Ultralife
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2017OR/ / 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) Delaware16-1387013(State or other jurisdiction of (I.R.S. Employerincorporation or organization)Identification No.) 2000 Technology Parkway, Newark, New York14513(Address of principal executive offices)(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 className of each exchange on which registeredCommon Stock, par value $0.10 per shareNASDAQ 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 1934during 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 filingrequirements 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 Filerequired 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 suchshorter 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, andwill not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-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, smaller reporting company, or anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growthcompany" in Rule 12b-2 of the Exchange Act.Large accelerated filer ….Accelerated filer ...…Non-accelerated filer ….Smaller reporting company..X...Emerging growth company ....If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any newor revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐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 30, 2017, the aggregate market value of the common stock held by non-affiliates as defined in Rule 405 under the Securities Act of 1933) of theregistrant was approximately $69,474,629 (in whole dollars) based upon the closing price for such common stock as reported on the NASDAQ GlobalMarket on June 30, 2017.As of February 1, 2018, the registrant had 15,653,649 shares of common stock outstanding, net of 4,019,711 treasury shares.  DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders are specifically incorporated by reference inPart 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 ITEMPAGE PART I1 Business3 1A Risk Factors15 1B Unresolved Staff Comments22 2 Properties22 3 Legal Proceedings22 4 Mine Safety Disclosures23 PART II5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities23 6 Selected Financial Data24 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations25 7A Quantitative and Qualitative Disclosures About Market Risk34 8 Financial Statements and Supplementary Data35 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure59 9A Controls and Procedures59 9B Other Information60 PART III10 Directors, Executive Officers and Corporate Governance61 11 Executive Compensation61 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters61 13 Certain Relationships and Related Transactions, and Director Independence61 14 Principal Accountant Fees and Services61 PART IV15 Exhibits, Financial Statement Schedules62 Signatures65 Index to Exhibits66  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 tomanagement. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks anduncertainties, including, but not limited to, our reliance on certain key customers; potential costs because of the warranties we supply with our productsand services; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with ourChina operations; our efforts to develop new commercial applications for our products; possible breaches in security and other disruptions; reduced U.S.and foreign military spending including the uncertainty associated with government budget approvals; potential disruptions in our supply of rawmaterials and components; variability in our quarterly and annual results and the price of our common stock; our inability to comply with changes to theregulations for the shipment of our products; safety risks, including the risk of fire; possible impairments of our goodwill and other intangible assets;negative publicity of Lithium-ion batteries; our resources being overwhelmed by our growth prospects; our ability to retain top management and keypersonnel; our exposure to foreign currency fluctuations; our customers’ demand falling short of volume expectations in our supply agreements; the riskthat 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 netoperating loss carryforwards; our ability to comply with government regulations regarding the use of “conflict minerals”; possible audits of our contractsby the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in thenon-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-lookingstatements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of theindustries 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 theforward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequentperiods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-lookingstatements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publiclyannounce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any priorperiods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed ashistorical data. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identifyforward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see “Risk Factors” in Item1A 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”) andincludes our wholly-owned subsidiaries, ABLE New Energy Co., Limited and its wholly-owned subsidiary ABLE New Energy Co., Ltd; Ultralife UK LTDand its wholly-owned subsidiary, Accutronics Ltd; Ultralife Batteries (UK) Ltd.; and our majority-owned joint venture Ultralife Batteries India PrivateLimited. 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 manufacturepower and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systemsand 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. 3 We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supplydistributors, 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®, AMTITM, ABLETM, ACCUTRONICS™, ACCUPRO™, ENTELLION™ brands. We have sales, operations andproduct 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 segmentincludes: 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 andcommunications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segmentperformance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. (See Note 11 in the Notes toConsolidated 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 thewebsite) our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to thosereports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and ExchangeCommission (“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 atwww.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. OurHiRate® and ThinCell® Lithium non-rechargeable batteries are sold primarily to the military and to OEMs in industrial markets for use in a variety ofapplications including radios, emergency radio beacons, search and rescue transponders, pipeline inspection gauges, portable medical devices and otherspecialty instruments and applications. Military applications for our non-rechargeable HiRate® batteries include: manpack and survival radios, nightvision devices, targeting devices, chemical agent monitors and thermal imaging equipment. Our Lithium Thionyl Chloride batteries, sold under ourABLE 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 advantagesover other currently available non-rechargeable battery technologies. These advantages include: higher energy density, lighter weight, longer operatingtime, longer shelf life and a wider operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which providestable power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in decreasing power outputduring discharge. While the price of our Lithium batteries is generally higher than alkaline batteries, the increased energy per unit of weight and volumeof 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 andcharging systems in a variety of custom sizes, shapes, and thicknesses offers substantial benefits to our customers. We market Lithium ion and NiMHrechargeable batteries comprising cells manufactured by qualified cell manufacturers. Our rechargeable products can be used in a wide variety ofapplications 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 bothgovernment 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 wedevelop. Revenues in this segment that pertain to development or license contracts may vary widely each year, depending upon the quantity and size ofcontracts obtained. Revenues for this segment for the year ended December 31, 2017 were $69,789 and segment contribution (gross profit) was $19,659. 4 Communications Systems Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems and accessories to support militarycommunications requirements, including RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers, equipment mounts, caseequipment, man-portable systems and integrated communication systems for fixed or vehicle applications such as vehicle amplifier-adapters (“VAA”),Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”) systems and SATCOM systems. All systems are packaged to meet specific customerneeds in rugged enclosures to allow for their use in extreme environments. We market these products to all branches of the U.S. military and foreigndefense organizations that we are permitted to sell our products to, as well as, U.S. and international prime defense contractors. Revenues for this segment for the year ended December 31, 2017 were $15,742 and segment contribution (gross profit) was $6,573. Corporate We allocate revenues and cost of sales between the above operating segments. The balance of income and expense, including but not limited to researchand 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, 2017 and our corporate operating expenses were $19,756. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the 2017 Consolidated Financial Statements and Notesthereto contained in this Annual Report on Form 10-K for additional information on the expenses referred to above. For information relating to totalassets 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 toConsolidated Financial Statements. History Ultralife was formed as a Delaware corporation in December 1990. In March 1991, we acquired certain technology and assets from Eastman KodakCompany ("Kodak") relating to its 9-volt Lithium Manganese Dioxide non-rechargeable battery. In December 1992, we completed our initial publicoffering 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, whichbroadened our product offering, including a wide range of Lithium Thionyl Chloride and Lithium Manganese batteries, and provided additionalexposure to new consumer markets. In July 2006, we finalized the acquisition of substantially all the assets of McDowell Research, Ltd. (“McDowell”), a manufacturer of militarycommunications accessories located originally in Waco, Texas. This acquisition, which enhanced our channels into the military communications areaand strengthened our presence in global defense markets, was relocated to our Newark, New York facility during the second half of 2007. In January2012, 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 JVassembles Ultralife power solution products and manages local sales and marketing activities, serving commercial, government and defense customersthroughout 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 tacticalcommunications products business (“AMTI”) designs, develops and manufactures tactical communications products including: amplifiers, man-portablesystems, cables, power solutions and ancillary communications equipment, which are sold by Ultralife under the brand name AMTI. The acquisitionstrengthened our communications systems business and provided us with direct entry into the handheld radio/amplifier market, complementingUltralife’s communications systems offerings. 5 In January 2016, we acquired Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., a leading independentdesigner and manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic devices. With aportfolio encompassing custom battery 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 andaspiration. We acquired Accutronics to advance our strategy of commercial revenue diversification, to expand our geographical penetration, and toachieve revenue growth from new product development. We are experiencing sales synergies between Accutronics and our existing commercial batterybusiness as we cross-sell our existing products and the 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 CarbonMonofluoride hybrid, and Lithium Thionyl Chloride technologies. We believe that the chemistry of Lithium batteries provides significant advantages over currently available non-rechargeable battery technologies, whichinclude: lighter weight, longer operating time, longer shelf life, and a wider operating temperature range. Our non-rechargeable batteries also haverelatively flat voltage profiles, which provide stable power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltageprofiles that result in decreasing power during discharge. While the prices for our Lithium batteries are generally higher than commercially availablealkaline batteries produced by others, we believe that the increased energy per unit of weight and volume of our batteries will allow longer operating timeand less frequent battery replacements for our targeted applications. As a result, we believe that our non-rechargeable batteries are priced competitivelywith 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, whichresults in a longer operating life for the battery and, accordingly, fewer battery replacements. While our 9-volt battery price is generally higher thanconventional 9-volt Carbon zinc and alkaline batteries, we believe the enhanced operating performance and decreased costs associated with batteryreplacement 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 ofapplications. We market our 9-volt Lithium batteries to OEM, distributor and retail markets including industrial electronics, safety and security, and medical. Typicalapplications include: smoke alarms, wireless alarm systems, bone growth stimulators, telemetry devices, blood analyzers, ambulatory infusion pumps andparking 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 alsomanufacture our 9-volt Lithium battery under private labels for a variety of companies. Additionally, we sell our 9-volt battery to the broader consumermarket 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 onLithium Manganese Dioxide, Lithium Manganese Dioxide Carbon Monofluoride hybrid and Lithium Thionyl Chloride technologies, represent some ofthe most advanced Lithium power sources currently available. We market a wide range of cylindrical non-rechargeable Lithium cells and batteries invarious sizes under both the Ultralife HiRate and ABLE brands. These include: D, C, 5/4 C, 1/2 AA, 2/3 A, CR123A and other sizes, which are soldindividually as well as packaged into multi-cell battery packs, including our leading BA-5390 military battery, an alternative to the competing Li-SO2BA-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% to100% more energy (mission time) than the BA-5590, and it is used in approximately 60 military applications. With the introduction of our LithiumCarbon Monofluoride hybrid chemistry, we now offer a D-cell that has 100% more energy than the competing Li-SO2 D-cell. 6 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 inspection equipment, automatic re-closers and oceanographic devices. Assettracking 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 andtelemetry systems. Search and rescue applications include: ELT’s (Emergency Locator Transmitters) for aircraft and EPIRB’s (Emergency PositionIndicating 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 arecurrently marketing these batteries to OEMs for applications such as displays, wearable medical devices, toll passes, theft detection systems, and RFIDdevices. In contrast to non-rechargeable batteries, after a rechargeable battery is discharged, it can be recharged and reused many times. Generally, discharge andrecharge cycles can be repeated hundreds or thousands of times in rechargeable batteries, but the achievable number of cycles (cycle life) varies amongtechnologies and is an important competitive factor. All rechargeable batteries experience a small, but measurable, loss in energy with each cycle. Theindustry commonly reports cycle life in the number of cycles a battery can achieve until 80% of the battery's initial energy capacity remains. In therechargeable battery market, the principal competing technologies are Nickel Cadmium, Nickel Metal Hydride and Lithium ion (including Lithiumpolymer) batteries. Rechargeable batteries are used in many applications, such as military radios, laptop computers, mobile telephones, portable medicaldevices, 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 theability of rechargeable batteries to be designed to fit a variety of shapes and sizes of battery compartments. Thin profile batteries with prismatic geometryprovide the design flexibility to fit the battery compartments of today's electronic devices. Energy density refers to the total amount of electrical energystored 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 energydensity batteries generally are longer lasting power sources providing longer operating time and necessitating fewer battery recharges. High energydensity and long achievable cycle life are important characteristics for comparing rechargeable battery technologies. Greater energy density will permitthe 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 lighterbatteries with energy comparable to those currently marketed. Lithium ion batteries, by the nature of their electrochemical properties, are capable ofproviding higher energy density than comparably sized batteries that utilize other chemistries and, therefore, tend to consume less volume and weight fora given energy content. Long achievable cycle life, particularly in combination with high energy density, is suitable for applications requiring frequentbattery recharges, such as cellular telephones and laptop computers, and allows the user to charge and recharge many times before noticing a difference inperformance. 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 cellmanufacturers. 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 andcommercial 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 beconnected 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 throughcontracts 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 militarycommunications systems, including RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers, equipment mounts, caseequipment, man-portable systems and integrated communication systems for fixed or vehicle applications such as vehicle amplifier-adapters andSATCOM systems. We package all systems to meet specific customer needs in rugged enclosures to allow their use in extreme environments. 7 We offer a wide range of military communications systems and accessories designed to enhance and extend the operation of communications equipmentsuch 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 ofmanpack 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; multibandtransceiver kits; enroute communications cases; and radio cases. These systems give communications operators everything that is needed to providereliable 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 and AC to DC power supplies, among many others. We canprovide 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 andfixed-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 commercialcustomers, including OEM’s, as well as government and defense agencies in the U.S. and abroad and have contractual arrangements with sales agents whomarket our products on a commission basis in defined territories. Every effort is made to adjust future prices accordingly, but the ability to adjust prices isgenerally based on market conditions. We also distribute some of our products through domestic and international distributors and retailers. Our sales are generated primarily from customerpurchase orders. We have several long-term contracts with the U.S. government and other customers. These contracts do not commit the customers tospecific purchase volumes, nor to specific timing of purchase order releases, and they include fixed price agreements over various periods of time. Ingeneral we do not believe our sales are seasonal, although we may sometimes experience seasonality for some of our military products based on thetiming 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. Thesecontracts are subject to procurement laws and regulations that specify policies and procedures for acquiring goods and services. The regulations alsocontain guidelines for managing contracts after they are awarded, including conditions under which contracts may be terminated, in whole or in part, atthe government’s convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or administrativeproceedings involving fines, penalties, suspension of payments, or suspension or debarment from government contracting or subcontracting for a periodof time. Even if a contract is awarded there is no guarantee that the government will order product under the contract. We have one major customer, a large defense primary contractor, which comprised 18% and 12% of our revenues in 2017 and 2016, respectively. Duringthe year ended December 31, 2016, another large defense contractor comprised 13% of our sales; however, sales to this customer in 2017 comprised 3% ofour sales. There were no other customers that comprised greater than 10% of our total revenues during these years. In 2017, sales to U.S. and non-U.S. customers were approximately $47,614 and $37,917, respectively. In 2016, sales to U.S. and non-U.S. customers wereapproximately $45,094 and $37,366, respectively. For more information relating to revenues by country for the last two fiscal years and long-lived assetsfor 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 AnnualReport on Form 10-K. 8 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 andmarketing alliances with OEM’s and governmental agencies that utilize our batteries in their products, commit to cooperative research and developmentor marketing programs, and recommend our products for design-in or replacement use in their products. We are addressing these markets through directcontact 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 increasedproduct awareness and sales at the end-user or consumer level. We are also selling our 9-volt battery to the consumer market through retail distributionthrough a number of national retailers. Most military procurements are done directly by the specific government organizations requiring products, basedon a competitive bidding process. Additionally, we are typically required to successfully meet contractual specifications and to pass variousqualifications 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 couldhave a material adverse effect on future growth prospects. When a government contract is awarded, there is a government procedure that allows forunsuccessful companies to formally protest the award if they believe they were unjustly treated in the government’s bid evaluation process. A prolongeddelay 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, financialcondition 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. InMarch 2017, we were awarded a production contract by the U. S. Government’s Defense Logistics Agency for up to five years, with a maximum totalpotential of $21,400, to provide our BA-5390 non-rechargeable Lithium Manganese Dioxide batteries to the U.S. military. While production deliveriesare expected to begin in the first half of 2019, we continue to receive orders for our legacy BA-5390 batteries from the Defense Logistics Agency. InJanuary 2018, we received a $3,348 contract from the Defense Logistics Agency to ship our legacy BA-5390 batteries within one hundred ninety days ofthe contract date. In October 2017, we were awarded a production contract by the Defense Logistics Agency for five years, with a maximum potential of$49,800, to provide our hybrid lithium manganese dioxide/carbon monofluoride (CFx) non-rechargeable BA-5790 and BA-5795 batteries. Productiondeliveries under this award are expected to begin in the first half of 2019. We target sales of our Lithium ion rechargeable batteries and charging systems to OEM customers, as well as distributors and resellers focused on ourtarget markets. We respond to RFPs to design products for OEMs, and believe that our design capabilities, product characteristics and solution integrationwill 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 thisexpansion includes increasing our design and assembly capabilities as well as building our network of distributors and value added distributorsthroughout the world. At December 31, 2017 and 2016, our backlog related to Battery & Energy Products was approximately $31,000 and $23,100, respectively. The 34%increase in our Battery & Energy Products backlog at December 31, 2017 is primarily due to higher demand for batteries from global medical productsOEMs, a large U.S.-based global defense contractor, and government and defense suppliers. The 2017 backlog is related to orders that are expected toship 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, tomilitary OEMs and U.S. and allied foreign militaries. We sell our products directly and through authorized distributors to OEMs and todefense contractors and U.S. and foreign militaries in the U.S. and internationally. We market our products to defense organizations and OEMs in the U.S.and internationally. 9 At December 31, 2017 and 2016, our backlog related to Communications Systems orders was approximately $8,100 and $3,000, respectively. The 166%increase in our Communications Systems backlog at December 31, 2017 is mostly a result of a December 2017 $3,900 award to supply our VehicleAmplifier-Adaptors (“VAA”) to a large global defense contractor, the remaining shipments on an August 2017 $4,700 award to supply our VehicleInstalled Power Enhanced Rifleman Appliqués (“VIPER”) to a large global defense contractor and increased demand for our core products such as our 20-watt amplifiers, universal vehicle adaptors and power supplies. 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 developour competitive position. Despite our efforts to protect our proprietary information, there can be no assurance that others will neither develop the same orsimilar information independently nor obtain access to our proprietary information, know-how and trade secrets. In addition, there can be no assurancethat we would prevail if we asserted our intellectual property rights against third parties, or that third parties will not successfully assert infringementclaims against us in the future. We believe, however, that our success depends more on the knowledge, ability, experience and technological expertise ofour employees, than on the legal protection that our patents and other proprietary rights may or will afford. We hold six patents issued in the U.S., two patents issued in Mexico, two patents issued in the European Union, one patent issued in the United Kingdom,one patent issued in China, one patent issued in Japan and have eleven patents pending in the U.S, Europe, Australia, India, and Taiwan. We believe ourpatents 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 certaininformation and the assignment of rights to inventions made by them while employed by us. These agreements also contain certain noncompetition andnon-solicitation provisions effective during the employment term and for varying periods thereafter depending on position and location. There can be noassurance 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 forthe confidentiality of certain information received during the course of their employment. Nevertheless, the enforceability of such agreements is subjectto public policy limitations that vary from state to state and country by country so we cannot assure that they will be enforceable in accordance with theirterms, 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. Thefollowing are registered trademarks of ours: Ultralife®, Ultralife Thin Cell®, Ultralife HiRate®, Ultralife & design®, LithiumPower®, LithiumPower &Design®, SmartCircuit®, Smart Circuit®, Smart Circuit & design®, We Are Power®, AMTI®, ABLE™, ACCUTRONICS®, ACCUPRO®, ENTELLION®,Intelligent Power Vault®, McDowell Research® and RPS®. 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,ISO 14001, and ISO 13485 certified. Our manufacturing facilities in Shenzhen, China are ISO 9001, ISO 1400 and ISO 13485 certified. Our manufacturingfacilities in Virginia Beach, Virginia are ISO 9001certified. 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 global demand of our products, 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, isalso affected by demand for particular products, and product mix changes can produce bottlenecks in an individual operation, constraining overallcapacity. We have acquired new machinery and equipment in areas where production bottlenecks have resulted in the past and we believe that we havesufficient capacity in these areas. We continually evaluate our requirements for additional capital equipment, and we believe that the planned increaseswill be adequate to meet foreseeable customer demand. 10 Certain materials used in our products are available only from a single source or a limited number of sources. Additionally, we may elect to developrelationships with a single or limited number of sources for materials that are otherwise generally available. Although we believe that alternative sourcesare 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 analternative material, any interruption in our supply from any supplier that serves currently as our sole source could delay product shipments and adverselyaffect our financial performance and relationships with our customers. Although we have experienced interruptions of product deliveries by sole sourcesuppliers, 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 otherraw materials we utilize are readily available from many sources. We believe that the raw materials and components utilized for our rechargeable batteries are readily available from many sources. Although we believethat alternative sources are available to supply materials and components that could replace materials or components we use, any interruption in oursupply from any supplier that serves currently as our sole source could delay product shipments and adversely affect our financial performance andrelationships with our customers. Our Newark, New York facility has the capacity to produce significant volumes of rechargeable batteries, as this operation generally assembles batterypacks and chargers and is limited only by physical space and is not constrained by manufacturing equipment capacity which can accommodatesignificant additional volumes of product. Similarly, our China and United Kingdom facilities also have capacity to produce significant quantities ofprimary and rechargeable batteries 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 toapproximately $16,650 and $13,639 as of December 31, 2017 and 2016, respectively. The year-over-year increase primarily reflects inventory to serviceour higher backlog at December 31, 2017. 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 tosupply materials and components that could replace materials or components we use, any interruption in our supply from any supplier that servescurrently 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 andis 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 toapproximately $9,676 and $9,817 as of December 31, 2017 and 2016, respectively. Research and Development We concentrate significant resources on research and development activities to improve our technological capabilities and to design new products forcustomers’ 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 2017 and 2016, we expended $5,142 and $6,155, respectively, on research anddevelopment, including $405 and $209, respectively, on customer sponsored research and development activities, which are included in cost of goodssold. The year-over-year decrease primarily reflects the timing of development and testing costs associated with the initial shipment of VIPER units in2016 and discretionary cost reduction actions completed during and subsequent to the second quarter of 2016, including synergies with Accutronics. Weexpect that research and development expenditures in the future will be fairly consistent with those in 2017, as we anticipate that new productdevelopment initiatives will drive our growth. As in the past, we will continue to make funding decisions for our research and development efforts basedupon strategic demand for customer applications. 11 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, asour customers’ needs for portable power continue to grow and new technologies become available. The U.S. government sponsors research and development programs, which Ultralife participates in, designed to improve the performance and safety ofexisting 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 demandsof our customers. 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 tominimize 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 andHazardous Materials Safety Administration (“PHMSA”), and internationally by the International Civil Aviation Organization (“ICAO”) andcorresponding 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 DangerousGoods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship our products pursuant to PHMSA, ICAO, IATA, IMDGand other country specific hazardous goods regulations. The regulations require companies to meet certain testing, packaging, labeling, marking andshipping paper specifications for safety reasons. We have not incurred, and do not expect to incur, any significant costs in order to comply with theseregulations. We believe we comply with all current U.S. and international regulations for the shipment of our products, and we intend and expect tocomply 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 transportour 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 hazardoussubstances in electrical and electronic equipment. All applicable products sold in the European Union market must pass RoHS compliance. While thisdirective does not apply to batteries and does not currently affect our defense products, should any changes occur in the directive that would affect ourproducts, we intend and expect to comply with any new regulations that are imposed. However, we cannot assure that the cost of complying with suchnew 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 tocover all types of batteries regardless of their shape, volume, weight, material composition or use. It is aimed at reducing mercury, cadmium, lead andother metals in the environment by minimizing the use of these substances in batteries and by treating and re-using old batteries. The EU BatteryDirective applies to all types of batteries except those used to protect European Member States' security, for military purposes, or sent into space. Toachieve these objectives, the EU Battery Directive prohibits the marketing of some batteries containing hazardous substances. It establishes schemesaimed at high level of collection and recycling of batteries with quantified collection and recycling targets. The EU Battery Directive sets out minimumrules for producer responsibility and provisions with regard to labeling of batteries and their removability from equipment. The EU Battery Directiverequires product markings for batteries and accumulators to provide information on capacity and to facilitate reuse and safe disposal. We currently shipour products pursuant to the requirements of the EU Battery Directive. 12 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 inEuropean Union markets based on their relative market share. This directive calls on each European Union member state to enact enabling legislation toimplement the directive. As additional European Union member states pass enabling legislation our compliance system should be sufficient to meet suchrequirements. 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 fromour current estimates. China’s “Management Methods for Restricted Use of Hazardous Substances in Electrical and Electronic Products” (“China RoHS 2”) provides aregulatory framework including hazardous substance restrictions similar to those imposed by the EU RoHS Directive. China RoHS 2 applies to methodsfor the control and reduction of pollution and other public hazards to the environment caused during the production, sale, and import of electrical andelectronic products (“EEP”) in China. The regulatory framework of China RoHS 2, also now references the updated marking and labeling requirementsunder Standard SJ/T 11364-2014 (“Marking Standard”). The methods under China RoHS 2 only apply to EEP placed in the marketplace in China. Webelieve our compliance system is sufficient to meet our requirements under China RoHS 2. Our current estimated costs associated with our compliancewith this regulation based on our current market share are not significant. However, we continue to evaluate the impact of this regulation, and actual costscould differ from our current estimates. National, state and local laws impose various environmental controls on the manufacture, transportation, storage, use and disposal of batteries and ofcertain chemicals used in the manufacture of batteries. Although we believe that our operations are in material compliance with current environmentalregulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwisesubject 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 suchregulations will not have a material adverse effect on our business, financial condition and results of operations. In 2017 and 2016, we spentapproximately $175 and $117, 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 processesmust be performed in a controlled environment with low relative humidity. Our Newark, New York and Shenzhen, China facilities contain dry rooms orglove 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 governinginternational trade and exports including but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export AdministrationRegulations (“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 StatesMunitions List. These regulations implement the provisions of the Arms Export Control Act, and are described in the Code of Federal Regulations. TheDepartment 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 alsoinvolved in the review and approval process. Inspections in support of import and export laws are performed at border crossings by Customs and BorderProtection, 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 theforeign location operates. We believe we are in material compliance with these domestic and international export regulations. However, failure of compliance could have a materialadverse effect on our business through possible fines, denial of export privileges, or loss of customers. Further, while we are not aware of any proposedchanges to these regulations, any change in the scope or enforcement of export or import regulations or related legislation could have a material adverseeffect on our business through increased costs of compliance or reduction in the international growth prospects available to us. 13 Our future estimated costs associated with our compliance with ITAR, EAR, and the foreign export and import controls we are subject to based on ourcurrent sales volumes are not significant. However, we continue to evaluate the impact of these regulations, and actual costs could differ from our currentestimates. 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, wehave experienced fires that have temporarily interrupted certain manufacturing operations. We believe that we have adequate fire suppression systemsand 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. Corporate The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Section 1502 (the “Dodd-Frank Act”) requires public companies to disclosewhether tantalum, tin, gold and tungsten, commonly known as “conflict minerals,” are necessary to the functionality or production of a productmanufactured by a public company and if those elements originated from armed groups in the Democratic Republic of Congo or adjoining countries. Tocomply with the Dodd-Frank Act, as implemented by SEC rules, we are required to perform due diligence inquiries of our suppliers to determine whetheror not our products contain such minerals and from which countries and source (smelter) the minerals were obtained. Our annual report on Form SD wasfiled by the statutory due date of June 1, 2017 for the 2016 calendar year and we continue to utilize appropriate measures with our suppliers in order tobetter 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 developmentstage companies to major domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distributionand other resources significantly greater than ours. We compete against companies producing batteries as well as companies producing communicationssystems. We compete on the basis of design flexibility, performance, price, reliability and customer support. There can be no assurance that ourtechnologies and products will not be rendered obsolete by developments in competing technologies or services that are currently under development orthat may be developed in the future or that our competitors will not market competing products and services that obtain market acceptance more rapidlythan ours. Historically, although other entities may attempt to take advantage of the growth of the battery market, the Lithium battery cell industry has certaintechnological and economic barriers to entry. The development of technology, equipment and manufacturing techniques and the operation of a facilityfor 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 webelieve would be difficult to reproduce without substantial time and expense. Employees As of December 31, 2017, we employed a total of 568 permanent and temporary employees: 33 in research and development, 464 in production and 71 insales and administration. None of our employees are represented by a labor union. 14 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 describedbelow 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 adverselyaffect our business, financial condition and results of operations. Additional risks and uncertainties that are not currently known to us or that are notcurrently believed by us to be material may also harm our business operations and financial results. These risk factors may change from time to time andmay 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 withthe SEC in the future. A significant portion of our revenues is derived from certain key customers. We have one major customer, a large defense primary contractor, which comprised 18% and 12% of our revenues in 2017 and 2016, respectively. Duringthe year ended December 31, 2016, another large defense contractor comprised 13% of our sales; however, sales to this customer in 2017 comprised 3% ofour sales. There were no other customers that comprised greater than 10% of our total revenues during these years. While we consider our relationshipwith our major customer to be good, the reduction, delay or cancellation of orders from this customer or this customer’s insolvency / inability to pay, forany reason, would reduce our revenue and operating income and could materially and adversely affect our business, operating results and financialcondition in other ways. 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 thedate of purchase. With respect to our communications systems products, we now offer up to a three-year warranty. We provide for a reserve for thesepotential warranty expenses, which is based on an analysis of historical warranty issues. There is no assurance that future warranty claims will beconsistent with past history, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves will besufficient. Excessive warranty claims could have a material adverse effect on our business, financial condition and results of operations. A decline in demand for products using our batteries or communications systems could reduce demand for our products and/or our products couldbecome obsolete resulting in lower revenues and profitability. A substantial portion of our business depends on the continued demand for products using our batteries and communications systems sold by ourcustomers, including original equipment manufacturers. Our success depends significantly upon the success of those customers’ products in themarketplace. 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, ●market acceptance of the customer’s product or service, ●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. The market for our products is characterized by changing technology and evolving industry standards, often resulting in product obsolescence or shortproduct lifecycles. Although we believe that our products utilize state-of-the-art technology, there can be no assurance that competitors will not developtechnologies or products that would render our technologies and products obsolete or less marketable. Many of the companies with which we competehave substantially greater resources than we do, and some have the capacity and volume of business to be able to produce their products more efficientlythan we can. In addition, these companies are developing or have developed products using a variety of technologies that are expected to compete withour technologies. Furthermore, we have noted an increase in foreign competition, especially in Asia, over the last several years which tend to compete onprice in the battery industry. If these companies successfully market their products in a manner that renders our technologies obsolete, this would reduceour revenue and operating income and could have other material adverse effects on our business, financial condition and results of operations. 15 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 wagelaws, 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, currencyexchange controls, fluctuations of currency, and currency revaluations, eminent domain claims, civil unrest, power outages, water shortages, laborshortages, 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 othermaterial adverse effects on our business, financial condition and results of operations. For example, during 2014 the landlord for our China facility informed us that the local village government in Shenzhen was exercising its right ofeminent domain and that the lease for our facility would not be extended past its expiration in October 2014 due to zoning changes. Accordingly, wedeveloped and executed a plan which we completed in 2015. Under the plan we found a replacement facility, entered into a five-year lease, negotiatedcompensation from the local government for our forfeited leasehold improvements and moving expenses, refurbished the replacement facility to meet ouroperational needs and relocated all of our operations and employees to the new facility. While this situation was handled on time, on plan and with noknown disruption to our business, there can be no assurances that other situations posing such risks to the business will be successfully remediated to thesame extent. 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 these new products will be accepted due to the highlycompetitive nature of the industry. There are many new product and technology entrants into the markets into which we sell our products, and we mustcontinually reassess the markets in which our products can be successful and seek to engage customers in those markets that will adopt our products foruse in their products. In addition, these customers must be successful with their products in their markets for us to gain increased business. Increasedcompetition, failure to gain customer acceptance of products, the introduction of competitive technologies or failure of our customers in their marketscould have a further adverse effect on our business and reduce our revenue and operating income. Breaches in security and other disruptions and/or our ability to prevent or respond to such breeches, could diminish our ability to generate revenues orcontain 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 classifiedinformation, and threats to physical and cyber security. Our information technology networks and related systems are critical to the operation of ourbusiness and essential to our ability to successfully perform day-to-day operations. The risks of a security breach, cyber attack, cyber intrusion, ordisruption, particularly through actions taken by computer hackers, foreign governments and cyber terrorists, have increased as the number, intensity andsophistication of attempted attacks and intrusions from around the world have increased. Although we have acquired and developed systems andprocesses designed to protect our proprietary or classified information, they may not be sufficient and the failure to prevent these types of events coulddisrupt our operations, require significant management attention and resources, and could negatively impact our reputation among our customers and thepublic, which could have a negative impact on our financial condition, and weaken our results of operations and liquidity. In 2017, we formed a cybersecurity executive management committee with oversight responsibility to minimize the risk of breaches. The committee is presently reviewing all keyaspects of cyber security and has engaged outside security consultants to ensure a robust plan is in place. Reductions or delays in U.S. and foreign military spending could continue to have a material adverse effect on our business, financial condition andresults 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. Inthe years ended December 31, 2017 and 2016, approximately $44,700 or 52% and $41,600 or 50%, respectively, of our revenues were comprised of salesmade 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 toU.S. Government customers. The amounts and percentages of our net revenue that were derived from sales to U.S. Government customers, including theDepartment of Defense, whether directly or through prime contractors, was approximately $35,100 or 41% in 2017 and $33,600 or 41% in 2016.Therefore, any significant disruption or deterioration of our relationship with the U.S. Government or any prime defense contractor could stillsignificantly reduce our revenue. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government andwill continue these efforts in the future, and the U.S. Government may choose to use other contractors or suppliers. 16 Budget and appropriations decisions made by the U.S. Government, including possible future sequestration periods or other similar formulaic reductionsin federal expenditures, are outside of our control and have long-term consequences for our business. A continued decline in U.S. military expenditurescould result in a reduction in the military’s demand for our products, which could have a material adverse effect on our business, financial condition andresults of operations 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 andcomponents could become in short supply resulting in limited availability and/or increased costs. Additionally, we may elect to develop relationshipswith a single or limited number of suppliers for materials and components that are otherwise generally available. Due to our involvement with supplyingdefense products to the U.S. government, we could receive a government preference to continue to obtain critical supplies to meet military productionneeds. However, if the government did not provide us with a government preference in such circumstances, the difficulty in obtaining supplies couldhave a material adverse effect on our business, financial condition and results of operations. We believe that alternative suppliers are available to supplymaterials and components that could replace materials and components currently used and that, if necessary, we would be able to redesign our products tomake use of such alternatives. However, any interruption in the supply from any supplier that serves as a sole source could delay product shipments andhave a material adverse effect on our business, financial condition and results of operations. We have experienced interruptions of product deliveries bysole source suppliers in the past, and we cannot guarantee that we will not experience a material interruption of deliveries from sole source suppliers inthe future. Of particular note is the increased demand for Lithium-based cells from the electric vehicle manufacturers. While this has resulted in increasedsupply 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 bepassed on to us in higher prices for our raw materials, which could increase our cost of business, lower our margins and have other materially adverseeffects 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 ofsignificant 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 economicconditions. 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 asizeable base of fixed overhead costs that do not fluctuate much with changes in revenue. Due to such variances in operating results, we have sometimesfailed 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, includingtechnological innovations or commercial products, litigation or public concerns as to the safety or commercial value of one or more of our products maycause the market price of our common stock to fluctuate substantially for reasons which may be unrelated to our operating results. 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 ina 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 AirTransport Association (“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (“IMDG”) and in the U.S. by theDepartment of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”). These regulations are based on the United NationsRecommendations on the Transport of Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship ourproducts 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 withthese regulations. We believe we comply with all current U.S. and international regulations for the shipment of our products, and we intend and expect tocomply with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations. If weare unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to transport our products to customers in acost-effective manner, this could reduce our operating income and margins, and have other material adverse effects on our business, financial conditionand results of operations. 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 incorporateprocedures in research, development, product design, manufacturing processes and the transportation of Lithium batteries that are intended to minimizesafety 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 currentlycarry insurance policies which cover loss of the plant and machinery, leasehold improvements, inventory and business interruption, any accident, whetherat the manufacturing facilities or from the use of the products, may result in significant production delays or claims for damages resulting from injuries ordeath. While we maintain what we believe to be sufficient casualty liability coverage to protect against such occurrences, these types of losses couldreduce our available cash and our operating and net income and have other material adverse effects on our business, financial condition and results ofoperation. 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 andcircumstances indicate that goodwill and other indefinite-lived intangible assets may be impaired. Any excess goodwill and/or indefinite-livedintangible assets value resulting from the impairment test must be written off in the period of determination. Intangible assets (other than goodwill andother indefinite-lived intangible assets) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or makean investment in a business which will require us to record goodwill based on the purchase price and the value of the acquired tangible and intangibleassets. We may subsequently experience unforeseen issues with such business which adversely affect the anticipated results of the business or value of theintangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. There is a possibilitythat our goodwill and other intangible assets could be impaired should there be a significant change in our internal forecasts and other assumptions weuse in our impairment analysis. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test oraccelerated amortization of other intangible assets could have a negative impact, although not affecting cash, on our results of operations. 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 environmentalimpact of their disposal, and how it may impact the industries or markets we serve. Ongoing negative attention being given to Lithium ion batteries thatare used in certain cellular phones or are integrated into the power systems of new commercial aircraft and electric motor vehicles may have an impact onthe 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 adverseeffect 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 marketgrowth 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. Forexample, 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 requireddemand. We cannot assure, however, that our business will grow rapidly or that our efforts to expand manufacturing and quality control activities will besuccessful 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. Thefailure to manage growth and expansion effectively could have an adverse effect on our business, financial condition, and results of operations. 18 The loss of top management and key personnel could significantly harm our business, and our ability to put in place a succession plan and recruitexperienced, 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 recruitexperienced, competent management is critical to the success of our business. The continuity of our officers and executive team is vital to the successfulimplementation of our business model and growth strategy designed to deliver sustainable, consistent profitability. A top management priority has beenthe development and implementation of a formal written succession plan to mitigate the risks associated with the loss of senior executives. There is noguarantee 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 andtechnical staffs. The loss of these employees could have a material adverse effect on our business, financial condition and results of operations. Ourability to effectively pursue our business strategy will depend upon, among other factors, the successful retention of our key personnel, recruitment ofadditional highly skilled and experienced managerial, sales, engineering and technical personnel, and the integration of such personnel obtained throughbusiness 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 orto find people with the desired skills could result in greater demands being placed on limited management resources which could delay or impede theexecution of our business plans and have other material 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 sellour products in foreign currencies, and therefore currency fluctuations may impact our pricing of products sold and materials purchased. While thepercentage of our business with customers outside of the U.S. slightly declined in 2017, sales to such customers still make up a significant percentage ofour total revenues. For example, in 2017, 44% our sales were to customers outside of the U.S. as compared to 45% in 2016. A future strengthening of theU.S. Dollar relative to our customers’ currencies could make our products relatively more expensive to them, and may adversely affect our sales levels andreduce profitability. In addition, our United Kingdom and China subsidiaries maintain their books in local currency and the translation of the subsidiaryfinancial statements into U.S. dollars for our consolidated financial statements could have an adverse effect on our consolidated financial results due tochanges 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. cashbalances denominated in foreign currencies, and the U.S. dollar equivalent of these balances fluctuates with changes in the foreign exchange ratesbetween 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-basedpricing based on expected volumes, we cannot assure that adjustments to reflect volume shortfalls will be made under current industry practices becausepricing is rarely adjusted retroactively when contract volumes are not achieved. Every effort is made to adjust future prices accordingly, but our ability toadjust 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 producecompeting 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 ofpatents and other proprietary rights. However, we claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarksrelating to our products and manufacturing processes. We cannot guarantee the degree of protection these various claims may or will afford, or thatcompetitors will not independently develop or patent technologies that are substantially equivalent or superior to our technology. We protect ourproprietary 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 these contractual measures may or will afford. We have hadpatents 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 pendingapplications, or that the claims allowed under any issued patents will be sufficiently broad to protect our technology, (2) that any patents issued to us willnot 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 obtainlicenses with respect to such patents on acceptable terms, if at all. The failure to obtain necessary licenses could delay product shipments or theintroduction of new products, and costly attempts to design around such patents could foreclose the development, manufacture or sale of products. 19 We are subject to the contract rules and procedures of the U.S. and foreign governments. These rules and procedures create significant risks anduncertainties 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 insolicitations for awards of contracts. The receipt of an award, however, does not always result in the immediate release of an order and does not guaranteein 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 governmentsto purchase products manufactured by us could have a material adverse effect on our business, financial condition and results of operations. In thesescenarios we are also typically required to successfully meet contractual specifications and to pass various qualification-testing for the products undercontract. Our inability to pass these tests in a timely fashion, as well as meet delivery schedules for orders released under contract, could have a materialadverse 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 suchaward if they believe they were unjustly treated in the evaluation process. As a result of these protests, the government is precluded from proceedingunder 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 protestcould 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 (toforeign officials and otherwise) and require companies to keep accurate books and records and maintain appropriate internal controls. Our trainingprogram and policies mandate compliance with such laws. We operate in some parts of the world that have experienced governmental corruption to somedegree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. If we are found to be liablefor 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 ofour third party partners or agents), we could suffer from civil and criminal penalties or other sanctions, incur significant internal investigation costs andsuffer reputational harm. Our ability to use our net operating loss carryforwards in the future may be limited, which could increase our tax liabilities and reduce our cash flowand net income. At December 31, 2017, we had approximately $70,000 of U.S. and $13,000 of U.K. net operating loss carryforwards (“NOLs”) and $2,000 of U.S. taxcredit carryforwards available to offset future taxable income. We continually assess the carrying value of these assets based on the relevant accountingstandards. The U.S. NOLs of $70,000 expire beginning in 2019 through 2034. As of December 31, 2017, we reflected a full valuation allowance againstour deferred tax assets to the extent they are not able to be offset by future reversing temporary differences. As we continue to assess the realizability ofour deferred tax assets, the amount of the valuation allowance could be reduced. Achieving our business plan targets, particularly those relating torevenue and profitability, is integral to our assessment regarding the recoverability of our deferred tax assets. The reduction of all or a portion of thevaluation allowance could result in a significant one-time benefit to earnings followed in subsequent periods by an increase in our effective tax rate andincreases in tax liabilities. 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 requirementsregarding the use of certain minerals, which are mined from the Democratic Republic of Congo and adjoining countries, known as conflict minerals. Thedisclosure rules were effective in May 2014. We are required to perform due diligence inquiries of our supply chain and publicly disclose whether wemanufacture (as defined in the Act) any products that contain conflict minerals and could incur significant costs related to implementing a process thatwill meet the mandates of the Act. Additionally, customers typically rely on us to provide critical data regarding the parts they purchase, includingconflict mineral information. Our material sourcing is broad-based and multi-tiered, and we may not be able to easily verify the origins for conflictminerals 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 inour products. Additionally, customers may demand that the products they purchase be free of conflict minerals. This may limit the number of suppliersthat can provide products in sufficient quantities to meet customer demand or at competitive prices. 20 The U.S. and foreign governments can audit our contracts with their respective defense and government agencies and, under certain circumstances, canadjust 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 aresubject to procurement laws and regulations that lay out policies and procedures for acquiring goods and services. The regulations also containguidelines for managing contracts after they are awarded, including conditions under which contracts may be terminated, in whole or in part, at thegovernment’s convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or administrativeproceedings involving fines, penalties, suspension of payments, or suspension or disbarment from government contracting or subcontracting for a periodof 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 ofcertain chemicals used in the manufacture of batteries. We use and generate a variety of chemicals and other hazardous by-products in our manufacturingoperations. These environmental laws govern, among other things, air emissions, wastewater discharges and the handling, storage and release of wastesand hazardous substances. Such laws and regulations can be complex and are subject to change. Although we believe that our operations are insubstantial compliance with current environmental regulations and that, except as noted below, there are no environmental conditions that will requirematerial 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 thatchanges in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. There can be noassurance that additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufactureour batteries or restricting disposal of batteries will not be imposed, or as to how these regulations will affect our customers or us. Such changes inregulations could reduce our operating income and margins and have other material adverse effects on our business, financial condition and results ofoperations. We could incur substantial costs as a result of violations of environmental laws, including clean up costs, fines and sanctions and third-partyproperty damage or personal injury claims. Failure to comply with environmental requirements could also result in enforcement actions that materiallylimit or otherwise affect the operations of the facilities involved. Under certain environmental laws, a current or previous owner or operator of anenvironmentally 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 soldin the European Union market after July 1, 2006 must comply with EU RoHS Directive. While this directive does not apply to batteries and does notcurrently affect our defense products, should any changes occur in the directive that would affect our products, we intend and expect to comply with anynew regulations that are imposed. Our commercial chargers are in compliance with this directive. Additional European Union directives, entitled theWaste 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 arefinancially responsible for specified collection, recycling, treatment and disposal of past and future covered products. These directives assign levels ofresponsibility to companies doing business in European Union markets based on their relative market share. These directives call on each EuropeanUnion member state to enact enabling legislation to implement the directive. As additional European Union member states pass enabling legislation ourcompliance system should be sufficient to meet such requirements. Our current estimated costs associated with our compliance with these directives basedon our current market share are not significant. However, we continue to evaluate the impact of these directives as European Union member statesimplement guidance, and actual costs could differ from our current estimates. 21 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 atreducing mercury, cadmium, lead and other metals in the environment by minimizing the use of these substances in batteries and by treating and re-usingold batteries. This directive applies to all types of batteries except those used to protect European Member States' security, for military purposes, or sentinto space. To achieve these objectives, the EU Battery Directive prohibits the marketing of some batteries containing hazardous substances. Itestablishes processes aimed at high levels of collection and recycling of batteries with quantified collection and recycling targets. The directive sets outminimum rules for producer responsibility and provisions with regard to labeling of batteries and their removability from equipment. Product markingsare required for batteries and accumulators to provide information on capacity and to facilitate reuse and safe disposal. We currently ship our productspursuant to the requirements of the directive. Our current estimated costs associated with our compliance with these directives based on our currentmarket 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 RoHSDirective, 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 referencesthe updated marking and labeling requirements under Standard SJ/T 11364-2014 (“Marking Standard”). The methods under China RoHS 2 only apply toEEP placed in the marketplace in China. We believe our compliance system is sufficient to meet our requirements under China RoHS 2. Our currentestimated costs associated with our compliance with this regulation based on our current market share are not significant. However, we continue toevaluate 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 forproduct recycling. Of particular note are the EU Batteries Directive and the New York State Rechargeable Battery Recycling Law. We are committed toresponsible product stewardship and ongoing compliance with these and future statutes and regulations. The compliance costs associated with currentrecycling statutes and regulations are not expected to be significant at this time. However, we continue to evaluate the impact of these regulations, andactual costs could differ from our current estimates and additional laws could be enacted by these and other states which entail greater costs ofcompliance. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of December 31, 2017, we own two buildings in Newark, New York comprising approximately 250,000 square feet, which serve operations primarilyin the Battery & Energy Products operating segment. Our corporate headquarters are located in our Newark, New York facility. We also leaseapproximately 97,000 square feet in two buildings on one campus in Shenzhen, China and approximately 25,000 square feet in six buildings in acontiguous 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 servesoperations in the Communications Systems operating segment. We also lease sales and administrative offices, as well as manufacturing and productionfacilities, 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 anddevelopment efforts for our Communications Systems products are conducted in Tallahassee, Florida and at our facility in Virginia Beach, Virginia. Webelieve that our facilities are adequate and suitable for our current needs. However, we may require additional manufacturing and administrative space ifdemand for our products and services grows. 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 nothave a material adverse effect on our financial position, results of operations or cash flows. 22 Dreamliner Litigation In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines (“EA”) was damaged by a fire while parked at LondonHeathrow 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 wasissued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused bycircumstances 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. Ultralifehas had this cell in production since 2001, with millions of units produced. The cell is widely-used for global defense and commercial applications. Thisbattery product has gone through rigorous safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests andCriteria, 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 plusother unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurancethrough reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers. We are workingwith 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. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES 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 2016 and 2017: Closing Sales Prices High Low 2016: Quarter ended March 27, 2016 $6.51 $4.95 Quarter ended June 26, 2016 $5.85 $3.76 Quarter ended September 25, 2016 $5.05 $3.95 Quarter ended December 31, 2016 $5.05 $3.92 2017: Quarter ended April 2, 2017 $5.90 $4.93 Quarter ended July 2, 2017 $7.20 $5.25 Quarter ended October 1, 2017 $7.45 $6.30 Quarter ended December 31, 2017 $7.70 $6.00 23 Holders As of February 7, 2018, there were approximately 3,200 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 onMay 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 toexceed twelve months. The Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to berepurchased 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 purchasesand block trades in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made duringstock trading black-out periods under 10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’sdiscretion. 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 repurchasedunder the Share Repurchase Program for an aggregate amount (excluding fees and commissions) of $603. 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 sharesfor an aggregate cost (excluding fees and commissions) of $10,480. The following table sets forth information regarding 2016 purchases of our common stock under this program: TotalNumber ofSharesPurchased AveragePrice PaidPer Share Total Number ofSharesPurchasedAs Part ofPubliclyAnnouncedProgram MaximumNumber ofShares ThatMay Yet BePurchasedUnder theProgram 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 anydividends. We intend to retain earnings, if any, to finance future operations and expansion and, therefore, do not anticipate paying any cash dividends inthe foreseeable future. Any future payment of dividends will depend upon our financial condition, capital requirements and earnings, as well as uponother 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. 24 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 theretoappearing 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 ofdollars, 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 systemsand accessories and custom engineered systems. We sell our products worldwide through a variety of trade channels, including original equipmentmanufacturers (“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 segmentincludes Lithium 9-volt, cylindrical, thin cell and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable powersupplies, charging systems and accessories, such as cables. The Communications Systems segment includes RF amplifiers, power supplies, cable andconnector assemblies, amplified speakers, equipment mounts, case equipment, integrated communication systems for fixed or vehicle applications andcommunications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segmentperformance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint ventures, which can broaden the scopeof our products and services, expand operating and market opportunities and provide the ability to enter new lines of business synergistic with ourportfolio of product offerings. In January 2016, we acquired Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., a leading independentdesigner 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 andother international defense organizations can be sporadic based on the needs of those particular customers. Consolidated revenues increased by $3,071 or 3.7% to $85,531 for the year ended December 31, 2017 compared to $82,460 for the year ended December31, 2016. During 2017, we experienced revenue growth of 7.8% for our Battery & Energy products business and a revenue decline of 11.1% for ourCommunications Systems business. This 2017 performance reflected a $3,167 or 7.6% increase in sales to government and defense customers and a $96or 0.2% decrease in sales to our commercial customers. The increase in government and defense sales reflects higher U.S. and international demand for ourmilitary batteries and chargers which increased $5,132 or 21.3% in 2017 and higher demand for our core Communications Systems products such as 20-watt amplifiers, universal vehicle adaptors and power supplies which increased $5,431 or 73.3% in 2017. These increases were partially offset by a year-over-year decrease of $7,396 in shipments of our Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”) systems to fulfill contracts awarded in2016 and 2017. The slight decline in our commercial business was due primarily to timing differences in medical sales and the impact of the weaker U.S.Dollar on certain export sales. Despite unfavorable currency fluctuations, sales for Accutronics increased by 5.1% in 2017. Gross margin increased to 30.7% for the year ended December 31, 2017, as compared to 30.4% for the year ended December 31, 2016. The 30 basis pointincrease was due primarily to product mix in our Communications Systems business segment, which was more heavily weighted towards our coreproducts. 25 Operating expenses decreased by $1,589 or 7.4% to $19,756 during the year ended December 31, 2017, compared to $21,345 during the year endedDecember 31, 2016. This decrease was due primarily to strict control over discretionary spending, while focusing on the development of new productsand revenue growth. Operating expenses as a percentage of revenues decreased 270 basis points from 25.9% in 2016 to 23.2% in 2017 due to thecombination of higher revenues and lower expenses in 2017. Income tax benefit was $1,369 million for the year ended December 31, 2017, compared to expense of $98 for the year ended December 31, 2016. As aresult of the Tax Cuts and Jobs Act, a one-time, non-cash tax benefit of $1,939 was included in our 2017 results upon the revaluation, at the newlyenacted 21% Federal tax rate, of deferred tax liabilities relating to book-to-tax differences on goodwill and indefinite-lived intangible assets. Net income attributable to Ultralife for 2017 was $7,648, which includes the one-time, non-cash tax benefit of $1,939, compared to $3,509 for the yearended December 31, 2016. Reported earnings per share for 2017 of $0.49 per basic share ($0.48 per diluted share) includes $0.37 from our operatingperformance compared to $0.23 per basic share ($0.23 per diluted share) for 2016, plus $0.12 related to the tax benefit. Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation andamortization, plus/minus expenses/income that we do not consider reflective of our continuing operations, amounted to $9,594 for the year endedDecember 31, 2017 compared to $7,502 for the prior period. See the section “Adjusted EBITDA” beginning on page 29 for a reconciliation of AdjustedEBITDA 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 $18,330, an increaseof $7,624 from the cash position of $10,706 as of December 31, 2016. The increase primarily reflects our favorable operating performance, partially offsetby an increase in inventory to help service our increased backlog in 2018. We had no debt as of December 31, 2017 or December 31, 2016. For 2017, we achieved our stated goal of generating profitable growth, increasing operating income by 72% on a 4% gain in revenue. As a result of theactions taken in 2017 to lay the foundation for new revenue contributions in 2018, we are starting the year with a higher backlog than last year. Thecombination of new revenue opportunities and continued disciplined execution of our business model places us in an excellent position to extend ourtrack record of profitable growth. Results of Operations Year Ended December 31, 2017 Compared With the Year Ended December 31, 2016: Year Ended December 31, Increase/ 2017 2016 (Decrease) Revenues: Battery & Energy Products $69,789 $64,753 $5,036 Communications Systems 15,742 17,707 (1,965)Total 85,531 82,460 3,071 Cost of Products Sold: Battery & Energy Products 50,130 45,173 4,957 Communications Systems 9,169 12,179 (3,010)Total 59,299 57,352 1,947 Gross Profit: Battery & Energy Products 19,659 19,580 79 Communications Systems 6,573 5,528 1,045 Total 26,232 25,108 1,124 Operating Expenses 19,756 21,345 (1,589)Operating Income 6,476 3,763 2,713 Other Expense, Net 181 183 2 Income Before Taxes 6,295 3,580 2,715 Income Tax (Benefit) Provision (1,369) 98 (1,467)Net Income 7,664 3,482 4,182 Net Income (Loss) Attributable to Non-Controlling Interest 16 (27) 43 Net Income Attributable to Ultralife $7,648 $3,509 $4,139 Net Income Attributable to Ultralife Common Shares – Basic $0.49 $0.23 $0.26 Net Income Attributable to Ultralife Common Shares – Diluted $0.48 $0.23 $0.25 Weighted Average Shares Outstanding –Basic 15,528,000 15,261,000 267,000 Weighted Average Shares Outstanding – Diluted 15,858,000 15,405,000 453,000 26 Revenues. Total revenues for the year ended December 31, 2017 amounted to $85,531, an increase of $3,071, or 3.7% from the $82,460 reported for theyear ended December 31, 2016. Battery & Energy Products revenues increased $5,036, or 7.8%, for the year ended December 31, 2017. Government and defense sales of this businessincreased 21.5% from 2016 and now comprise 41.6% of total segment sales versus 36.9% last year. The increase reflects the higher overall demand forbatteries and chargers across our U.S. and international customer base. Commercial revenues of this business decreased .2% from 2016 and now comprise58.4% of total segment sales versus 63.1% last year. The year-over-year decrease primarily resulted from timing differences in medical sales, includinglarge shipments in the fourth quarter of 2016 to stock a large global medical OEM under an ongoing master supply agreement, and the impact of currencyfluctuations on some export sales. The reduction in 2017 was not fully offset by a 5.1% increase in medical sales by Accutronics and a 4.3% increaseacross our expanding commercial customer base. Communications Systems revenues decreased $1,965 or 11.1% for the year ended December 31, 2017. Revenues attributable to fulfillment of ordersthrough an OEM to the U.S. Army of the Vehicle Installed Power Enhanced Riflemen Appliqué (“VIPER”) were $2,895 in 2017 compared to $10,291 in2016. Excluding the VIPER shipments, sales of core amplifiers and integrated solutions products increased $5,431 or 73.3% in 2017 driven by increaseddemand for our core products such as our 20-watt amplifiers, universal vehicle adaptors and power supplies. Our order backlog at December 31, 2017 was $39,086, an increase of $12,912 or 49.3% from the backlog at December 31, 2016, which was $26,174. Forour Battery & Energy Products business, the backlog increased by $7,876 or 34.0% to $31,013 from $23,137 primarily due to higher demand for medicalproducts. For our Communications Systems business, the backlog increased by $5,036 or 165.8% to $8,973 from $3,037 resulting primarily from theaward of a $3,900 order to supply our Vehicle Amplifier-Adaptor (“VAA”) through a large global defense supplier for the U.S. Army’s Security ForceAssistance Brigades (SFABs) and the completion of shipments under a 2017 VIPER award. Cost of Products Sold and Gross Profit. Cost of products sold for the year ended December 31, 2017 increased $1,947, or 3.4%, from the year endedDecember 31, 2016. Consolidated cost of products sold as a percentage of total revenue decreased from 69.6% for the year ended December 31, 2016 to69.3% for the year ended December 31, 2017. Correspondingly, consolidated gross margin was 30.7% for the year ended December 31, 2017, comparedwith 30.4% for the year ended December 31, 2016. The 30 basis point improvement in gross margin is due primarily to product mix in ourCommunications Systems business segment, which was more heavily weighted towards our high value proposition core products. For our Battery & Energy Products segment, the cost of products sold increased $4,957 or 11.0%, from the year ended December 31, 2016. Battery &Energy Products’ gross profit for 2017 was $19,659 or 28.2% of revenues, an increase of $79 or 0.4% from gross profit of $19,580, or 30.2% of revenues,for 2016. As a result, Battery & Energy Products’ gross margin as a percentage of revenues decreased for the year ended December 31, 2017 by 200 basispoints over the prior year, reflecting product mix, including a larger concentration of government and defense sales compared to the prior year, as well asnon-recurring incremental supply chain and logistics fees experienced in 2017. For our Communications Systems segment, the cost of products sold decreased by $3,010 or 24.7% from the year ended December 31, 2016.Communications Systems’ gross profit for the year ended December 31, 2017 was $6,573 or 41.8% of revenues, an increase of $1,045 or 18.9% from grossprofit of $5,528 or 31.2% of revenues, for the year ended December 31, 2016. The 1,060 basis points increase in gross margin as a percentage of revenueduring 2017 is due to sales product mix primarily related to the higher sales of core products. 27 Operating Expenses. Total operating expenses for the year ended December 31, 2017 decreased $1,589 or 7.4% from the year ended December 31, 2016.This decrease was primarily attributable to strict control over non-revenue related discretionary spending, while focusing on the development of newproducts and revenue growth. Overall, operating expenses as a percentage of revenues were 23.1% for the year ended December 31, 2017 compared to 25.9% for the comparable 2016period. Amortization expense associated with intangible assets related to our acquisitions decreased to $422 for the year ended December 31, 2017 ($257in selling, general and administrative expenses and $165 in research and development costs) from $503 for the year ended December 31, 2016 ($303 inselling, general and administrative expenses and $200 in research and development costs). Research and development costs were $4,737 in 2017, adecrease of $1,209 or 20.3%, from $5,946 reported in 2016. The decrease primarily reflects the timing of development and testing costs associated withthe initial shipment of VIPER units in 2016 and discretionary cost reduction actions completed during and subsequent to the second quarter of 2016,including synergies with Accutronics. Selling, general, and administrative expenses decreased $380 or 2.5%, from $15,399 for the year ended December31, 2016 to $15,019 for the year ended December 31, 2017. The decrease is attributable to the absence of one-time costs incurred to complete theacquisition of Accutronics in January 2016 and discretionary cost reductions. Other Income (Expense). Other income (expense) totaled ($181) for the year ended December 31, 2017 compared to ($183) for the year ended December31, 2016. Interest and financing expense, net of interest income, decreased $80 to $183 for 2017 from $263 for 2016, as a result of one-time costs of $48associated with the acquisition of Accutronics in 2016 and more favorable terms of our Revolving Credit Agreement which was executed on May 31,2017. Miscellaneous income (expense) amounted to $2 for 2017 compared with $80 for 2016, primarily due to transactions impacted by foreign currencyfluctuation between the U. S. Dollar, Pound Sterling and Euro. Income Taxes. We recorded a tax benefit of $1,369 for the year ended December 31, 2017 compared to a tax provision of $98 for the year ended December31, 2016. As a result of the Tax Cuts and Jobs Act, a one-time, non-cash tax benefit of $1,939 was included in our 2017 results upon the revaluation, atthe newly enacted 21% Federal tax rate, of deferred tax liabilities relating to book-to-tax differences on goodwill and certain other indefinite-livedintangible assets. Excluding this benefit, the tax provision for 2017 would have been $570 primarily reflecting the income generated by our foreignoperations and the recognition of deferred tax liabilities generated from the amortization of goodwill and certain other indefinite-lived intangible assetsfor tax purposes that cannot be predicted to reverse for book purposes. The year-over-year decrease is primarily attributable to tax benefit associated withthe Tax Cuts and Jobs Act, which more than offset higher 2017 taxes on foreign earnings and the 2016 reversal of an excess accrual of income taxes fromprior years. The effective consolidated tax rates for the years ended December 31, 2017 and 2016 were as follows: Years Ended December 31, 2017 2016 Income Before Income Taxes (a) $6,295 $3,580 Income Tax Benefit (b) (1,369) 98 Effective Rate (b) / (a) (21.8%) 2.7% In 2017 and 2016, in the U.S. and for certain past operations in the U.K., we continue to report a valuation allowance for our net operating losscarryforwards and other deferred tax assets that cannot be offset by reversing temporary differences. The recognition of a valuation allowance is based onan assessment of all available evidence, both positive and negative, weighted based on objective verifiability. The assessment of the realizability of theU.S. deferred tax assets was based on a number of factors including our history of operating losses prior to 2015, our historical operating volatility, ourhistorical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate. The use of our U.K.NOL carryforwards may be limited due to the change in the past U.K. operations. Based on our assessment of all available evidence and its weightingbased on objective verifiability, we concluded that the realizability of these deferred tax assets is not more likely than not. In both 2017 and 2016, wehave not recognized a valuation allowance against our other foreign deferred tax assets as we believe that it is more likely than not that they will berealized. We will continue to evaluate the realizability of our deferred tax assets and anticipate a full or partial reversal of the valuation allowance infuture periods. (See Notes 1 and 9 in the Notes to Consolidated Financial Statements for additional information.) 28 Net Income Attributable to Ultralife. Net income attributable to Ultralife was $7,648, which includes the $1,939 tax benefit, compared to $3,509 for theyear ended December 31, 2016. Reported earnings per share for 2017 of $0.49 per basic share ($0.48 per diluted share) includes $0.37 from our operatingperformance compared to $0.23 per basic share ($0.23 per diluted share) for 2016, plus $0.12 related to the tax benefit. Average common sharesoutstanding used to compute diluted earnings per share increased from 15,405,000 in the 2016 period to 15,858,000 in the 2017 period, mainly due tothe increase in the weighted average stock from $4.73 for 2016 to $6.42 for 2017 and the resulting impact on the treasury method used to calculatedilutive shares. Adjusted EBITDA In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operatingperformance. 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 asupplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use ofAdjusted EBITDA facilitates investors’ use of operating performance comparisons from period to period and company to company by backing outpotential 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 relativedepreciation 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 asincome (loss) from operations. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to ourperformance based on our U.S. GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period withoutany correlation to underlying operating performance, and of non-cash stock-based compensation, which is a non-cash expense that varies widely amongcompanies. We believe that by presenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forwardbasis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data thatwe employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on aconsolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capitalexpenditures. The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented inaccordance with U.S. GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, AdjustedEBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement ofoperations 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 serviceinterest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costsassociated 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 inthe 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 financialstatements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumedvolatility of our common stock; and 29 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. AdjustedEBITDA is calculated as follows for the periods presented: Years ended December 31, 2017 2016 Net Income Attributable to Ultralife $7,648 $3,509 Add: Interest Expense, Net 183 263 Income Tax (Benefit) Provision (1,369) 98 Depreciation and Amortization of Financing Fees 2,057 2,294 Amortization of Intangible Assets 422 503 Stock-Based Compensation Expense 653 710 Non-Cash Purchase Accounting Adjustment - 96 Loss on Asset Disposal and Other - 29 Adjusted EBIDTA $9,594 $7,502 Liquidity and Capital Resources Cash Flows and General Business Matters As of December 31, 2017, cash totaled $18,330 (including restricted cash of $99), an increase of $7,624 from the beginning of the year primarilyattributable to the Company’s operating performance. During the year ended December 31, 2017, we generated $7,270 of cash from operating activitiesas compared to $7,653 of cash for the year ended December 31, 2016, a decrease of $383. In 2017, the cash generated from operating activities was aresult of our net income of $7,664 plus an add-back of $1,463 for non-cash expenses of depreciation, amortization, and stock-based compensation,partially offset by a $1,669 net deferred tax benefit primarily attributable to a one-time benefit of $1,939 relating to the revaluation of deferred taxliabilities on goodwill and certain other indefinite-lived intangible assets upon enactment of the Tax Cuts and Jobs Act . Working capital changes of$1,857 partially offset the operating cash generated, due mainly to an increase in inventory to service the year-over-year increase in backlog. In 2016, thecash generated from operating activities resulted from 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 ininventory. We used $1,392 in cash for investing activities during 2017 compared with $11,076 in cash used for investing activities in 2016. Cash paid for capitalexpenditures totaled $1,392 and $1,219 in 2017 and 2016, respectively. The year-over-year increase in cash paid for capital expenditures was dueprimarily to the 2017 payment for automation equipment pertaining to our Battery & Energy Products business. The Company acquired Accutronics in2016 utilizing cash of $11,161, which was partially offset by the cash acquired from Accutronics of $1,304. We generated $1,403 in cash from financing activities during 2017, compared to a use of $173 in cash for financing activities during 2016. We received$1,429 and $460 in 2017 and 2016, respectively, in funds from the issuance of common stock in connection with the exercise of stock options by ouremployees. In 2017 and 2016, we used $26 and $28, respectively, for tax withholdings related to stock-based awards. In 2016, we spent $607 torepurchase treasury stock under the Company’s Share Repurchase Program, which was concluded in June of that year. Although we carry a full reserve for our deferred tax asset as of both December 31, 2017 and 2016, we continue to have significant U.S. NOLs available toutilize as an offset to taxable income. As of December 31, 2017, none of our U.S. NOLs have expired. See Note 9 in our Notes to the ConsolidatedFinancial Statements for additional information. 30 As of December 31, 2017, we had made commitments to purchase approximately $1,392 of production machinery and equipment, which we expect tofund through operating cash flows. In January 2016, we acquired Accutronics Limited (“Accutronics”) as disclosed in Note 2 to our Consolidated Financial Statements. The purchase priceof £7,708 (approximately $11,200) was funded out of our cash. Based on operating cash flows and working capital management, including reductions indiscretionary spending and further reductions of inventory, a large portion of the cash used was restored over the course of 2016 and 2017. Debt and Lease Commitments On May 31, 2017, Ultralife Corporation entered into a Credit and Security Agreement (the “Credit Agreement”) and related security agreements withKeyBank National Association (“KeyBank” or the “Bank”) to establish a $30,000 senior secured, cash flow-based, revolving credit facility that includesa $1,500 letter of credit subfacility (the “Credit Facility”). The Credit Agreement provides that the Credit Facility may be increased with the Bank’sconcurrence to $50,000 prior to the last six months of the term and is scheduled to expire on May 30, 2020. The Credit Facility replaces the Company’sasset-based revolving credit facility with PNC Bank National Association which expired in accordance with its terms on May 24, 2017 (the “Prior CreditAgreement”). The Credit Facility provides the Company with an aggregate of up to $30,000 of loan and letter of credit availability determined based on a borrowingbase formula. The Company had available borrowings of approximately $30,000 under the Credit Facility at December 31, 2017. The Company may useadvances under the Credit Facility for general working capital purposes, to reimburse drawings under letters of credit and to fund capital expenditures andacquisitions, all subject to the terms of the Credit Agreement. The Company had no amounts drawn under the Prior Credit Agreement at the time of itsexpiration and has not borrowed under the Credit Facility. Interest will accrue on outstanding indebtedness under the Credit Agreement at the Overnight LIBOR Rate plus the applicable margin, or at the Base Rateplus the applicable margin, as selected by the Company. During the period beginning May 31, 2017 and ending April 1, 2018, the applicable margin forOvernight LIBOR Loans is 185 basis points, the applicable margin for Base Rate Loans is negative 50 basis points and applicable margin for the UnusedFee is 20 basis points. Beginning April 2, 2018 and thereafter, the applicable margins will be determined based on the chart below. Consolidated Senior Leverage RatioApplicable BasisPoints for OvernightLIBOR LoansApplicable BasisPoints forBase Rate LoansApplicable BasisPoints for UnusedFee Less than 1.50 to 1.00185(50)20 Greater than or equal to 1.50 to 1.00 but less than2.50 to 1.00200(25)15 Greater than or equal to 2.50 to 1.00215010 The Company must pay a fee on its unused availability equal to the applicable margin for the Unused Fee and customary letter of credit fees. In addition to the affirmative and negative covenants, the Company must maintain a fixed charge coverage ratio of 1.15 to 1.0, tested each fiscal quarterfor the trailing four fiscal quarters, and a minimum tangible net worth of $40,000, tested as of the end of each calendar year. The Company was in fullcompliance with its covenants as of December 31, 2017. Any outstanding borrowings must be repaid upon expiration of the term of the Credit Facility. Payments must be made during the term to the extentoutstanding borrowings exceed the maximum amount then permitted to be drawn as borrowings under the Credit Facility and from the proceeds of certaintransactions. Upon the occurrence of an event of default, the outstanding obligations of the Company under the Credit Facility may be accelerated inaddition to the other remedies available to the Bank under the terms of the Credit Agreement. The Credit Facility is secured by substantially all the assetsof the Company. As of December 31, 2017, we had no outstanding balance under the Credit Facility and no outstanding letters of credit related to the Credit Facility. See Note 6 in the Notes to Consolidated Financial Statements for additional information. 31 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 fromthe date of purchase. With respect to our communications accessory products, we typically offer a three-year warranty. We provide for a reserve for thesepotential warranty expenses, which is based on an analysis of historical warranty issues. There is no assurance that future warranty claims will beconsistent with past history, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves would besufficient. 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 havebeen prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions thataffect amounts reported therein. The estimates and assumptions that require management’s most difficult, subjective or complex judgments are describedbelow. Revenue Recognition: Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When products are shipped with terms thatrequire 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 isrecognized for warranty costs expected to be incurred. Customers, including distributors, do not have a general right of return on products shipped. Forproducts shipped under vendor managed inventory arrangements, revenue is recognized when the product is consumed by the customer, at which pointtitle has transferred and there are no further obligations by the Company. Deferred Revenue - For each source of revenues, we defer recognition if: (i) evidence of an agreement does not exist, (ii) delivery or service has notoccurred, (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 net realizable value, with cost determined using the first-in, first-out (“FIFO”) method. Our inventory includesraw materials, work in process and finished goods. We record provisions for excess, obsolete or slow moving inventory based on changes in customerdemand, 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 andforeign regulations governing hazardous materials (see Item 1A – Risk Factors for further information on foreign regulations). We manage our exposure toinventory valuation risks by maintaining safety stocks, minimum purchase lots, managing product end-of-life issues brought on by aging components ornew product introductions, and by utilizing certain inventory minimization strategies such as vendor-managed inventories. We believe that theaccounting estimate related to valuation of inventories is a "critical accounting estimate" because it is susceptible to changes from period-to-period dueto 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, inventoryadjustments to lower market values would result in a reduction to the carrying value of inventory, an increase in inventory write-offs and a decrease ingross margins. Warranties: We maintain provisions related to normal warranty claims by customers. We evaluate these reserves quarterly based on actual experience with warrantyclaims 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. 32 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. Thisis 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 valueand the fair value of the asset. Fair value is estimated either through the assistance of an independent valuation or as the present value of expecteddiscounted future cash flows. The discount rate used by us in our evaluation is an industry-based weighted average cost of capital. If the expectedundiscounted 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 conditioncaused 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 amortizegoodwill and intangible assets with indefinite lives, but instead evaluate these assets for impairment at least annually, or when events indicate thatimpairment exists. We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being utilized overtheir weighted-average estimated useful life. The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the reportingunit 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. Ifthe carrying amount of a reporting unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount ofimpairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assetswith their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal tothat excess. The Company changed the date of its annual impairment test in 2017 from December 31 to the first day of the fourth quarter. The change was made foradministrative purposes and did not materially impact the estimated fair values. We conducted our annual impairment tests for goodwill and other indefinite-lived intangible assets as of October 1, 2017. For 2017, we identified fourgoodwill reporting units. We performed a quantitative impairment test of goodwill using a discounted cash flow model and concluded that the fair valueof each reporting unit exceeded its respective carrying value. To estimate the fair value of the reporting units, we used significant estimates andjudgments, including an assessment of our future revenue prospects, revenue growth rates and profit margins based on internal forecasts, industry andmarket based terminal growth rates, inputs to the weighted-average cost of capital used to discount future cash flows, and earnings multiples. Weperformed a quantitative impairment test of each of our four trademarks as of October 1, 2017 using the relief from royalty method and concluded that thefair value of each trademark exceeded its carrying value. Significant estimates and judgments included an assessment of our future revenue prospects,industry and market based terminal growth rates, inputs to the weighted-average cost of capital used to discount future cash flows, and royalty rates basedon external market data. Based on the results of our quantitative impairment tests, and consideration of qualitative factors, no impairments wereidentified. There is a possibility that our goodwill and other intangible assets could be impaired in the future should there be a significant change in ourinternal forecasts and other assumptions we use in our impairment analysis. 33 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 onthe fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equityaward). We calculate expected volatility for stock options by taking an average of historical volatility over the past five years and a computation ofimplied volatility. The computation of expected term was determined based on historical experience of similar awards, giving consideration to thecontractual 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 ondifferences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effectwhen the differences are expected to reverse. In 2017 and 2016, 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 believecannot 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 resultedfrom our evaluation of all available evidence, both positive and negative. The assessment of the realizability of the NOLs was based on a number offactors including our history of net operating losses prior to 2015, our historical operating volatility, our historical inability to accurately forecastearnings for future periods and the continued uncertainty of the general business climate. We concluded that these historical factors represent sufficientnegative evidence and have concluded that we should continue to record a full valuation allowance at December 31, 2017. We currently carry a deferredtax asset in China that we have determined does not require a valuation allowance as it is more likely than not to be fully realized. We continually assessthe 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 andestimated lives to property and equipment and intangible assets acquired. These determinations involve significant estimates and assumptions, includingthose with respect to future cash flows, discount rates and asset lives, and therefore require considerable judgment. These determinations affect theamount of depreciation and amortization expense recognized in future periods. The results of operations of acquired businesses are included in theconsolidated 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. 34 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 37. PageReport of Independent Registered Public Accounting Firm36 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2017 and 201637 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017 and 201638 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2017 and 201639 Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 201640 Notes to Consolidated Financial Statements41 35 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Ultralife Corporation Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Ultralife Corporation (the Company) and its subsidiaries as of December 31, 2017 and2016, the related consolidated statements of income and comprehensive income, change in shareholders’ equity and cash flows for the years then ended,and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements presentfairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flowsfor the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)(PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control overfinancial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Freed Maxick, CPAs, P.C. We have served as the Company's auditor since 2016. Rochester, New YorkFebruary 8, 2018 36 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in Thousands) December 31, 2017 2016 ASSETS Current Assets: Cash $18,241 $10,629 Restricted Cash 89 77 Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $292 and $277, Respectively 14,657 13,179 Inventories, Net 26,326 23,456 Prepaid Expenses and Other Current Assets 2,603 2,079 Total Current Assets 61,916 49,420 Property, Equipment and Improvements, Net 7,570 7,999 Goodwill 20,458 19,965 Other Intangible Assets, Net 7,085 7,194 Deferred Income Taxes 32 94 Security Deposits and Other Non-Current Assets 125 72 Total Assets $97,186 $84,744 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $8,787 $7,292 Accrued Compensation and Related Benefits 2,413 1,258 Accrued Expenses and Other Current Liabilities 2,871 2,606 Income Taxes Payable 168 172 Total Current Liabilities 14,239 11,328 Deferred Income Taxes 3,867 5,538 Other Non-Current Liabilities 31 18 Total Liabilities 18,137 16,884 Commitments and Contingencies (Note 7) Shareholders' Equity: 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 – 19,670,928 Shares and 19,324,723 Shares, Respectively; Outstanding – 15,651,217 Shares and 15,308,971 Shares, Respectively 1,966 1,932 Capital in Excess of Par Value 180,211 178,163 Accumulated Deficit (82,894) (90,542)Accumulated Other Comprehensive Loss (1,611) (3,080)Treasury Stock - at Cost; 4,019,711 Shares and 4,015,752 Shares at December 31, 2017 and 2016,respectively (18,469) (18,443)Total Ultralife Corporation Equity 79,203 68,030 Non-Controlling Interest (154) (170)Total Shareholders’ Equity 79,049 67,860 Total Liabilities and Shareholders' Equity $97,186 $84,744 The accompanying notes are an integral part of these consolidated financial statements. 37 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Dollars in Thousands, Except Per Share Amounts) Year Ended December 31, 2017 2016 Revenues $85,531 $82,460 Cost of Products Sold 59,299 57,352 Gross Profit 26,232 25,108 Operating Expenses: Research and Development 4,737 5,946 Selling, General and Administrative 15,019 15,399 Total Operating Expenses 19,756 21,345 Operating Income 6,476 3,763 Other Expense (Income): Interest and Financing Expense 183 263 Miscellaneous (2) (80)Income Before Income Taxes 6,295 3,580 Income Tax (Benefit) Provision (1,369) 98 Net Income 7,664 3,482 Net Income (Loss) Attributable to Non-Controlling Interest 16 (27) Net Income Attributable to Ultralife Corporation 7,648 3,509 Other Comprehensive Income (Loss): Foreign Currency Translation Adjustments 1,469 (2,173) Comprehensive Income Attributable to Ultralife Corporation $9,117 $1,336 Net Income Per Share Attributable to Ultralife Corporation Common Shareholders – Basic: $.49 $.23 Net Income Per Share Attributable to Ultralife Corporation Common Shareholders – Diluted: $.48 $.23 Weighted Average Shares Outstanding – Basic 15,528 15,261 Weighted Average Shares Outstanding – Diluted 15,858 15,405 The accompanying notes are an integral part of these consolidated financial statements. 38 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY(Dollars in Thousands) Capital Accumulated Common Stock in Excess Other Non- Number of of Par Comprehensive Accumulated Treasury Controlling Shares Amount Value Income (Loss) Deficit Stock Interest Total Balance – December 31,2015 19,181,815 $1,918 $177,007 $(907) $(94,051) $(17,808) $(143) $66,016 Purchases of Stock (635) (635)Vesting of RestrictedShares 15,900 2 (2) - Stock Option Exercises 127,008 12 448 460 Stock-BasedCompensation - StockOptions 676 676 Restricted Stock 34 34 Foreign CurrencyTranslationAdjustments (2,173) (2,173)Net Income 3,509 (27) 3,482 Balance – December 31,2016 19,324,723 $1,932 $178,163 $(3,080) $(90,542) $(18,443) $(170) $67,860 Purchases of Stock (26) (26)Vesting of RestrictedShares 12,900 1 (1) - Stock Option Exercises 333,305 33 1,396 1,429 Stock-BasedCompensation - StockOptions 642 642 Restricted Stock 11 11 Foreign CurrencyTranslationAdjustments 1,469 1,469 Net Income 7,648 16 7,664 Balance – December 31,2017 19,670,928 $1,966 $180,211 $(1,611) $(82,894) $(18,469) $(154) $79,049 The accompanying notes are an integral part of these consolidated financial statements. 39 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars In Thousands) Years ended December 31, 2017 2016 OPERATING ACTIVITIES: Net Income $7,664 $3,482 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 2,005 2,223 Amortization of Intangible Assets 422 503 Amortization of Financing Fees 52 71 Stock-Based Compensation 653 710 Loss on Long-Lived Asset Disposals - 29 Deferred Income Tax Expense (1,669) 135 Provision for allowance for doubtful accounts (5) (24)Changes in operating assets and liabilities: Accounts Receivable (1,295) (667)Inventories (2,537) 1,981 Prepaid Expenses and Other Assets (673) 730 Income taxes receivable and payable (8) (158)Accounts Payable and Other Liabilities 2,661 (1,362)Net Cash Provided by Operating Activities 7,270 7,653 INVESTING ACTIVITIES: Cash Paid for Property, Equipment and Improvements (1,392) (1,219)Acquisition of Accutronics, Net of Cash Acquired - (9,857)Net Cash Used in Investing Activities (1,392) (11,076) FINANCING ACTIVITIES: Proceeds from Exercise of Stock Options 1,429 460 Tax Withholdings on Stock-Based Awards (26) (28)Cash Paid to Repurchase Treasury Stock - (607)Proceeds from Debt Borrowings - 3,030 Payments of Debt Borrowings - (3,030)Net Cash Provided by (Used in) Financing Activities 1,403 (175) Effect of Exchange Rate Changes on Cash 331 (166) INCREASE (DECREASE) IN CASH 7,612 (3,764) Cash, Beginning of Year 10,629 14,393 Cash, End of Year $18,241 $10,629 Supplemental Cash Flow Information: Construction in Process in Accounts Payable $87 $83 Income Taxes Paid $345 $273 Interest Paid $102 $179 The accompanying notes are an integral part of these consolidated financial statements. 40 ULTRALIFE CORPORATIONNotes 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 ourwholly-owned subsidiaries, ABLE New Energy Co., Limited and its wholly-owned subsidiary ABLE New Energy Co.; Ltd; Ultralife UK LTD and itswholly-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 collaborativeapproach to problem solving, we serve government, defense and commercial customers across the globe. We design, manufacture, install and maintainpower and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systemsand accessories, and custom engineered systems. We sell our products worldwide through a variety of trade channels, including original equipmentmanufacturers (“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”) andinclude the accounts of Ultralife Corporation, our wholly-owned subsidiaries, Ultralife Batteries (UK) Ltd., Ultralife UK LTD, and its wholly-ownedsubsidiary Accutronics Ltd, ABLE New Energy Co., Limited, and its wholly-owned subsidiary ABLE New Energy Co., Ltd. (“ABLE” collectively), andour majority-owned subsidiary Ultralife Batteries India Private Limited (“India JV”). Intercompany accounts and transactions have been eliminated inconsolidation. 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 reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses duringthe 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) variousexpense 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 materialreclassifications for the years ended December 31, 2017 and 2016. e.Cash Our cash balances may at times exceed federally insured limits. We have not experienced any losses in these accounts and believe we are not exposed toany significant risk with respect to cash. 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. Tradeaccounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy of our allowance fordoubtful accounts quarterly. Accounts outstanding longer than contractual payment terms are considered past due and are reviewed individually forcollectability. We maintain reserves for potential credit losses based upon our loss history and specific receivables aging analysis. Receivable balancesare written off when collection is deemed unlikely. Allowance for doubtful accounts was $292 and $277 for the years ended December 31, 2017 and2016, respectively. 41 g.Inventories Inventories are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out (FIFO) method. We record provisions forexcess, 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 usefullives. Estimated useful lives are as follows (in years): Buildings10–20 Machinery and Equipment5–10 Furniture and Fixtures3–10 Computer Hardware and Software3–5 Leasehold ImprovementsLesser 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 whenincurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss ondisposition 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. Forproperty, plant and equipment and amortizable intangible assets, this is accomplished by comparing the expected undiscounted future cash flows of theassets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-downwould 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 ofexpected discounted future cash flows. The discount rate used by us in our evaluation is an industry-based weighted average cost of capital. If theexpected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized. 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 amortizegoodwill and intangible assets with indefinite lives, but instead evaluate these assets for impairment at least annually, or when events indicate thatimpairment exists. We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being utilized overtheir weighted-average estimated useful life. The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the reportingunit 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. Ifthe carrying amount of a reporting unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount ofimpairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assetswith their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal tothat excess. 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 adjustmentsrecorded as the sole component of accumulated other comprehensive loss on the balance sheets. Exchange gains and (losses) relate to foreign currencytransactions and balances denominated in currencies other than the functional currency included in net income for the years ended December 31, 2017and 2016 were $(10) and $86, 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 thatrequire 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 therevenue is recognized for warranty costs expected to be incurred. Customers, including distributors, do not have a general right of return on productsshipped. For products shipped under vendor managed inventory arrangements, revenue is recognized when the product is consumed by the customer, atwhich point title has transferred and there are no further obligations by the Company. 42 Deferred Revenue – For each source of revenues, we defer recognition if: (i) evidence of an agreement does not exist,( ii) delivery or service has notoccurred, (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 onhistorical experience of warranty claims. In the event the actual results of these items differ from the estimates, an adjustment to the warranty obligationwould 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 arereflected as revenue. n.Advertising Expenses Advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying ConsolidatedStatements of Income and Comprehensive Income. Such expenses amounted to $26 and $32 for the years ended December 31, 2017 and 2016,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 andbenefits, developmental supplies, depreciation and other contracted services. During 2017 and 2016, we expended $5,142 and $6,155, respectively, onresearch and development, including $405 and $209, respectively, on customer sponsored research and development activities, which are included incost of goods sold. We recognized $405 and $209 of revenue relating to these activities during 2017 and 2016, respectively. p.Environmental Costs Environmental expenditures that relate to current operations are expensed. Remediation costs that relate to an existing condition caused by pastoperations 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 ondifferences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to bein 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 31,2017, 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 temporarytax differences and the U.S. and U.K. net operating loss and tax credit carryforwards resulting in the deferred tax asset are not able to be offset by futurereversing temporary differences. The assessment of the realizability of the U.S. NOL was based on a number of historical factors including, our history ofnet operating losses prior to 2015, our historical operating volatility, our historical inability to accurately forecast earnings for future periods, and thecontinued uncertainty of the general business climate as of the end of 2017. We concluded that these historical factors represent sufficient negativeevidence and have concluded that we should record a full valuation allowance against these net deferred tax assets. We also recorded a full valuationallowance on our net deferred tax asset for the year ended December 31, 2016. r.Concentration Related to Customers and Suppliers During the year ended December 31, 2017, we had one major customer, a large defense primary contractor, which comprised 18% and 12% of ourrevenues in 2017 and 2016, respectively. During the year ended December 31, 2016, another large defense primary contractor comprised 13% of oursales; however, sales to this customer in 2017 comprised 3% of our sales. There were no other customers that comprised greater than 10% of our totalrevenues during these years. 43 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 todeploy 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 fromindividuals 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 2017 and 2016, we do not consider this customer to be a significant credit risk. We do not normallyobtain 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 andcomponents could become in short supply resulting in limited availability and/or increased costs. Additionally, we may elect to develop relationshipswith a single or limited number of suppliers for materials and components that are otherwise generally available. Although we believe that alternativesuppliers are available to supply materials and components that could replace materials and components currently used and that, if necessary, we wouldbe 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 delayproduct shipments and have a material adverse effect on our business, financial condition and results of operations. We have experienced interruptions ofproduct 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 mostadvantageous market in an orderly transaction between market participants on the measurement date. Fair value is estimated by applying the followinghierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest levelof input that is available and significant to the fair value measurement: Level 1:Quoted prices in active markets for identical assets or liabilities. Level 2:Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or that we corroborate with observable market data for substantially the full term of therelated assets or liabilities. Level 3: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, 2017 and 2016. The fair value of cash, trade accountsreceivable, 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 commonshares outstanding for the period. Diluted earnings per share calculations reflect the assumed exercise and conversion of dilutive employee stock optionsand unvested restricted stock, if any, applying the treasury stock method. Diluted earnings per share in 2017 include 1,035,711 outstanding in-the-moneystock options that add 330,676 shares to the number of shares outstanding. 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 sharesoutstanding. There were no unvested restricted stock units as of December 31, 2017. Diluted earnings per share calculations exclude the effect of 824,500 and 1,332,281 employee stock options in 2017 and 2016, respectively, as suchoptions 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-basedpayment transactions is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’srequisite service period (generally the vesting period of the equity award). 44 v.Segment Reporting We have two operating segments – Battery & Energy Products, and Communications Systems. The basis for determining our operating segments is themanner in which financial information is used in monitoring our operations. Management operates and organizes itself according to business units thatcomprise unique products and services across geographic locations. w.Recent Accounting Pronouncements In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, “Income Taxes: BalanceSheet Classification of Deferred Taxes”, which requires that deferred tax liabilities and assets be netted against each other and classified as non-current ina classified statement of financial position. ASU 2015-17 is effective for public companies for annual and interim periods beginning afterDecember 15, 2016. During the first quarter of 2017, we adopted ASU 2015-17 on a retrospective basis. As such, we reclassified $32 and $94 of foreigncurrent deferred tax assets to non-current on the consolidated balance sheets as of December 31, 2017 and 2016, respectively. The deferred tax liabilitiesrelate to U.S. tax obligations which cannot be netted against foreign deferred taxes. The adoption of ASU 2015-17 did not affect our consolidatedstatements of income. In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)”, which identifies areas for simplification involvingseveral aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity orliabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications onthe statement of cash flows. ASU 2016-09 is effective for public companies for annual and interim periods beginning after December 15, 2016. Weadopted the new accounting standard in the first quarter of 2017 and will maintain our policy to estimate forfeitures expected to occur to determine stock-based compensation expense. Adoption of this new accounting standard resulted in the recognition of an increase in the Company’s gross deferred taxasset of $1,123 and an offsetting increase in the valuation allowance. There was no impact to the Company’s retained earnings as a result of adopting thisnew accounting standard. In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory byusing only the lower of cost and net realizable value. This standard is effective for fiscal years and interim periods within those years beginning afterDecember 15, 2016, and must be applied on a retrospective basis. We adopted the new accounting standard in the first quarter of 2017. There was nomaterial impact to the Company's financial statements as a result of adopting this new accounting standard. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue fromContracts with Customer” related to revenue from contracts with customers. Under this standard, revenue is recognized when promised goods or servicesare transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standardwill replace most existing revenue recognition guidance under GAAP and permits the use of either the retrospective or cumulative effect transitionmethod. Topic 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.The company will adopt Topic 606 effective January 1, 2018. Topic 606 will not have a material impact on our Consolidated Financial Statements. In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” requires that lessees recognize a right-to-use asset and relatedlease liability for all significant financing and operating leases not considered short-term leases, and specifies where in the statement of cash flows therelated lease payments are to be presented. The guidance is effective for years beginning after December 15, 2018 and early adoption is permitted. TheCompany has not yet determined the impact of this standard on our Consolidated Financial Statements, but believes it may be significant. We haveelected not to adopt this standard in advance of its required effective date. In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other ThanInventory”. The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventorywhen the transfer occurs, rather than when the asset is sold to an outside party. The guidance is effective for annual reporting periods beginning afterDecember 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted. The new guidance requires adoption ona modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Thecompany will adopt Topic 740 effective January 1, 2018. Topic 740 will not have a material impact on our Consolidated Financial Statements. 45 In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain CashReceipts and Cash Payments”. The new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in thestatement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlyadoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should bereflected 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 inthe same period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would berequired to apply the amendments prospectively as of the earliest date practicable. The Company will adopt this standard effective January 1, 2018. Thisstandard will not have a material impact on our Consolidated Financial Statements. In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment”, whicheliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. The annualassessment of goodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. TheCompany is currently assessing the impact that adopting this new accounting standard will have on our Consolidated Financial Statements. In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting”, which providesguidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption ispermitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. We donot intend to early adopt ASU 2017-09 and do not expect the adoption of this new accounting standard will have a material impact on our ConsolidatedFinancial 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 inNewcastle-under-Lyme, U.K., from Intrinsic Equity Limited, Catapult Growth Fund Limited Partnership, MJF Pension Trustees Limited, Robert AndrewPhillips and Michael Allen (collectively, the “Sellers”). There are no material relationships between the Company or Merger Subsidiary and any of theSellers, other than pertaining to this acquisition. Accutronics is a leading independent designer and manufacturer of smart batteries and charger systemsfor high-performance, feature-laden portable and handheld electronic devices and is classified in the Battery & Energy Products segment. The acquisitionof Accutronics advances our strategy of commercial revenue diversification and expands our geographic reach within European OEM’s. With industryexperts predicting mid-to-high single digit growth in the global medical batteries market, this strategic investment positions Ultralife well for furtherpenetration 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 andthe 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 MergerSubsidiary received all of the outstanding shares of Accutronics ordinary stock. Monies to fund the purchase price were advanced to the MergerSubsidiary 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 asthe 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 thetotal 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 StandardsBoard (“FASB”) ASC Topic 805, Business Combinations. Under the guidance, the fair value of the consideration was determined and the assets acquiredand liabilities assumed have been recorded at their fair values at the date of the acquisition. The excess of the consideration paid over the estimated fairvalues has been recorded as goodwill. 46 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 ofacquisition. Management considered a number of factors, including reference to an analysis performed under FASB ASC Topic 805 solely for the purposeof allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to bereasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflectunanticipated events and circumstances that occur. The originally reported purchase price allocation has been updated based on information obtainedabout facts and circumstances that existed as of the acquisition date. As a result, adjustments were made which reduced identifiable intangible assets andproperty, plant and equipment by $402 and $99, respectively, and increased prepaids and other current assets, inventory, deferred income taxes onintangible assets and goodwill by $291, $75, $113 and $104, respectively. Cash $1,304 Accounts Receivable 1,344 Inventory 2,167 Prepaids and Other Current Assets 584 Property, Plant & Equipment 269 Identifiable Intangible Assets 4,374 Goodwill 4,487 Accounts Payable (1,009)Accrued Expenses (1,136)Income Taxes Payable (111)Non-Current Liabilities (209)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 timeattributable to increased market penetration from future new products and customers. The goodwill acquired in connection with the acquisition is notdeductible 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 $96for inventory acquired were recorded in the Company’s Consolidated Statement of Income and Comprehensive Income. Accutronics contributed revenueof $10,362 and operating income of $436 during the twelve-month period ended December, 2016, reflecting the purchase accounting adjustments andnon-recurring costs directly related to the acquisition. Set forth below is the unaudited pro forma results of the Company for the twelve-month period ended December 31, 2016 as if the acquisition occurred asof January 1, 2015. The unaudited pro forma results exclude direct acquisition costs of $251 and cost of sales of $96 related to the purchase accountingadjustments for inventory acquired. The results of Accutronics were not material for the period from January 1, 2016 to the acquisition date. Year Ended December 31, 2016 Revenue $82,460 Operating income $4,061 Net income attributable to Ultralife $3,821 Earnings per share: Basic $0.25 Diluted $0.25 47 The unaudited pro forma results do not reflect the realization of any expected cost savings or other synergies from the acquisition of Accutronics as aresult 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 operationsof the combined Company would have been if the acquisition had occurred at the beginning of the 2015 period presented, nor are they indicative offuture 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 onMay 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 toexceed twelve months. The Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to berepurchased 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 purchasesand block trades in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made duringstock trading black-out periods under 10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’sdiscretion. 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 repurchasedunder the Share Repurchase Program for an aggregate amount (excluding fees and commissions) of $603. 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 sharesfor an aggregate cost (excluding fees and commissions) of $10,480. Note 4 - Supplemental Balance Sheet Information a.Inventory, Net Inventories are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out (FIFO) method. The composition ofinventories, net was: December 31, 2017 2016 Raw Materials $14,606 $14,482 Work in Process 2,013 986 Finished Products 9,707 7,988 Total $26,326 $23,456 b.Property, Plant and Equipment Major classes of property, plant and equipment consisted of the following: December 31, 2017 2016 Land $123 $123 Buildings and Leasehold Improvements 7,858 7,757 Machinery and Equipment 50,852 49,722 Furniture and Fixtures 2,005 1,947 Computer Hardware and Software 5,338 5,223 Construction in Progress 535 421 66,711 65,193 Less – Accumulated Depreciation (59,141) (57,194)Total $7,570 $7,999 48 Estimated costs to complete construction-in-progress as of December 31, 2017 and 2016 were approximately $5,136 and $170, respectively. Depreciation expense was $2,005 and $2,223 for the years ended December 31, 2017 and 2016, respectively. c.Goodwill and Other Intangible Assets The Company performed its annual impairment tests of goodwill and other indefinite-lived intangible assets as of October 1, 2017. The Companychanged the date of its annual impairment test in 2017 from December 31 to the first day of the fourth quarter. The change was made for administrativepurposes and did not materially impact the estimated fair values. The Company performed a quantitative impairment test of its four identified goodwill reporting units. The fair value for the reporting units could not bedetermined using readily available quoted Level 1 inputs or Level 2 inputs that were observable in active markets. Therefore, we used a discounted cashflow model to estimate the fair value of the reporting units, using Level 3 inputs. To estimate the fair value of the reporting units, we used significantestimates and judgments, including an assessment of our future revenue prospects, revenue growth rates and profit margins based on internal forecasts,industry and market based terminal growth rates, inputs to the weighted-average cost of capital used to discount future cash flows, and earnings multiples. The Company performed a quantitative impairment test of its four other indefinite-lived intangible assets (trademarks). The fair value of our trademarkscould not be determined using readily available quoted Level 1 inputs or Level 2 inputs that were observable in active markets. Therefore, we used arelief from royalty approach to estimate the fair value of our trademarks, using Level 3 inputs. Significant estimates and judgments included anassessment of our future revenue prospects, industry and market based terminal growth rates, inputs to the weighted-average cost of capital used todiscount future cash flows, and royalty rates based on external market data. As a result of the impairment tests performed for 2017 and 2016, we determined that no impairments existed. Fair value exceeded carrying value for allreporting units and trademarks by more than 10%. There is a possibility that our goodwill and other intangible assets could be impaired in the future should there be a significant change in our internalforecasts and other assumptions used in our impairment analysis. The following table summarizes the goodwill activity by segment for the years ended December 31, 2017 and 2016: Battery &EnergyProducts Communi-cationsSystems Total Balance – January 1, 2016 $4,790 $11,493 $16,283 Acquisition of Accutronics 4,487 - 4,487 Effect of Foreign Currency Translation (805) - (805)Balance – December 31, 2016 8,472 11,493 19,965 Effect of Foreign Currency Translation 493 - 493 Balance – December 31, 2017 $8,965 $11,493 $20,458 The composition of intangible assets was: December 31, 2017 Cost AccumulatedAmortization Net Trademarks $3,411 $- $3,411 Customer Relationships 6,618 4,208 2,410 Patents and Technology 5,545 4,595 950 Distributor Relationships 377 377 - Trade Name 393 79 314 Total Other Intangible Assets $16,344 $9,259 $7,085 49 December 31, 2016 Cost AccumulatedAmortization Net Trademarks $3,404 $- $3,404 Customer Relationships 6,395 3,975 2,420 Patents and Technology 5,455 4,417 1,038 Distributor Relationships 377 368 9 Trade Name 359 36 323 Total Other Intangible Assets $15,990 $8,796 $7,194 The change in the cost value of other intangible assets is a result of the effect of foreign currency translations. Amortization of other intangible assets was included in the following financial statement captions: Year ended December 31, 2017 2016 Research and Development Expense $165 $200 Selling, General and Administrative Expense 257 303 Total $422 $503 Future amortization expense of amortizable intangible assets will be approximately $400, $379, $367, $348 and $334 for the fiscal years endingDecember 31, 2018 through 2022, respectively. Note 5 - Operating Leases We lease various buildings, machinery, land, automobiles and office equipment. Rental expenses for all operating leases were approximately $660 and$668 for the years ended December 31, 2017 and 2016, respectively. Future minimum lease payments under non-cancelable operating leases as ofDecember 31, 2017 are as follows: 2018 2019 2020 2021 2022 $558 $416 $100 $- $- Note 6 - Debt Credit Facilities On May 31, 2017, Ultralife Corporation entered into a Credit and Security Agreement (the “Credit Agreement”) and related security agreements withKeyBank National Association (“KeyBank” or the “Bank”) to establish a $30,000 senior secured, cash flow-based, revolving credit facility that includesa $1,500 letter of credit subfacility (the “Credit Facility”). The Credit Agreement provides that the Credit Facility may be increased with the Bank’sconcurrence to $50,000 prior to the last six months of the term and is scheduled to expire on May 30, 2020. The Credit Facility replaces the Company’sasset-based revolving credit facility with PNC Bank National Association which expired in accordance with its terms on May 24, 2017 (the “Prior CreditAgreement”). The Credit Facility provides the Company with an aggregate of up to $30,000 of loan and letter of credit availability determined based on a borrowingbase formula. The Company may use advances under the Credit Facility for general working capital purposes, to reimburse drawings under letters ofcredit and to fund capital expenditures and acquisitions, all subject to the terms of the Credit Agreement. The Company had no amounts drawn under thePrior Credit Agreement at the time of its expiration and has not borrowed under the Credit Facility. 50 Interest will accrue on outstanding indebtedness under the Credit Agreement at the Overnight LIBOR Rate plus the applicable margin, or at the Base Rateplus the applicable margin, as selected by the Company. During the period beginning May 31, 2017 and ending April 1, 2018, the applicable margin forOvernight LIBOR Loans is 185 basis points, the applicable margin for Base Rate Loans is negative 50 basis points and applicable margin for the UnusedFee is 20 basis points. Beginning April 2, 2018 and thereafter, the applicable margins will be determined based on the chart below. Consolidated Senior Leverage Ratio Applicable BasisPoints for OvernightLIBOR Loans Applicable BasisPoints forBase Rate Loans Applicable BasisPoints for UnusedFee Less than 1.50 to 1.00 185 (50) 20 Greater than or equal to 1.50 to 1.00 but less than 2.50 to 1.00 200 (25) 15 Greater than or equal to 2.50 to 1.00 215 0 10 The Company must pay a fee on its unused availability equal to the applicable margin for the Unused Fee and customary letter of credit fees. In addition to the affirmative and negative covenants, the Company must maintain a fixed charge coverage ratio of 1.15 to 1.0, tested each fiscal quarterfor the trailing four fiscal quarters, and a minimum tangible net worth of $40,000, tested as of the end of each calendar year. The Company was in fullcompliance with its covenants as of December 31, 2017. Any outstanding borrowings must be repaid upon expiration of the term of the Credit Facility. Payments must be made during the term to the extentoutstanding borrowings exceed the maximum amount then permitted to be drawn as borrowings under the Credit Facility and from the proceeds of certaintransactions. Upon the occurrence of an event of default, the outstanding obligations of the Company under the Credit Facility may be accelerated inaddition to the other remedies available to the Bank under the terms of the Credit Agreement. The Credit Facility is secured by substantially all the assetsof the Company. As of December 31, 2017, we had no outstanding balance under the Credit Facility 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 outof their performance. b.Purchase Commitments As of December 31, 2017, we have made commitments to purchase approximately $1,392 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 CorruptPractices Act, uncertainties as to application and interpretation of local laws and enforcement of contract and intellectual property rights, eminent domainclaims, 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. 51 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 eitherparty. This agreement provides for a base salary, as adjusted for increases at the discretion of our Board of Directors, and includes incentive bonusesbased upon attainment of specified quantitative and qualitative performance goals. This agreement also provides for severance payments in the event ofspecified events of termination of employment. In addition, this agreement provides for a lump sum payment in the event of termination of employmentin 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 informationand 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 noassurance 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 forthe confidentiality of certain information received during the course of their employment. 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 productwarranty liability during the years ended December 31, 2017 and 2016 were as follows: 2017 2016 Balance, January 1 $172 $192 Provision (reversal) for warranties issued 84 39 Settlements made (107) (59)Balance, December 31 $149 $172 f.Legal Matters 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 nothave 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 LondonHeathrow 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 wasissued by the Air Accidents Investigative Branch - - UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused bycircumstances 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. Ultralifehas had this cell in production since 2001, with millions of units produced. The cell is widely-used for global defense and commercial applications. Thisbattery product has gone through rigorous safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests andCriteria, 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 plusother unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurancethrough reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers. We are workingwith 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. 52 Note 8 - Shareholders' Equity a.Stock-Based Compensation Expense We recorded non-cash stock compensation expense in each period as follows: 2017 2016 Stock Options $642 $676 Restricted Stock Grants 11 34 Total $653 $710 These are more fully discussed as follows: b.Stock Options We have various stock-based employee compensation plans, for which compensation cost is recognized in the financial statements. The cost is measuredat 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 vestingperiod 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. Inaddition, 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 750,000shares of common stock and grant stock options, restricted stock awards, stock appreciation rights and other stock-based awards. Through shareholderapproved 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 June10, 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 sharesof 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 stockoptions 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 areeligible to receive ISOs and NQSOs; however, directors and consultants are eligible to receive only NQSOs. Most ISOs vest over a three- year period andexpire on the seventh anniversary of the grant date. As of December 31, 2017, there were 1,116,083 stock options outstanding under the 2004 LTIP and744,128 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 sharesover 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-yearperiod 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 pershare 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 thatdate; 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 a30-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) were due to expire on December 30, 2017. On April 19, 2017, the Company’s Board of Directors extended the expiration date to December 30,2020. Pursuant to Accounting Standards Codification Topic 718, Compensation – Stock Compensation, the transaction was accounted for as an equityaward modification. During the second quarter, the Company recognized compensation cost of $193 representing the incremental fair value of themodified award computed as of the modification date as the difference between the fair value of the modified award and the fair value of the originalaward immediately before it was modified. All such options in items (iii) and (iv) shall expire as of the later of December 30, 2017 and five years after theinitial 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 notbeen met as of December 31, 2017. The options set forth in items (ii), (iii) and (iv) were subject to shareholder approval of an amendment to the 2004LTIP, which approval was obtained on June 7, 2011. 53 On January 3, 2011, pursuant to the terms of his employment agreement, we granted our President and Chief Executive Officer, Michael D. Popielec, anoption 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 expired on December 30, 2017. As of December 31, 2017, there was $385 of total unrecognized compensation costs related to outstanding stock options, which we expect to recognizeover a weighted average period of 1.0 years. We use the Black-Scholes option-pricing model to estimate fair value of stock-based awards. The following weighted average assumptions were used tovalue options granted during the years ended December 31, 2017 and 2016: Years Ended December 31, 2017 2016 Risk-free interest rate 1.7% 1.4%Volatility factor 50.0% 48.2%Weighted average expected life (years) 5.0 4.8 Forfeiture rate 10.0% 10.0%Dividends 0.0% 0.0% 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 newawards in the years ended December 31, 2017 or 2016. We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected termwas determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vestingschedules. 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. Forfeiturerates are calculated by dividing unvested shares forfeited by beginning shares outstanding. The pre-vesting forfeiture rate is calculated yearly and isdetermined 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, 2017 Numberof Shares WeightedAverageExercisePricePer Share WeightedAverageRemainingContractualTerm AggregateIntrinsic Value Shares under Option – January 1 2,323,581 $6.22 Options Granted 244,750 5.60 Options Exercised (333,305) 4.29 Options Forfeited or Expired (374,815) 8.11 Shares under option – December 31 1,860,211 $5.06 2.93 $2,624 Vested and Expected to Vest - December 31 1,649,594 $4.63 2.75 $2,438 Options Exercisable – December 31 1,045,798 $4.18 2.63 $1,806 Year Ended December 31, 2016 Numberof Shares Weighted AverageExercise PricePer Share Shares under Option – January 1 2,257,969 $6.30 Options Granted 369,550 4.69 Options Exercised (152,789) 3.86 Options Forfeited or Expired (151,149) 6.09 Shares under option – December 31 2,323,581 $6.22 Options Exercisable – December 31 1,302,390 $5.05 54 The following table represents additional information about stock options outstanding at December 31, 2017: Option Outstanding Options Exercisable Range ofExercise Prices Number ofOutstandingOptions –December31, 2017 Weighted-AverageRemainingContractualLife Weighted-AverageExercisePrice Number ofOptionsExercisableatDecember31, 2017 Weighted-AverageExercisePrice $3.22-$3.99 435,398 3.28 $3.78 368,406 $3.80 $4.00-$4.99 510,213 3.27 4.37 335,624 4.40 $5.00-$9.99 614,600 5.56 5.69 341,768 5.77 $10.00-$15.00 300,000 2.00 12.50 - - $3.22-$15.00 1,860,211 2.93 $5.06 1,045,798 $4.18 The weighted average fair value of options granted during the years ended December 31, 2017 and 2016 was $2.47 and $2.01, respectively. The totalintrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercisedduring the years ended December 31, 2017 and 2016 was $588 and $149, respectively. Cash received from option exercises under our stock-based compensation plans for the years ended December 31, 2017 and 2016 was $1,429 and $460,respectively. 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 estimatedtheir weighted average grant date fair value to be $3.24 per share. $11 and $34 of expense was recorded in 2017 and 2016, respectively, relating to theseunits. In September 2017, 12,900 shares of the awarded restricted stock vested and the Company repurchased 3,959 shares to satisfy the statutory taxwithholding on shares vested for certain employees. At December 31, 2017, there was no unrecognized compensation expense related to restricted stock grants. d.Reserved Shares We have reserved 946,027 shares of common stock under the various stock option plans, warrants and restricted stock awards as of December 31, 2017. 55 Note 9 - Income Taxes Our income tax provision consists of: Years Ended December 31, 2017 2016 Current: Federal $- $(70)State - 20 Foreign 300 13 300 (37)Deferred: Federal (1,717) 220 State 55 - Foreign (7) (85) (1,669) 135 Total income tax provision $(1,369) $98 On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (3)changing rules related to usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017; (4) generallyeliminating U.S. federal income taxes on dividends from foreign subsidiaries for tax years beginning after December 31, 2017; and (5) implementing aterritorial tax system and imposing a transition toll tax on deemed repatriated earnings of foreign subsidiaries. The Act reduces the U.S. corporate tax rate to 21 percent, effective January 1, 2018. Deferred tax liabilities associated with goodwill and certain otherintangible assets have been reduced by $1,939, resulting in a deferred income tax benefit of $1,939 for the year ended December 31, 2017. The Act provided for a one-time deemed mandatory repatriation for post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through theyear ended December 31, 2017. The Company had a deficit in foreign E&P and is not expected to be subject to the deemed mandatory repatriation. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrantdoes not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting forcertain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred taxassets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. As of December 31, 2017,we have completed the majority of our accounting for the tax effects of the Act. If revisions are needed as new information becomes available, the finaldetermination of the deemed re-measurement of our deferred assets and liabilities or other applicable provisions of The Act will be completed asadditional information becomes available, but no later than one year from the enactment of the 2017 Tax Act. The deferred U.S. income tax benefit for 2017 primarily represents a one-time, non-cash benefit of $1,939 relating to the revaluation of deferred taxliabilities on goodwill and certain other intangible assets upon the enactment of the Tax Act, offset by the increase in the deferred tax liability associatedwith the increase in the taxable temporary difference related to the goodwill and certain other indefinite-lived intangible assets. The deferred income taxprovision for 2016 is primarily due to the recognition of deferred tax liabilities relating to goodwill and certain other intangible assets that cannot bepredicted to reverse during our loss-carryforward for book purposes partially offset by the deferred tax benefit of the amortization of certain intangibleassets of Accutronics (U.K.). The current income tax provision is primarily attributable to the operating income of Accutronics (U.K.). The benefitassociated with the current income tax provision in 2016 is primarily related to an excess accrual of income taxes in prior years. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amount used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows: Years Ended December 31, 2017 2016 Deferred Tax Liabilities: Property, Plant and Equipment $- $- Other 38 - Intangible Assets 3,806 5,471 Total Deferred Tax Liabilities 3,844 5,471 Deferred Tax Assets: Property, Plant and Equipment 44 77 Net Operating Loss Carryforwards 17,870 27,127 Tax Credit Carryforwards 1,837 1,704 Intangible Assets 1,535 2,923 Accrued Expenses, Reserves and Other 1,359 1,527 Total Deferred Tax Assets 22,645 33,358 Valuation Allowance for Deferred Tax Assets (22,636) (33,331)Net Deferred Tax Assets 9 27 Net Deferred Tax Liabilities $3,835 $5,444 56 Net deferred tax liabilities are comprised of the following balance sheet amounts: Years Ended December 31, 2017 2016 Non-Current Deferred Tax Assets $32 $94 Non-Current Deferred Tax Liabilities (3,867) (5,538) $(3,835) $(5,444) The valuation allowance for deferred tax assets decreased by $10,695 and $1,262 in the years ended December 31, 2017 and 2016, respectively. Thedecreases in the valuation allowance were due to the reduction of deferred tax assets due to the Company’s pretax income as well as the revaluation of thedeferred taxes due to the enactment of the Tax Cuts and Jobs Act. Effective January 1, 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. As a result of the adoption, the Company recognized a gross deferred tax asset of $1,123 and a corresponding valuationallowance in the same amount resulting in no net deferred tax asset recognition. In 2017 and 2016, in the U.S. and for certain past operations in the U.K., we continue to report a valuation allowance for our net operating losscarryforwards and other deferred tax assets that cannot be offset by reversing temporary differences. The recognition of the valuation allowance is basedon an assessment of all available evidence, both positive and negative, weighted based on objective verifiability. The assessment of the realizability ofthe U.S. deferred tax assets was based on a number of factors including our history of operating losses, our historical operating volatility, our historicalinability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate. The use of our U.K. net operatingloss carryforwards may be limited due to the change in the past U.K. operation. Based on our assessment of all available evidence and its weighting basedon objective verifiability, we concluded that the realizability of these deferred tax assets is not more likely than not. In both 2017 and 2016, we have notrecognized 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. Wewill continue to evaluate the realizability of our deferred tax assets in future periods. As of December 31, 2017, we have domestic and foreign NOLs totaling $69,594 and $12,760, respectively, and domestic tax credits of approximately$1,837, available to reduce future taxable income. Included in our NOL carryforward are foreign loss carryforwards of approximately $12,760, nearly allof which can be carried forward indefinitely. The domestic NOL carryforward of $69,594 expires beginning in 2019, through 2034. At December 31, 2017, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations. For financial reporting purposes, income from continuing operations before income taxes is as follows: Years Ended December 31, 2017 2016 United States $4,831 $2,803 Foreign 1,464 777 $6,295 $3,580 The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate toincome (loss) from continuing operations before income taxes as follows: Years Ended December 31, 2017 2016 Statutory Income Tax Rate 34% 34.0%(Increase) Decrease in Tax Provision Resulting From: Equity Compensation 0.7 9.6 Income Tax Credits (0.9) (6.2)Foreign Tax Rates (3.8) (2.2)Release of Unrecognized Tax Benefits - - Valuation Allowance (20.9) (30)Excess Accrual - (5.2)Tax Rate Change (30.8) - Other (0.1) 2.7 Effective Income Tax Rate (21.8)% 2.7% Accounting for Uncertainty in Income Taxes There were no unrecognized tax benefits related to uncertain tax positions at December 31, 2017 and 2016. 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 areroutinely subject to examination by taxing authorities in these various jurisdictions. Our U.S. tax matters for the years 2002 through 2017 remain subjectto examination by the Internal Revenue Service (“IRS”) due to our NOL carryforwards. Our U.S. tax matters for the years 2002 through 2017 remainsubject to examination by various state and local tax jurisdictions due to our NOL carryforwards. Our tax matters for the years 2009 through 2017 remainsubject to examination by the respective foreign tax jurisdiction authorities. 57 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 asprescribed 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 2017 and 2016, we contributed $181 and $191, respectively, to the401(k) plan. Note 11 - Business Segment Information We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Productssegment includes: Lithium 9-volt, cylindrical and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable powersupplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connectorassemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicleapplications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator ofsegment performance. 2017: Battery &EnergyProducts CommunicationsSystems Corporate Total Revenue $69,789 $15,742 $- $85,531 Segment Contribution 19,659 6,573 (19,756) 6,476 Interest Expense, Net (183) (183)Miscellaneous (2) (2)Income Tax Benefit 1,369 1,369 Non-Controlling Interest (16) (16)Net Loss Attributable to Ultralife $7,648 Total Assets $44,720 $32,169 $20,297 $97,186 Capital Expenditures $1,015 $212 $63 $1,290 Goodwill $8,965 $11,493 $- $20,458 Depreciation and Amortization of IntangibleAssets $1,830 $430 $167 $2,427 Stock-Based Compensation $301 $88 $264 $653 2016: Battery &EnergyProducts CommunicationsSystems Corporate Total Revenue $64,753 $17,707 $- $82,460 Segment Contribution 19,580 5,528 (21,345) 3,763 Interest Expense, Net (263) (263)Miscellaneous 80 80 Income Tax Provision (98) (98)Non-Controlling Interest 27 27 Net Income Attributable to Ultralife $3,509 Total Assets $39,691 $32,021 $13,032 $84,744 Capital Expenditures $852 $158 $367 $1,377 Goodwill $8,472 $11,493 $- $19,965 Depreciation and Amortization of IntangibleAssets $2,042 $541 $143 $2,726 Stock-Based Compensation $403 $110 $197 $710 58 U.S. and Non-U.S. Revenue Information1: 2017: TotalRevenue UnitedStates Non-UnitedStates Battery & Energy Products $69,789 $33,397 $36,392 Communications Systems 15,742 14,217 1,525 Total $85,531 $47,614 $37,917 56% 44% 2016: TotalRevenue UnitedStates Non-UnitedStates Battery & Energy Products $64,753 $29,587 $35,166 Communications Systems 17,707 15,507 2,200 Total $82,460 $45,094 $37,366 55% 45% 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 $12,443 and$11,652 at December 31, 2017 and 2016, respectively. Commercial and Government/Defense Revenue Information: 2017: TotalRevenue Commercial Government/Defense Battery & Energy Products $69,789 $40,790 $28,999 Communications Systems 15,742 - 15,742 Total $85,531 $40,790 $44,741 48% 52% 2016: TotalRevenue Commercial Government/Defense Battery & Energy Products $64,753 $40,886 $23,867 Communications Systems 17,707 - 17,707 Total $82,460 $40,886 $41,574 50% 50% ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A.CONTROLS AND PROCEDURES Evaluation Of Disclosure Controls And Procedures – Our president and chief executive officer (principal executive officer) and our chief financialofficer 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 financialofficer and treasurer concluded that our disclosure controls and procedures were effective as of such date. 59 Changes In Internal Controls Over Financial Reporting –There has been no change in our internal control over financial reporting (as defined inSecurities Exchange Act Rule 13a-15(f)) that occurred during the fourth quarter of the fiscal year covered by this annual report that has materiallyaffected, 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 adequateinternal control over our financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. Because of the inherent limitations of internal control systems, our internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate becauseof 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, 2017. In making this assessment, we usedthe 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, 2017, our internal control over financial reporting was effective based on thosecriteria. ITEM 9B.OTHER INFORMATION None. 60 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 inour definitive proxy statement (“Proxy Statement”) to be filed pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year coveredby this report, in connection with our 2018 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 "CorporateGovernance" 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 ManagementCommittee " in the Proxy Statement are incorporated herein by reference. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS The section entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” in the Proxy Statement is incorporatedherein by reference. Equity Compensation Plan Information Plan Category Number of securities tobe issued upon exerciseof outstanding options,warrants and rights(a) Weighted-averageexercise price ofoutstanding options,warrants and rights(b) Number of securities remainingavailable for future issuance underequity compensation plans(excluding securities reflected incolumn (a)(c) Equity compensation plans approvedby security holders 1,860,211 $5.06 946,027 Equity compensation plans notapproved by security holders - - - Total 1,860,211 $5.06 946,027 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 ProxyStatement is incorporated herein by reference. 61 PART IV ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES (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: ExhibitIndex Description of Document Incorporated By Reference from: 2.1Stock Purchase Agreement by and between BCFSolutions, Inc. and Ultralife Corporation Exhibit 2.1 of the Form 10-Q for the quarter endedSeptember 30, 2012, filed November 8, 2012 2.2Stock Purchase Agreement Relating to AccutronicsLimited by and between Robert Andrew Phillips andOthers and Ultralife Corporation Exhibit 2.2 of the Form 10-K for the year endedDecember 31, 2015, filed March 2, 2016 3.1Restated Certificate of Incorporation Exhibit 3.1 of the Form 10-K for the year endedDecember 31, 2008, filed March 13, 2009 3.2Amended and Restated By-laws Exhibit 3.2 of the Form 8-K filed December 9, 2011 4.1Specimen Stock Certificate Exhibit 4.1 of the Form 10-K for the year endedDecember 31, 2008, filed March 13, 2009 10.1*Technology Transfer Agreement relating to LithiumBatteries Exhibit 10.19 of our Registration Statement on Form S-1filed on October 7, 1994, File No. 33-84888 (the “1994Registration Statement”) 10.2*Technology Transfer Agreement relating to LithiumBatteries Exhibit 10.20 of the 1994 Registration Statement 10.3*Amendment to the Agreement relating torechargeable batteries Exhibit 10.24 of our Form 10-K for the fiscal year endedJune 30, 1996 (this Exhibit may be found in SEC File No.0-20852) 10.4†Ultralife Corporation 2014 Long-Term IncentivePlan Appendix A to our Definitive Proxy Statement filed onApril 21, 2014 10.5†Ultralife Batteries, Inc. Amended and Restated 2004Long-Term Incentive Plan Exhibit 99.2 of our Registration Statement on Form S-8filed on July 26, 2004, File No. 333-117662 10.6†Amendment No. 1 to Ultralife Batteries, Inc.Amended and Restated 2004 Long-Term IncentivePlan Exhibit 99.3 of our Registration Statement on Form S-8filed August 18, 2006, File No. 333-136737 10.7†Amendment No. 2 to Ultralife Batteries, Inc.Amended and Restated 2004 Long-Term IncentivePlan Exhibit 99.4 of our Registration Statement on Form S-8filed November 13, 2008, File No. 333-155349 10.8†Amendment No. 3 to Ultralife Batteries, Inc.Amended and Restated 2004 Long-Term IncentivePlan Exhibit 99.5 of our Registration Statement on Form S-8filed November 13, 2008, File No. 333-155349 10.9†Employment Agreement between the Registrant andPeter F. Comerford Exhibit 10.30 of the Form 10-K for the year endedDecember 31, 2009, filed March 16, 2010 62 10.10†Employment Agreement between the Registrant andMichael D. Popielec dated December 6, 2010 Exhibit 10.40 of the Form 10-K for the year endedDecember 31, 2010, filed March 15, 2011 10.11†Revised definition of “Change in Control” forUltralife Corporation Amended and Restated 2004Long-Term Incentive Plan Exhibit 10.1 of the Form 8-K filed on May 26, 2011 10.12Settlement Agreement between the Registrant andthe United States of America dated June 1, 2011 Exhibit 10.1 of the Form 8-K filed on June 2, 2011 10.13†Amendment No. 4 to Ultralife Corporation Amendedand Restated 2004 Long-Term Incentive Plan Exhibit 4.5 of the Registration Statement on Form S-8filed on January 30, 2012, File No. 333-179235 10.14†Amendment No. 5 to Ultralife Corporation Amendedand Restated 2004 Long-Term Incentive Plan Exhibit 10.1 of the Form 8-K filed on May 26, 2011 10.15Revolving Credit, Guaranty, and SecurityAgreement between Ultralife Corporation and PNCBank, National Association, dated May 24, 2013 Exhibit 10.1 of the Form 10-Q for the quarter ended June30, 2013, filed August 9, 2013 10.16†Retirement and Consulting Agreement, Release andWaiver of All Claims, between Ultralife Corporationand Peter F. Comerford, dated May 28,2013 Exhibit 10.2 of the Form 10-Q for the quarter ended June30, 2013, filed August 9, 2013 10.17†Restricted Stock Unit Agreement between UltralifeCorporation and Michael D. Popielec. Dated June 4,2013 Exhibit 10.3 of the Form 10-Q for the quarter ended June30, 2013, filed August 9, 2013 10.18†Amended No. 6. to Ultralife Corporation Amendedand Restated 2004 Long-Term Incentive Plan Appendix A of Form DEF 14A filed on April 22, 2013 10.19Amendment No. 1, dated April 30, 2014, to theRevolving Credit, Guaranty, and SecurityAgreement between Ultralife Corporation and PNCBank, National Association, dated May 24, 2013 Exhibit 10.1 of the Form 10-Q for the quarter endedMarch 30, 2014, filed May 9, 2014 10.20Amendment No. 2, dated October 28, 2014, to theRevolving Credit, Guaranty, and SecurityAgreement between Ultralife Corporation and PNCBank, National Association, dated May 24, 2013 Exhibit 10.1 of the Form 10-Q for the quarter endedSeptember 28, 2014, filed November 4, 2014 10.21Amendment No. 3, dated April 30, 2015, to theRevolving Credit, Guaranty, and SecurityAgreement between Ultralife Corporation and PNCBank, National Association, dated May 24, 2013 Exhibit 10.1 of the Form 8-K filed on April 30, 2015 10.22Amendment No. 4, dated June 5, 2015, to theRevolving Credit, Guaranty, and SecurityAgreement between Ultralife Corporation and PNCBank, National Association, dated May 24, 2013 Exhibit 10.1 of the Form 8-K filed on June 5, 2015 10.23Amendment No. 5, dated January 13, 2016, to theRevolving Credit, Guaranty, and SecurityAgreement between Ultralife Corporation and PNCBank, National Association, dated May 24, 2013 Exhibit 10.1 of the Form 8-K filed on January 20, 2016 10.24Credit and Security Agreement between UltralifeCorporation and KeyBank National Associationdated May 31, 2017 Exhibit 10.1 of the Form 8-K filed on June 6, 2017 63 21Subsidiaries Filed herewith 23.1Consent of Freed Maxick CPAs, P.C. Filed herewith 31.1CEO 302 Certifications Filed herewith 31.2CFO 302 Certifications Filed herewith 32906 Certifications Filed herewith100.INSXBRL Instance Document Filed herewith100.SCHXBRL Taxonomy Extension Schema Document Filed herewith100.CALXBRL Taxonomy Calculation Linkbase Document Filed herewith100.LABXBRL Taxonomy Label Linkbase Document Filed herewith100.PREXBRL Taxonomy Presentation Linkbase Document Filed herewith100.DEFXBRL Taxonomy Definition Document Filed herewith * Confidential treatment has been granted as to certain portions of this exhibit. † Management contract or compensatory plan or arrangement. 64 SIGNATURES 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 itsbehalf by the undersigned, thereunto duly authorized. ULTRALIFE CORPORATION Date: February 8, 2018 /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 theRegistrant and in the capacities and on the dates indicated. Date: February 8, 2018 /s/ Michael D. Popielec Michael D. Popielec President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 8, 2018 /s/ Philip A. Fain Philip A. Fain Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) Date: February 8, 2018 /s/Steven M. Anderson Steven M. Anderson (Director) Date: February 8, 2018 /s/ Thomas L. Saeli Thomas L. Saeli (Director) Date: February 8, 2018 /s/ Robert W. Shaw II Robert W. Shaw II (Director) Date: February 8, 2018 /s/ Ranjit C. Singh Ranjit C. Singh (Director) Date: February 8, 2018 /s/ Bradford T. Whitmore Bradford T. Whitmore (Director) 65 Index to Exhibits 21Subsidiaries23.1Consent of Freed Maxick CPAs, P.C.31.1Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 200231.2Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 200232Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Calculation Linkbase Document101.LABXBRL Taxonomy Label Linkbase Document101.PREXBRL Taxonomy Presentation Linkbase Document101.DEFXBRL Taxonomy Definition Document 66Exhibit 21 SUBSIDIARIES 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 NewEnergy 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 Exhibit 23.1 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 8, 2018 on the consolidated financial statements of Ultralife Corporation for the year endedDecember 31, 2017, which appear in this Form 10-K. /s/ Freed Maxick CPAs, P.C.Rochester, New YorkFebruary 8, 2018  Exhibit 31.1I, Michael D. Popielec, certify that: 1.I have reviewed this annual report on Form 10-K of Ultralife Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, 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 financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalentfunctions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: February 8, 2018 /s/ Michael D. Popielec Michael D. Popielec President and Chief Executive Officer  Exhibit 31.2I, Philip A. Fain, certify that: 1.I have reviewed this annual report on Form 10-K of Ultralife Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, 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 financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalentfunctions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: February 8, 2018 /s/ Philip A. Fain Philip A. Fain Chief Financial Officer and Treasurer  Exhibit 32Section 1350 Certification 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 andPhilip 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, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results ofoperations 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 UltralifeCorporation and furnished to the Securities and Exchange Commission or its staff upon request. Date: February 8, 2018 /s/ Michael D. Popielec Michael D. Popielec President and Chief Executive Officer Date: February 8, 2018 /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”), andSection 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 orotherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under theSecurities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate this certification by reference. 

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