board committees. Each director attended at least 75% of the aggregate of: (1) the total number of meetings of the Board;
and (2) the total number of meetings held by all committees of the Board on which he or she served.
Our Board of Directors has adopted a charter for each of the three standing committees that addresses the composition and
function of each committee and has also adopted Corporate Governance Principles that address the composition and function
of the Board of Directors. These charters and Corporate Governance Principles are available on our website at
http://investor.ultralifecorporation.com under the subheading “Corporate Governance.” Pursuant to our Corporate
Governance Principles, it is our policy that directors retire from service at the annual meeting following their 70th birthday.
Our Board of Directors has determined that all of the directors who serve on these committees are “independent” for
purposes of NASDAQ listing standards, and that the members of the Audit and Finance Committee are also “independent”
for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended, which we refer to in this proxy
statement as the Exchange Act. Our Board of Directors based these determinations primarily on a review of the responses of
the directors to questions regarding employment, compensation history, affiliations and family and other relationships, and
on follow-up discussions.
Committees of the Board of Directors
8
The composition and the functions of our three standing committees of our Board of Directors are set forth below. Our
Board of Directors will meet subsequent to the Meeting to appoint members of the committees and designate Chairs of those
committees from among those individuals elected at the Meeting to serve on our Board of Directors until the 2018 Annual
Meeting of Shareholders.
Audit and Finance Committee
The current members of the Audit and Finance Committee are Thomas L. Saeli (Chair), Steven M. Anderson and Ranjit C.
Singh. This committee selects our independent registered public accounting firm, subject to ratification of our full Board of
Directors, and has oversight responsibility for reviewing the scope and results of the independent registered public
accounting firm’s annual audit of our financial statements and the quality and integrity of those financial statements.
Further, the committee reviews the qualifications and independence of the independent registered public accounting firm,
and meets with our Chief Financial Officer and Treasurer and the independent registered public accounting firm to review
matters relating to internal accounting controls, our accounting practices and procedures and other matters relating to our
financial condition. The committee also reviews and monitors areas of financial risk that could have a material impact on
our Company. The Audit and Finance Committee met six times during 2016.
Our Board of Directors has determined that each of the members of the Audit and Finance Committee is “financially literate”
in accordance with NASDAQ listing standards. In addition, our Board of Directors has determined that Mr. Saeli qualifies
as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.
Corporate Development and Governance Committee
The current members of the Corporate Development and Governance Committee are Ranjit C. Singh (Chair), Steven M.
Anderson and Robert W. Shaw II. This committee works with management to develop corporate strategy and to identify and
evaluate acquisition opportunities, reviews the performance and compensation of our directors, makes recommendations to
our Board of Directors for membership and committee assignments and for the compensation of our directors, and manages
the annual evaluation of the performance of our President and Chief Executive Officer and our Board Chair. The Corporate
Development and Governance Committee met seven times during 2016.
The Corporate Development and Governance Committee identifies potential nominees for director based on its own research
for appropriate candidates as well as on recommendations received by directors or from shareholders as described below.
The Corporate Development and Governance Committee may retain an executive search firm to assist in the identification of
potential director nominees. The evaluation process and the factors considered in undertaking that evaluation are set forth
under the caption “Shareholder Recommendations and Standards for Director Nominations” below.
The Corporate Development and Governance Committee also has overall responsibility for assessing and managing our
exposure to risks associated with the conduct of our business.
Compensation and Management Committee
The current members of the Compensation and Management Committee are Robert W. Shaw II (Chair), Steven M.
Anderson and Thomas L. Saeli. The Compensation and Management Committee has ultimate responsibility for determining
the compensation of officers elected by our Board of Directors, granting stock options and other equity awards and otherwise
administering our equity compensation plans, and approving and administering any other compensation plans or agreements.
The Compensation and Management Committee has the authority to retain outside experts in making compensation
determinations. Our 2014 Long-Term Incentive Plan (“2014 LTIP”) is administered by the Compensation and Management
Committee. The Compensation and Management Committee met five times during 2016.
Shareholder Recommendations and Standards for Director Nominations
As noted above, the Corporate Development and Governance Committee considers and establishes procedures regarding
recommendations for nomination to our Board of Directors, including nominations submitted by shareholders. Such
recommendations, if any, should be sent to Corporate Secretary, Attn: Philip A. Fain, Ultralife Corporation, 2000
Technology Parkway, Newark, New York 14513. Any recommendations submitted to the Corporate Secretary should be in
writing and should include any material the shareholder considers appropriate in support of that recommendation, but must
include the information that would be required under the rules of the SEC in a proxy statement soliciting proxies for the
election of such candidate and a signed consent of the candidate to serve as a director, should he or she be elected. The
Corporate Development and Governance Committee evaluates all potential candidates in the same manner, regardless of the
source of the recommendation.
9
Based on the information provided to the Corporate Development and Governance Committee with respect to director
candidates, the Corporate Development and Governance Committee will make an initial determination whether to conduct a
full evaluation of a candidate. The Corporate Development and Governance Committee considers the composition and size
of the existing Board of Directors, along with other factors, in making its determination to conduct a full evaluation of a
candidate. As part of the full evaluation process, the Corporate Development and Governance Committee may conduct
interviews, obtain additional background information and conduct reference checks of candidates. The Corporate
Development and Governance Committee may also ask the candidate to meet with management and other members of our
Board of Directors. In evaluating a candidate, our Board of Directors, with the assistance of the Corporate Development and
Governance Committee, takes into account a variety of factors as described in our Corporate Governance Principles,
including the particular experience, attributes and skills that would qualify the candidate to serve as a director. The criteria
for selection to our Board of Directors include character and leadership skills; general business acumen and executive
experience; knowledge of strategy, finance and relations between business and government; and internal business operations
– all to ensure an active Board of Directors whose members work well together and possess the collective knowledge and
expertise required to meaningfully contribute as directors. Our Corporate Development and Governance Committee reviews
the qualifications of director candidates with those of our current directors to augment and complement the skill sets of our
current Board members. We believe that it is important for our Board of Directors to be comprised of individuals with
diverse backgrounds, skills and experiences. Although we do not have a formal diversity policy and identify qualified
potential candidates without regard to any particular classification, we believe that possessing a breadth of experience and
qualifications, as our Board does, promotes Board diversity.
Annual Meeting Attendance
Our policy is that all of the directors, absent special circumstances, should participate in our Annual Meeting of
Shareholders, either in person or telephonically. All directors participated in last year’s Annual Meeting of Shareholders.
Executive Sessions
Our Corporate Governance Principles require our independent directors to meet in executive session regularly by requiring
them to have at least four regularly scheduled meetings per year without management present. Our independent directors
met in executive session six times during 2016. In addition, our standing committees meet in executive session on a regular
basis.
Communicating with the Board of Directors
Shareholders interested in communicating directly with our Board of Directors as a group or individually may do so in
writing to our Corporate Secretary, Attn. Philip A. Fain, Ultralife Corporation, 2000 Technology Parkway, Newark, New
York 14513. The Corporate Secretary will review all such correspondence and forward to our Board of Directors a summary
of that correspondence and copies of any correspondence that, in his opinion, deals with the functions of the Board of
Directors or that he otherwise determines requires their attention. Directors may at any time review a log of all
correspondence received by us that is addressed to members of the Board of Directors and request copies of any such
correspondence. Any concerns relating to accounting, internal controls or auditing matters will be brought to the attention of
the Audit and Finance Committee and handled in accordance with the procedures established by the Audit and Finance
Committee with respect to such matters.
Risk Management
Our management team is responsible for assisting the Corporate Development and Governance Committee in its assessment
of our exposure to risks associated with the conduct of business. We have an enterprise risk management process to identify,
assess and manage the most significant risks facing our Company. Our Corporate Development and Governance Committee
has overall responsibility to review management’s risk management process, including the policies and guidelines used by
management to identify, assess and manage our exposure to risk. Our Audit and Finance Committee has oversight
responsibility for financial risks and other risks that could have a material impact on our Company. Our management
reviews these financial risks with our Audit and Finance Committee regularly and reviews the risk management process, as it
affects financial risks, with our Audit and Finance Committee on an on-going basis.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of our
common stock to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of
our common stock and our other equity securities. To our knowledge, based solely on the written representations of our
10
directors and executive officers and the copies of such reports filed with the SEC during 2016, all Section 16(a) filings
applicable to our officers, directors and more than 10% beneficial owners were filed in a timely manner with the following
exception. One of our directors, Robert W. Shaw II, failed to file a report on Form 4 required under Section 16(a) of the
Exchange Act of 1934 on a timely basis in 2016. A Form 4 was filed by Mr. Shaw on May 16, 2016, to disclose Mr. Shaw’s
acquisition of 3,000 shares of our common stock. The transaction was not reported timely as a result of an inadvertent
administrative oversight.
Code of Ethics
We have a Code of Ethics applicable to all employees, including our executive officers and all members of our Board of
Directors. Our Code of Ethics incorporates the elements of a code of ethics specified in Item 406 of Regulation S-K and also
complies with NASDAQ requirements for a code of conduct. Shareholders can find a link to this Code of Ethics on our
website at http://investor.ultralifecorporation.com under the subheading “Corporate Governance.”
Our Code of Ethics emphasizes our commitment to conducting business in a legal and ethical manner and encourages
prompt and confidential reporting of any suspected violations of law or the Code of Ethics. As part of our Code of Ethics,
directors and employees are expected to make business decisions and to take actions based upon the best interests of our
Company and not based upon personal relationships or benefits. In conjunction with our Code of Ethics, our General
Counsel conducts an annual training session with our Board of Directors with emphasis on all facets of compliance with new
and existing regulations and best practices. Any potential conflict of interest, and any transaction or relationship involving
our officers or directors that could give rise to a conflict of interest, must be reviewed and resolved by our Corporate
Development and Governance Committee.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
We presently use cash compensation to attract and retain qualified candidates to serve on our Board of Directors. Our
practice is to survey our peer group companies every three to four years to ascertain whether our overall director
compensation is appropriate and balanced. If we perceive that there has been a major change in our Company or the market,
we may reduce the period of time between surveys. In setting director compensation, we consider the amount of time that
directors spend fulfilling their duties to us, the skill-level required by members of our Board of Directors, and, based on
publicly available data, the compensation paid to directors in similar sized organizations in our industry. Our program is
designed to deliver annual director compensation at the median levels of director compensation for companies in similar
industries and of similar size. Our annual director compensation period runs from July 1 to June 30.
Annual Retainers
Each non-employee director will receive an annual cash retainer of $65,000, except for the Board Chair, who will receive an
annual cash retainer of $95,000 for the period July 1, 2016 through June 30, 2017. Each non-employee director received an
annual cash retainer of $60,000, except for the Board Chair, who received an annual cash retainer of $90,000 for the period
July 1, 2015 through June 30, 2016. In addition, each director who is a member of a Board committee receives an additional
cash retainer for such committee service. Annual retainers for Board committee service for the periods July 1, 2015 to June
30, 2016 and July 1, 2016 to June 30, 2017 were as follows:
Audit and Finance Committee
Compensation and Management Committee
Corporate Development and Governance
Committee
Annual Retainer for
Committee Members
$6,750
$5,250
Annual Retainer for
Committee Chair
$16,750
$13,250
$6,750
$16,750
Annual retainers for both committee members and committee chairs are paid quarterly in cash. For Board and committee
service during the fiscal year ended December 31, 2016, we paid our non-employee directors an aggregate $426,768.
11
Our non-employee directors have stock ownership guidelines that require them to maintain ownership of at least $40,000 of
our common stock. Newly elected directors have two years from their election to the Board to achieve the stock ownership
requirement. Currently, all of our non-employee directors meet the stock ownership guidelines. Refer to the Executive
Officer Compensation section contained herein for stock ownership guidelines for our executive officers.
Director Compensation Table
The table below summarizes the compensation paid by us to our non-employee directors for their service during the fiscal
year ended December 31, 2016.
Fees
Earned or
Paid in
Cash ($)
81,256
84,504
84,254
84,254
92,500
Stock
Awards
(2)
Option
Awards
(3)
Non- Equity
Incentive
Plan
Compensation
(4)
Nonqualified
Deferred
Compensation
Earnings
(5)
All Other
Compensation
(6)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
81,256
84,504
84,254
84,254
92,500
Name
(1)
Steven. M. Anderson
Thomas L. Saeli
Robert W. Shaw II
Ranjit C. Singh
Bradford T. Whitmore
(1) Michael D. Popielec, our President and Chief Executive Officer, is ineligible to receive compensation for his service
as a director because he is also an employee. Refer to the Summary Compensation Table for the compensation of our
executive officers.
(2)
There were no stock awards granted to our non-employee directors during 2016 or outstanding at December 31,
2016.
(3) There were no option awards granted to our non-employee directors during 2016 or outstanding at December 31,
2016.
(4) There was no non-equity incentive plan compensation paid to our non-employee directors for the fiscal year ended
December 31, 2016.
(5)
There were no deferred compensation earnings for our non-employee directors for the fiscal year ended December
31, 2016.
(6) There was no other compensation paid to our non-employee directors for the fiscal year ended December 31, 2016.
Executive Officer Compensation
This Amendment No. 1 provides certain information relating to the compensation of our named executive officers. We have
determined that Messrs. Popielec and Fain were our only named executive officers for 2016.
As a smaller reporting company under the Securities Exchange Act of 1934, as amended, we are providing executive
compensation information in accordance with the scaled disclosure requirements of Regulation S-K. As a result,
Compensation Disclosure and Analysis (“CD&A”) and certain other disclosures are not included.
12
Summary Compensation Table
The following table sets forth information concerning the compensation earned by or awarded to our executive officers for
their services in all capacities to us during 2016 and 2015:
Name and
Principal Position
Michael D. Popielec
President and Chief Executive Officer
Philip A. Fain
Chief Financial Officer, Treasurer and Secretary
Salary ($)
(1)
Bonus ($)
(2)
500,160
505,401
309,311
303,737
-
236,455
-
87,738
Year
2016
2015
2016
2015
Stock
Awards ($)
(3)
-
-
-
-
Option
All Other
Awards ($) Compensation ($)
(4)
75,398
86,600
37,969
41,283
(5)
18,166
18,075
9,769
10,040
Total
($)
593,724
846,531
357,049
442,798
(1) Amounts shown represent base salary cash compensation paid during the respective years. Amounts may differ from
amounts earned due to timing of payroll periods. Refer to the “Narrative to Summary Compensation Table” for further
information.
(2) Amounts shown represent short-term incentive plan (“STIP”) cash awards earned during the respective years and paid in
the subsequent year. Refer to the “Narrative to Summary Compensation Table” for further information.
(3) There were no stock awards granted during fiscal years 2016 and 2015.
(4) Amounts shown represent the aggregate grant date fair value of stock options awarded during the respective years
computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718
(“ASC 718”). See Note 8 and Note 9 to our audited financial statements included in our Annual Reports on Form 10-K
for the fiscal years ended December 31, 2016 and December 31, 2015, respectively, for the assumptions used in valuing
these stock options in accordance with ASC 718. Refer to the “Narrative to Summary Compensation Table” for further
information.
(5) Amounts shown as “All Other Compensation” consist of the following:
401(k) Plan
Employer
Match
($)
5,300
5,200
5,300
5,300
Other
Benefits (a)
($)
12,866
12,875
4,469
4,740
Total
($)
18,166
18,075
9,769
10,040
Michael D. Popielec
2016
Philip A. Fain
2015
2016
2015
(a) The “Other Benefits” column of the above table includes premiums paid for group medical and dental
coverage and long-term care insurance, reimbursement for tax preparation and certain financial planning
expenses.
Narrative to Summary Compensation Table
Compensation Overview
Our executive compensation program is evaluated and approved each year by our Compensation and Management
Committee. Annual total compensation for our executive officers is comprised of the following key components:
(cid:120) Base salary;
(cid:120) Short-term incentive plan (“STIP”);
(cid:120) Long-term incentive plan (“LTIP”); and
13
(cid:120) Limited perquisites and other benefits.
Our executive compensation program is structured to align the interests of our executive officers with those of our
shareholders by rewarding performance that achieves successful execution of our business strategy, grows our business and
increases shareholder value. Our executive rewards program is designed to incentivize our executive officers to achieve
strong financial, operational and strategic performance and to provide a link between the compensation earned by our
executives and the creation of long-term sustainable value. The Compensation and Management Committee establishes
specific annual, long-term and strategic goals and seeks to reward our executive officers for performance that meets or
exceeds those goals. In addition, we expect our executive officers to work toward achievement of these goals while
maintaining the highest ethical standards.
Base Salary
The Compensation and Management Committee evaluates the performance of Mr. Popielec, our President and Chief
Executive Officer, and presents its evaluation and recommendation for base salary adjustment, if any, to the Board of
Directors for approval. Mr. Popielec evaluates the performance of Mr. Fain, our Chief Financial Officer, Treasurer and
Secretary, and presents his evaluation and recommendation for a base salary adjustment, if any, to the Compensation and
Management Committee, which, in turn, may recommend acceptance of or adjustment to such base salary recommendation
to the Board of Directors. If adjustments to base salaries are recommended and approved, the adjustments are made to be
effective for a period ranging from twelve to fifteen months from the date of the last salary adjustment.
In May 2016, the Board of Directors, at the recommendation of the Compensation and Management Committee, approved a
base salary increase of 4.0% for Mr. Popielec ($486,683 to $506,150) and for Mr. Fain ($300,976 to $313,015). The salary
increases were approved by the Committee based on a number of factors including individual and Company performance.
Other than these adjustments, no further changes were made to the base salaries of our executive officers during 2016.
In March 2015, the Board of Directors, at the recommendation of the Compensation and Management Committee, approved
a base salary increase of 5% for Mr. Fain ($286,650 to $300,976). Mr. Popielec’s base salary was not adjusted during 2015.
Short-Term Incentive Plan
Our Compensation Committee establishes a STIP each fiscal year to provide our executive officers an opportunity to earn an
annual cash award in addition to their base salaries. The STIP is designed to place “at risk” a significant portion of the
annual total cash compensation of our executive officers to incentivize them to achieve our short-term financial objectives
while making progress toward our longer term goals. Generally, the STIP target levels are set such that, assuming
achievement of pre-established performance metrics, the combined annual base salary and STIP award for our executive
officers will be at or near the 50th percentile for executive officers at the companies in our peer group.
For 2016, the STIP target bonus levels for Messrs. Popielec and Fain were 75% and 50% of their respective base salaries.
The performance goals to be achieved to be awarded the STIP targeted bonus for 2016 were consolidated operating profit
and revenue goals of $7.1 million and $102.6 million, respectively, as measured pursuant to generally accepted accounting
standards. The STIP award was structured with a 70% weighting on the consolidated operating profit goal and a 30%
weighting on the consolidated revenue goal. Achievement of less than 75% of the operating profit goal or less than 90% of
the revenue goal would result in no award being earned with respect to that metric. Achievement of 75% to 100% of the
operating profit goal and achievement of 90% to 100% of the revenue goal would result in an award ranging from 50% to
100% of the target award with respect to the metric for which such performance levels had been achieved. Achievement of
over 100% to 135% of the operating profit goal and over 100% to 125% of the revenue goal would result in an award
ranging from 101% to 150% of the target award with respect to the metric for which such performance levels had been
achieved. Our executive officers were eligible for a partial award if one of the two metrics was achieved.
Based on our 2016 financial performance, our executive officers did not earn a STIP award for 2016.
For 2015, the STIP target bonus levels for Mr. Popielec and Mr. Fain were 75% and 45% of their respective base salaries.
The STIP target bonus levels were based on pre-established 2015 consolidated operating profit and revenue goals of $3.75
million and $80.3 million, respectively. The STIP was structured with 70% of the award weighted on the consolidated
operating profit goal and 30% weighted on the consolidated revenue goal. Achievement of less than 75% of the operating
profit goal or less than 89% of the revenue goal would result in no award being earned with respect to that metric.
Achievement of 75% to 100% of the operating profit goal and achievement of 89% to 100% of the revenue goal would result
in an award ranging from 50% to 70% of the target award with respect to the metric for which such performance levels had
14
been achieved. Achievement of 127% to 160% of the operating profit goal and 107% to 118% of the revenue goal would
result in an award ranging from 100% to 150% of the target award with respect to the metric for which such performance
levels had been achieved. Our executive officers were eligible for partial awards if one of the two metrics was achieved.
Based on our 2015 financial performance, Messrs. Popielec and Fain earned STIP awards for 2015 of $236,455 and $87,738,
respectively, which were paid in March 2016.
Long-Term Incentive Plan
Stock options and other equity awards are used to align the interests of our executive officers with those of our shareholders
by incentivizing our executive officers to achieve long-term growth and sustainable shareholder value.
Refer to “Outstanding Equity Awards” for stock options granted during 2016 and 2015. There were no other equity-based
awards granted to our executive officers during 2016 and 2015.
Retirement Benefits
We provide a tax-qualified 401(k) plan to all active employees that provides for both employer and employee
contributions. Under this plan, employees may contribute a portion of their eligible cash compensation to the plan. We
provide a company match of 50% of an employee’s contributions, up to a maximum of 4% of the employee’s annual
salary.
Perquisites and Other Personal Benefits
We provide our executive officers with certain perquisites and other personal benefits which are consistent with the
objectives of our overall compensation program to better enable us to attract and retain superior employees for key
positions. The Compensation and Management Committee periodically reviews the levels of such perquisites and other
personal benefits to ensure they remain at appropriate levels. The aggregate incremental costs of the perquisites and other
personal benefits provided to our executive officers are included in the “All Other Compensation” column of the
Summary Compensation Table.
Outstanding Equity Awards
The following table sets forth information concerning the number of shares underlying exercisable and non-exercisable stock
option awards outstanding at December 31, 2016 for our executive officers.
15
Name
Michael D. Popielec
Philip A. Fain
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
50,000
250,000
50,000
-
-
13,334
6,667
-
25,000
50,000
20,000
46,667
10,000
-
-
-
-
-
-
26,666 (3)
13,333 (4)
40,000 (5)
-
-
-
23,333 (6)
20,000 (7)
20,000 (8)
-
-
-
200,000 (2)
200,000 (2)
-
-
-
-
-
-
-
-
-
Option
Exercise
Price ($)
Option
Expiration
Date
6.4218
6.4218
6.5820
10.0000
15.0000
3.7103
3.7876
4.2902
6.9061
4.4218
3.9797
3.9384
3.7103
4.2902
(1)
(1)
12/30/2017
12/30/2017
12/30/2017
12/30/2020
12/30/2020
3/3/2022
3/5/2022
6/1/2023
12/3/2017
12/9/2018
1/3/2019
3/4/2021
3/3/2022
6/1/2023
(1) On April 19, 2017, our Board of Directors, on recommendation of the Compensation and Management Committee,
extended the option expiration date from December 30, 2017 to December 30, 2020, pursuant to the Company’s
Amended and Restated 2004 Long-Term Incentive Plan.
(2) Stock options were granted to Mr. Popielec under the terms of his employment agreement and begin to vest on the
date our common stock first reaches a closing price equal to the exercise price for 15 trading days in a 30-day trading
period, with such vesting in equal amounts on the four anniversary dates of that date. All such options expire as of
the later of December 31, 2017 and five years after the initial vesting commences, but in no event later than
December 31, 2020.
(3) On March 3, 2015, our Board of Directors, on recommendation of the Compensation and Management Committee,
granted to Mr. Popielec the option to purchase 40,000 shares of our common stock. This option vested with respect to
13,334 shares and 13,333 shares on March 3, 2016 and March 3, 2017, respectively, and will vest with respect to
13,333 shares on March 3, 2018.
(4) On March 5, 2015, our Board of Directors, on recommendation of the Compensation and Management Committee,
granted to Mr. Popielec the option to purchase 20,000 shares of our common stock. This option vested with respect to
6,667 shares and 6,667 shares on March 5, 2016 and March 5, 2017, respectively, and will vest with respect to 6,666
shares on March 5, 2018.
(5) On June 1, 2016, our Board of Directors, on recommendation of the Compensation and Management Committee,
granted to Mr. Popielec the option to purchase 40,000 shares of our common stock. This option will vest with respect
to 13,334 shares on June 1, 2017, 13,333 shares on June 1, 2018 and 13,333 shares on June 1, 2019.
(6) On March 4, 2014, our Board of Directors, on recommendation of the Compensation and Management Committee,
granted to Mr. Fain the option to purchase 70,000 shares of our common stock. This option vested with respect to
23,334 shares on March 4, 2015, 23,333 shares on March 4, 2016 and 23,333 shares on March 4, 2017.
(7) On March 3, 2015, our Board of Directors, on recommendation of the Compensation and Management Committee,
granted to Mr. Fain the option to purchase 30,000 shares of our common stock. This option vested with respect to
10,000 shares on March 3, 2016 and 10,000 shares on March 3, 2017, and will vest with respect to 10,000 shares on
March 3, 2018.
(8) On June 1, 2016, our Board of Directors, on recommendation of the Compensation and Management Committee,
granted to Mr. Fain the option to purchase 20,000 shares of our common stock. This option will vest with respect to
6,667 shares on June 1, 2017, 6,667 shares on June 1, 2018 and 6,666 shares on June 1, 2019.
16
There were no other equity awards outstanding at December 31, 2016 for our executive officers.
Employment Arrangements
On December 6, 2010, the Company entered into an employment agreement with Mr. Popielec, providing that Mr. Popielec
would become our President and Chief Executive Officer effective December 30, 2010. Mr. Popielec’s annual base salary
was set at $450,000 subject to adjustment. Mr. Popielec is also eligible to receive an annual cash bonus under our short-term
incentive plan if we meet or exceed certain quantitative and qualitative performance metrics to be agreed upon and approved
by the Compensation Committee no later than January 31 of the year for which the bonus applies. The bonus goals and
payout ranges for 2016 are set forth on Page 17.
Pursuant to the terms of his employment agreement, Mr. Popielec was granted options to purchase shares of our common
stock. Certain of the options granted were conditional and subject to shareholder approval to increase the number of shares
available under our Amended and Restated 2004 Long-Term Incentive Plan (“Restated 2004 LTIP”). Shareholder approval
was obtained in June 2011. All options awarded to Mr. Popielec pursuant to the terms of his employee agreement were
outstanding as of December 31, 2016. Refer to the Outstanding Equity Awards section.
Mr. Popielec is also entitled to receive the retirement benefits, perquisites and other personal benefits described in this proxy
statement under the sections entitled “Retirement Benefits” and “Perquisites and Other Personal Benefits”.
The employment agreement provides that Mr. Popielec’s employment is “at will.” Mr. Popielec is entitled to certain
severance benefits if the Company terminates his employment without Business Reasons or a Constructive Termination
occurs (as those terms are defined in the employment agreement), including (i) salary continuation for a period of 12 months
following the termination date; (ii) a pro rata amount (calculated on a per diem basis) of the full-year bonus which Mr.
Popielec would have earned for the calendar year in which the termination of employment occurs; (iii) acceleration of
vesting of all outstanding stock options and other equity awards to the extent that the outstanding options and other equity
awards would otherwise have vested no more than 18 months after the date of termination, and all such options and other
equity awards shall remain exercisable for one year following the termination date or through the original expiration date, if
earlier; (iv) continuation of health benefits for Mr. Popielec, his spouse and any dependent children for a period of 12 months
after the termination date followed by 18 months of executive-paid COBRA eligibility. In addition, if we terminate the
employment of Mr. Popielec within 12 months following the occurrence of a Change in Control, without Business Reasons
or if a Constructive Termination occurs (as those terms are defined in the employment agreement), then Mr. Popielec shall
be entitled to receive (i) any earned but unpaid salary, any unpaid bonus from the prior year plus an amount equal to 18
months of his base salary as then in effect, payable immediately upon the termination date; (ii) one and one-half times his
target bonus for the calendar year in which the termination date occurs; (iii) acceleration of vesting of all outstanding stock
options and other equity awards, which are to remain exercisable for 18 months following the termination date, or through
the original expiration date, if earlier; (iv) continuation of health benefits for Mr. Popielec, his spouse and any dependent
children for a period of 24 months after the termination date. To the extent the vesting and/or accelerated payment of
outstanding stock options would subject Mr. Popielec to the imposition of tax and/or penalties under Section 409A of the
Internal Revenue Code (the “Code”), the vesting and/or payment of such stock options and other equity shall be delayed to
the extent necessary to avoid the imposition of such tax and/or penalties. The employment agreement also provides for the
continuation of certain benefits in the event Mr. Popielec’s employment is terminated for Disability (as defined in the
employment agreement) or by his death. Mr. Popielec has also executed an Employee Confidentiality Non-Disclosure, Non-
Compete, Non-Disparagement and Assignment Agreement in our standard form.
We do not have an employment agreement with Mr. Fain.
Retirement Benefits and Potential Payments upon Termination or Change in Control
The only arrangement that we maintain that provides for retirement benefits is our tax-qualified defined contribution
401(k) plan. The material terms of our tax-qualified defined contribution 401(k) plan are summarized above under the
heading “Retirement Benefits.”
All of the potential payments and benefits payable by us to those of our executive officers in the event of various
circumstances involving either a termination of employment or change in control are determined pursuant to the
employment agreement with Mr. Popielec or the Restated 2004 LTIP.
17
The employment agreement with Mr. Popielec is summarized above under the heading “Employment Arrangements” on
page 15. We do not have an employment agreement with Mr. Fain. Under the Restated 2004 LTIP and 2014 LTIP, all
outstanding unvested stock options and other equity awards immediately vest upon the occurrence of a “Change in
Control” (as defined by the respective plan).
Stock Ownership Guidelines
In order to better align the interests of our executive officers and shareholders, the Compensation Committee
implemented stock ownership requirements for our executive officers. The stock ownership requirements for our
executive officers are as follows:
President & CEO
Chief Financial Officer
1.00 times salary
0.50 times salary
For 2016, the Compensation Committee established the presumed share price to be used for purposes of determining the
minimum number of shares to be owned by the executive officers. This presumed price was $4.98 per share, which was
based on the volume weighted average price (“VWAP”), calculated as an amount equal to the sum of all dollars traded for
every transaction in our common stock for the two-year period ended December 31, 2015 divided by the total shares
traded for such two-year period. Each year the Compensation Committee will establish a new price per share to be used
to determine the minimum number of shares required to be held which will be based on the VWAP of our common stock
for the preceding two-year period. Executive officers have three years from the date of hire to achieve the required
holdings, which are based on the price per share as calculated above. Additionally, our stock ownership policy requires
that until the share ownership guidelines are met, executive officers are prohibited from disposing of more than 50% of
vested shares received from restricted share grants (on an after tax basis) and 50% of shares received on exercise of stock
options. Shares owned by an executive, as well as shares underlying awards of stock options and restricted stock are
treated as owned by the executive for purposes of determining whether required ownership has been achieved. Our
executive officers have met their respective stock ownership requirement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The table below shows certain information regarding the beneficial ownership of shares of our common stock as of April 27,
2017 by each person known by us to beneficially own more than five percent of the outstanding shares of our common stock,
with percentages based on 15,490,305 shares issued and outstanding.
Name and Address of Beneficial Owner
Bradford T. Whitmore (1)
1560 Sherman Avenue, Suite 900
Evanston, IL 60201
NGP Energy Technology Partners II, L.P. (2)
1700 K Street NW, Suite 750
Washington, D.C. 20006
Number of Shares
Beneficially Owned
Percent of Class
Beneficially Owned
5,363,073
34.6%
950,721
6.1%
(1) This information as to the beneficial ownership of shares of our common stock is based on the Form 4 dated
February 24, 2016 filed with the SEC by Grace Brothers, Ltd., an Illinois limited partnership, Bradford T.
18
Whitmore individually and as general partner of Grace Brothers, Ltd. and as manager and sole voting member of
Sunray I, LLC, Spurgeon Corporation, as general partner of Grace Brothers, Ltd. and Sunray I, LLC, a Delaware
limited liability company that reports beneficial ownership of 5,298,229 shares of our common stock. Mr.
Whitmore reports sole voting and dispositive power with respect to 4,844,457 of such shares, of which 4,452,283
shares are held in the name of Sunray I, LLC. Grace Brothers, Ltd., Mr. Whitmore and Spurgeon Corporation
report shared voting and dispositive power with respect to 518,616 of such shares.
(2) This information as to the beneficial ownership of shares of our common stock is based on Amendment No. 2 to
Schedule 13G dated April 5, 2016 filed with the SEC by NGP Energy Technology Partners II, L.P. (a Delaware
limited partnership which owns the reported securities), NGP ETP II, L.L.C., the general partner of NGP Energy
Technology Partners II, L.P, Energy Technology Partners, L.L.C., the sole manager of NGP ETP II, L.L.C., and
Philip J. Deutch, the sole member and manager of Energy Technology Partners, L.L.C. and the manager of NGP
ETP II, L.L.C. Mr. Deutch is also a member of the investment committee of NGP ETP II, L.L.C. NGP Energy
Technology Partners II, L.P. reports sole voting and dispositive power with respect to all 950,721 shares. By
virtue of the relationships between and among the reporting persons, NGP ETP II, L.L.C., Energy Technology
Partners, L.L.C. and Mr. Deutch may be deemed to have the power to direct the voting and disposition of the
shares of common stock beneficially owned by NGP Energy Technology Partners II, L.P. NGP ETP II, L.L.C.,
Energy Technology Partners, L.L.C. and Mr. Deutch disclaim beneficial ownership of the reported securities
except to the extent of their pecuniary interest therein.
Security Ownership of Management
The table below shows certain information regarding the beneficial ownership of shares of our common stock as of April 27,
2017 by (1) each of our directors, (2) each of our executive officers, and (3) all of our directors and executive officers as a
group.
Name of Beneficial Owner (1)
Number of Shares
Beneficially Owned (1)
Percent of Class
Beneficially Owned (2)
Steven M. Anderson
Michael D. Popielec
Thomas L. Saeli
Robert W. Shaw II
Ranjit C. Singh
Bradford T. Whitmore
Philip A. Fain
All Directors and Executive
Officers as a group (7 persons)
___________________________
*Less than 1%
18,500
*
673,623 (3)
1.7% (7)
52,246
46,280
79,801
5,363,073 (4)
258,115 (5)
*
*
*
34.6%
*
6,491,638 (6)
38.1% (7)
(1) Except as otherwise indicated, the shareholders named in this table have sole voting and investment power with
respect to the shares of our common stock beneficially owned by them. The information provided in this table is
based upon information provided to us by such shareholders. The table reports beneficial ownership for our
directors and executive officers in accordance with Rule 13d-3 under the Exchange Act. This means all our
securities over which directors and executive officers directly or indirectly have or share voting or investment
power are listed as beneficially owned. The amounts also include shares that may be acquired by exercise of
stock options prior to July 21, 2017, which shares are referred to in the footnotes to this table as “shares subject
to options that may be exercised.”
(2) Based on 15,490,305 shares issued and outstanding.
19
(3) The amount shown includes 403,335 shares subject to options that may be exercised by Mr. Popielec prior to
July 21, 2017.
(4) The amount shown includes 518,616 shares beneficially owned by Grace Brothers, Ltd., an Illinois limited
partnership, held in a margin account, and Spurgeon Corporation, which is a general partner of Grace Brothers,
Ltd. Mr. Whitmore is a general partner of Grace Brothers, Ltd. See “Security Ownership of Certain Beneficial
Owners” above for more information about Grace Brothers, Ltd.
(5) The amount shown includes 191,667 shares subject to options that may be exercised by Mr. Fain prior to July
21, 2017.
(6) The amount shown includes 595,002 shares subject to options that may be exercised by Directors and executive
officers.
(7) Percentages exclude shares subject to options that may be exercised by Directors and Executive Officers.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes compensation plans under which our equity securities are authorized for issuance as of
December 31, 2016.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a)
(c)
2,323,581
$6.22
1,053,112
-
2,323,581
-
$6.22
-
1,053,112
Plan Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Related Party Transactions
We have adopted written policies and procedures for the review and approval or ratification of any “related party
transaction,” as defined by Regulation S-K, Item 404. The policy provides that each related party transaction must be
reviewed by our Audit and Finance Committee. The Audit and Finance Committee reviews the relevant facts and
circumstances of the transaction, including if the transaction is on terms comparable to those that could be obtained in arms-
length dealings with an unrelated third party and the extent of the related party’s interest in the transaction, taking into
account the conflicts of interest and corporate opportunity provisions of our Code of Ethics, and either recommends that the
Board of Directors approve or disapprove the related party transaction. We will disclose all related party transactions, as
required, in our filings with the SEC. No reportable transactions occurred during 2016 and 2015, and there are currently no
such proposed transactions.
Director Independence
Refer to the Corporate Governance section of Part III, Item 10 of this report.
20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firm of Bonadio & Co., LLP served as our independent registered public accounting firm for the year ended December
31, 2015 and the firm of Freed Maxick CPAs P.C. served as our independent registered public accounting firm for the year
ended December 31, 2016.
Principal Accountant Fees and Services
Aggregate fees for professional services rendered for us for 2015 and 2016 were:
2015
2016
$200,000
13,750
24,375
-
$192,800
11,800
-
-
$238,125
$204,600
Audit Fees
Audit - Related Fees
Tax Fees
All Other Fees
Total Fees
Audit Fees
Audit fees were for professional services rendered for the audit of our consolidated financial statements and reviews of our
quarterly consolidated financial statements.
Audit-Related Fees
Audit-related fees were for the annual audit of our 401(k) defined contribution plan. Also included in the audit-related fees
for 2016 is an amount related to a review of our 8-K filing related to our acquisition of Accutronics and for 2015 is an
amount related to a review of our S-8 filing.
Tax Fees
Tax fees relate to tax compliance services, including the preparation of corporate and state tax returns.
Our Audit and Finance Committee has not adopted pre-approval policies and procedures for audit and non-audit services.
Although no pre-approval policy was in effect, all audit, audit-related and permitted non-audit services for which our
independent registered public accounting firm was engaged were reviewed and approved prior to the commencement of the
services by our Audit and Finance Committee in compliance with applicable SEC requirements.
21
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
3. Exhibits:
The exhibits listed in the exhibit index of the Original Filing and the exhibits listed in the exhibit index of this
Amendment No. 1 are filed with, or incorporated by reference in, this report.
22
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: April 28, 2017
ULTRALIFE CORPORATION
/s/ Michael D. Popielec
Michael D. Popielec
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: April 28, 2017
Date: April 28, 2017
Date: April 28, 2017
Date: April 28, 2017
Date: April 28, 2017
Date: April 28, 2017
Date: April 28, 2017
/s/ Michael D. Popielec
Michael D. Popielec
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
/s/ Steven M. Anderson
Steven M. Anderson (Director)
/s/ Thomas L. Saeli
Thomas L. Saeli (Director)
/s/ Robert W. Shaw II
Robert W. Shaw II (Director)
/s/ Ranjit C. Singh
Ranjit C. Singh (Director)
/s/ Bradford T. Whitmore
Bradford T. Whitmore (Director)
23
Index to Exhibits
31.1
31.2
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
24
I, Michael D. Popielec, certify that:
Exhibit 31.1
1.
2.
I have reviewed this Amendment No. 1 to annual report on Form 10-K of Ultralife Corporation; and
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report.
Date: April 28, 2017
/s/ Michael D. Popielec
Michael D. Popielec
President and Chief Executive Officer
25
I, Philip A. Fain, certify that:
Exhibit 31.2
1.
2.
I have reviewed this Amendment No. 1 to annual report on Form 10-K of Ultralife Corporation; and
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report.
Date: April 28, 2017
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
26
CORPORATE & SHAREHOLDER INFORMATION
Board of Directors
Bradford T. Whitmore
Board Chair, Managing Partner, Grace Brothers, Ltd.
Steven M. Anderson
Brigadier General (Ret.) U.S. Army; Afghanistan Country Manager,
Fluor Corporation
Michael D. Popielec
President and Chief Executive Officer, Ultralife Corporation
Thomas L. Saeli
Chief Executive Officer, JRB Enterprises, Inc.
Robert W. Shaw II
Consultant for Large Maritime Operating and Electronics Companies
Ranjit C. Singh
Chief Executive Officer, CSR Consulting Group
Corporate Officers
Michael D. Popielec
President and Chief Executive Officer
Philip A. Fain
Chief Financial Officer, Treasurer and Secretary
Stock Exchange Listing
NASDAQ
Stock Symbol
ULBI
Stock Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Annual Meeting
July 18, 2017
9:00 A.M. Local Time
The Westin Crystal City
1800 Jefferson Davis Highway
Arlington, VA 22202
Form 10-K
Shareholders may obtain a copy of our Annual
Report on Form 10-K for the fiscal year ended
December 31, 2016 by going to the Investor
Info page at www.ultralifecorporation.com or
by calling us at 1-315-332-7100. This
information is also available at no charge by
sending a request to Shareholder Services at
the following address:
Ultralife Corporation
Attn: Philip A. Fain
2000 Technology Parkway
Newark, NY 14513
Attn: Philip A. Fain