Ultralife
Annual Report 2018

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 1934For the fiscal year ended December 31, 2018OR/ / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934For 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 class Name of each exchange on which registeredCommon Stock, par value $0.10 per share NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes…. No..X...Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes…. No..X...Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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 ...X… Non-accelerated filer …. Smaller reporting company ..X... Emerging growth company .... 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, 2018, 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 $96,303,216 (in whole dollars) based upon the closing price for such common stock as reported on the NASDAQ GlobalMarket on June 29, 2018.As of February 6, 2019, the registrant had 20,059,168 shares of common stock outstanding, net of 4,399,850 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 1ARisk Factors15 1BUnresolved Staff Comments22 2 Properties22 3Legal Proceedings22 4Mine Safety Disclosures23 PART II5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities23 6Selected Financial Data24 7Management’s Discussion and Analysis of Financial Condition and Results of Operations25 7AQuantitative and Qualitative Disclosures About Market Risk34 8Financial Statements and Supplementary Data35 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure61 9AControls and Procedures61 9BOther Information61 PART III10Directors, Executive Officers and Corporate Governance62 11Executive Compensation62 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters62 13Certain Relationships and Related Transactions, and Director Independence62 14Principal Accountant Fees and Services62 PART IV15Exhibits, Financial Statement Schedules63 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-lookingstatements 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; possible future declines in demand for the products that use ourbatteries or communications systems; the unique risks associated with our China operations; potential costs because of the warranties we supply with ourproducts and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for ourproducts; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible breaches insecurity and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; ourinability to comply with changes to the regulations for the shipment of our products; our resources being overwhelmed by our growth prospects; ourability to retain top management and key personnel; possible impairments of our goodwill and other intangible assets; our customers’ demand fallingshort of volume expectations in our supply agreements; negative publicity of Lithium-ion batteries; our exposure to foreign currency fluctuations; therisk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreigngovernments; our ability to utilize our net operating loss carryforwards; 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 comply with government regulations regarding the use of “conflict minerals”; possible audits ofour contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technologicalinnovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-lookingstatements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and developments in 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”, plan”, “intend”, “foresee”, “may”, “could”, “will”, “likely”or“expect” or words of similar import are intended to identify some, but not all of, such forward-looking statements. For further discussion of certain of thematters described above and other risks and uncertainties, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K. As used in this Form 10-K Annual Report, unless otherwise indicated, the terms “the Company”, “we”, “our” and “us” refer to Ultralife Corporation(“Ultralife”) and includes our wholly-owned subsidiaries, ABLE New Energy Co., Limited and its wholly-owned subsidiary ABLE New Energy Co., Ltd;Ultralife UK LTD and its wholly-owned subsidiary, Accutronics Ltd; Ultralife Batteries (UK) Ltd.; and our majority-owned joint venture Ultralife BatteriesIndia Private Limited. Dollar amounts throughout this Form 10-K Annual Report are presented in thousands of dollars, except for per share amounts. ITEM 1. BUSINESS General We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government,defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and 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™, and ENTELLION™ brands. We have sales, operationsand product development facilities in North America, Europe and Asia. We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products 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 9 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 advantages overother currently available non-rechargeable battery technologies. These advantages include: higher energy density, lighter weight, longer operating time,longer shelf life and a wider operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which provide stablepower. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in decreasing power output duringdischarge. While the price of our Lithium batteries is generally higher than alkaline batteries, the increased energy per unit of weight and volume of ourLithium 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 be awarded development contracts resulting in intellectual property that we believe will enhance our efforts to commercialize newproducts that we develop. Revenues in this segment that pertain to product development may vary widely each year, depending upon the quantity andsize of contracts awarded. 4 Revenues for this segment for the year ended December 31, 2018 were $70,497 and segment contribution (gross profit) was $19,574. 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”) formultiple programs, including Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”) systems, U.S. Army Leader Radio Program, U.S. Army’sSecurity Force Assistance Brigades (SFABs) and SATCOM systems. All systems are packaged to meet specific customer needs in rugged enclosures toallow for their use in extreme environments. We market these products to all branches of the U.S. military and foreign defense organizations that we arepermitted 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, 2018 were $16,693 and segment contribution (gross profit) was $6,009. 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, 2018 and our corporate operating expenses were $19,028. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the 2018 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 total assetsby segment, revenues for the last two years by segment, and contribution by segment for the last two years, see Note 9 in the notes to consolidatedfinancial 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 additional exposureto 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 expanded our channels into the military communications area andstrengthened our presence in global defense markets. During the second half of 2007, the operations of the Waco, Texas facility were relocated to ourNewark, New York facility. In January 2012, we relocated these operations to our Virginia Beach, Virginia facility in order to gain operationalefficiencies. 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, complementing Ultralife’scommunications 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 DioxideCarbon Monofluoride hybrid, and Lithium Thionyl Chloride technologies. Non-Rechargeable Batteries 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, which resultsin a longer operating life for the battery and, accordingly, fewer battery replacements. While our 9-volt battery price is generally higher than conventional9-volt Carbon zinc and alkaline batteries, we believe the enhanced operating performance and decreased costs associated with battery replacement makeour 9-volt battery more cost effective than conventional batteries on a cost per unit of energy or volume basis when used in a variety of applications. We market our 9-volt Lithium batteries to OEM, distributor and retail markets including industrial electronics, safety and security, and medical. 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. Rechargeable Batteries 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, andremote power applications. This product is a direct replacement of 2.5 kWh and greater lead acid batteries in 24V or 48V applications. It can be connectedin 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. 7 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. 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; multiband transceiverkits; enroute communications cases; and radio cases. These systems give communications operators everything that is needed to provide reliable links tosupport 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 OEMs, 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 when and if possible, but the ability to adjustprices is generally based on market conditions. We also distribute some of our products through domestic and international distributors and retailers. These 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 the timingof 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 applicable procurement laws or regulations can result in civil, criminal oradministrative proceedings involving fines, penalties, suspension of payments, or suspension or debarment from government contracting orsubcontracting for a period of 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 16% and 18% of our revenues in 2018 and 2017, respectively. Therewere no other customers that comprised greater than 10% of our total revenues during these years. In 2018, sales to U.S. and non-U.S. customers were approximately $53,054 and $34,136, respectively. In 2017, sales to U.S. and non-U.S. customers wereapproximately $47,614 and $37,917, respectively. 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 OEMs and governmental agencies that utilize our batteries in their products, commit to cooperative research and development ormarketing 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 distributionchannels. Most military procurements are done directly by the specific government organizations requiring products, based on a competitive biddingprocess. Additionally, we are typically required to successfully meet contractual specifications and to pass various qualifications testing for the productsunder contract by the military. An inability by us to pass these tests for our new products in a timely fashion could have a material adverse effect on futuregrowth prospects. When a government contract is awarded, there is a government procedure that permits for unsuccessful companies to formally protestthe award if they believe they were unjustly treated in the government’s bid evaluation process. A prolonged delay in the resolution of a protest, or areversal of an award resulting from such a protest, could have a material adverse effect on our business, financial condition and results of operations. We market our products to defense organizations in the U.S. and other countries, which has resulted in awards of significant contracts. In March 2017, wewere awarded a production contract by the U. S. Government’s Defense Logistics Agency for up to five years, with a maximum total potential of $21,400,to provide an updated BA-5390 non-rechargeable Lithium Manganese Dioxide batteries to the U.S. military. While production deliveries are expected tobegin in the first half of 2019, we continue to receive orders for our legacy BA-5390 batteries from the Defense Logistics Agency. In January 2018, wereceived a $3,348 contract from the Defense Logistics Agency to ship our legacy BA-5390 batteries within one hundred ninety days of the 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 provideour hybrid lithium manganese dioxide/carbon monofluoride (CFx) non-rechargeable BA-5790 and BA-5795 batteries. Production deliveries under thisaward 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, a comprehensive forward-looking document which sets forth our strategicgrowth plans, tactical actions and financial projections over a rolling three-year period, 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 ofthis expansion includes increasing our design and assembly capabilities as well as building our network of distributors and value added distributorsthroughout the world. At December 31, 2018 and 2017, our backlog related to Battery & Energy Products was approximately $29,300 and $31,000, respectively. The 5% year-over-year decrease in our Battery & Energy Products backlog at December 31, 2018 was essentially eliminated with firm orders received in the first weekof January 2019. The 2018 year-end backlog is related to orders that are expected to ship throughout 2019. 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 to defensecontractors 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. andinternationally. 9 At December 31, 2018 and 2017, our backlog related to Communications Systems orders was approximately $21,700 and $8,100, respectively. The 168%increase in our Communications Systems backlog at December 31, 2018 is mostly a result of two October 2018 contract awards totaling $19,200 tosupply our Vehicle Amplifier-Adaptors (“VAA”) and Mounted Vehicle Adaptors to a large global defense contractor to support the U.S. Army’s NetworkModernization initiatives, Leader Radio Program and other opportunities, as well as a purchase order received on an October 2018 indefinite-delivery/indefinite quantity contract for vehicle communication kits for use by the U.S. Department of Defense. The 2018 year-end backlog is related toorders that are expected to ship throughout 2019. Patents, Trade Secrets and Trademarks We use our patented and unpatented proprietary information, know-how and trade secrets to maintain and develop our competitive position. Despite ourefforts to protect our proprietary information, there can be no assurance that others will neither develop the same or similar information independently norobtain access to our proprietary information, know-how and trade secrets. In addition, there can be no assurance that we would prevail if we asserted ourintellectual property rights against third parties, or that third parties will not successfully assert infringement claims against us in the future. We believe,however, that our success depends more on the knowledge, ability, experience and technological expertise of our employees, than on the legal protectionthat our patents and other proprietary rights may or will afford. We hold ten patents issued in the U.S., two patents issued in the European Union member states, one patent issued in the United Kingdom, one patentissued in China, one patent issued in India, one patent issued in Japan, one patent issued in Taiwan and have five patents pending in the U.S, EuropeanUnion member states, Australia and India. We believe our patents protect technology that makes automated production more cost-effective and protectsimportant 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 subject topublic 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. The following are registeredtrademarks of ours: Ultralife®, Ultralife Thin Cell®, Ultralife HiRate®, Ultralife & design®, Ultra®, 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 9001and ISO 13485 certified. Our manufacturing facilities in Shenzhen, China are ISO 9001, ISO 1401 and ISO 13485 certified. Our manufacturing facilities inVirginia Beach, Virginia are ISO 9001 certified. Our manufacturing facilities in the United Kingdom are ISO 9001 and ISO 13485 certified. We expect our future raw material purchases to fluctuate based on 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 planned increases willbe 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 other rawmaterials 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 $14,007 and $16,650 as of December 31, 2018 and 2017, respectively. The year-over-year 16% decrease primarily reflects Management’sefforts to reduce inventory from historically maintained levels. 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 $8,836 and $9,676 as of December 31, 2018 and 2017, respectively. The year-over-year 9% decrease primarily reflects Management’sefforts to reduce inventory from historically maintained levels. 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 2018 and 2017, we expended $4,905 and $5,142, respectively, on research and development,including $397 and $405, respectively, on customer sponsored research and development activities, which are included in cost of goods sold. The year-over-year decrease primarily reflects the timing of development and testing costs associated with our new products, including Vehicle Amplifier-Adaptorproducts for our Communications Systems business and new products for our Battery & Energy Products business. We expect that research anddevelopment expenditures in the future could increase by 20% or more over 2018 levels, based on current initiatives underway, including completing thedevelopment and testing of our CR123A batteries in Newark, N.Y., our Thionyl Chloride battery project in China and our VAA systems under the October2018 contract awards for our Communications Systems business, and as we anticipate that new product development will drive our growth. As in the past,we will continue to make funding decisions for our research and development efforts based upon strategic demand for customer applications. 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. Our batteries are subject to the regulations noted below, among others. 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 transport ourproducts 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. 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. 12 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 2018 and 2017, we spentapproximately $266 and $175, 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 the foreignlocation 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. 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. 13 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 systems andinsurance, 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, 2018 for the 2017 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 for new entrants to reproduce without substantial time and expense. Employees As of December 31, 2018, we employed a total of 580 permanent and temporary employees: 30 in research and development, 484 in production and 66 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 16% and 18% of our revenues in 2018 and 2017, respectively. Therewere no other customers that comprised greater than 10% of our total revenues during these years. While we consider our relationship with our majorcustomer to be good, the reduction, delay or cancellation of orders from this customer or this customer’s insolvency / inability to pay, for any reason,would reduce our revenue and operating income and could materially and adversely affect our business, operating results and financial condition in otherways. 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. Our operations in China are subject to unique risks and uncertainties, including tariffs and trade restrictions. 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, other civil disturbances and the possible impact of the imposition of tariffs by the U.S. Government on 9 Volt batteries that wemanufacture in China as well as any retaliating trade policies or restrictions. Any such disruptions could depress our earnings and have other materialadverse effects on our business, financial condition and results of operations. 15 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. We may incur significant costs or liabilities to satisfy obligations under the terms of the warranties we supply and the contractual terms under which wesell 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. Our supply of raw materials and components could be disrupted, delayed, or the cost of those raw materials and components may materially increase. 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 supplying defense products tothe U.S. government, we could receive a government preference to continue to obtain critical supplies to meet military production needs. However, if thegovernment did not provide us with a government preference in such circumstances, the difficulty in obtaining supplies could have a material adverseeffect on our business, financial condition and results of operations. We believe that alternative suppliers are available to supply materials andcomponents that could replace materials and components currently used and that, if necessary, we would be able to redesign our products to make use ofsuch alternatives. However, any interruption in the supply from any supplier that serves as a sole source could delay product shipments and have amaterial adverse effect on our business, financial condition and results of operations. We have experienced interruptions of product deliveries by solesource suppliers in the past, and we cannot guarantee that we will not experience a material interruption of deliveries from sole source suppliers in thefuture. 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 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. Reductions or delays in U.S. and foreign military spending could have a material adverse effect on our business, financial condition and results ofoperations. 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, 2018 and 2017, approximately $46,100 or 53% and $44,700 or 52%, 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 $39,900 or 46% in 2018 and $35,100 or 41% in 2017.Therefore, any significant disruption or deterioration of our relationship with the U.S. Government or any prime defense contractor could significantlyreduce our revenue. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government and will continuethese 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. Breaches in security, whether cyber or physical, and other disruptions and/or our inability to prevent or respond to such breeches, could diminish ourability to generate revenues or contain costs, compromise our assets, 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. In 2018 the Committee with the assistance ofoutside security consultants completed a comprehensive Systems Security Plan and a Plan of Action Memorandum in compliance with the requirementsof NIST Special Publication 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations. TheCommittee continues to review all key aspects of cyber security utilizing our outside security consultants to ensure a robust plan is in place and providesquarterly updates to our Board. 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. 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. 17 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. 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 required demand.We cannot assure, however, that our business will grow rapidly or that our efforts to expand manufacturing and quality control activities will be successfulor 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. 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. 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-lived intangibleassets value resulting from the impairment test must be written off in the period of determination. Intangible assets (other than goodwill and indefinite-lived intangible assets) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment ina business which will require us to record goodwill based on the purchase price and the value of the acquired tangible and intangible assets. We maysubsequently experience unforeseen issues with such business which adversely affect the anticipated results of the business or value of the intangibleassets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. There is a possibility that ourgoodwill and other intangible assets could be impaired should there be a significant change in our internal forecasts and other assumptions we use in ourimpairment analysis. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or acceleratedamortization of other intangible assets could have a negative impact, although not affecting cash, on our results of operations. 18 Our customers may not meet the volume expectations in our supply agreements. We sell most of our products and services through supply agreements and contracts. While supply agreements and contracts contain volume-based pricingbased on expected volumes, we cannot assure that adjustments to reflect volume shortfalls will be made under current industry practices because pricing israrely adjusted retroactively when contract volumes are not achieved. Every effort is made to adjust future prices accordingly, but our ability to adjustprices is generally based on market conditions and we may not be able to adjust prices in various circumstances. 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. 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. declined in 2018, sales to such customers still make up a significant percentage of our totalrevenues. For example, in 2018, 39% our sales were to customers outside of the U.S. as compared to 44% in 2017. A future strengthening of the U.S. Dollarrelative to our customers’ currencies could make our products relatively more expensive to them, and may adversely affect our sales levels and reduceprofitability. 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. With the present uncertainties surrounding Brexit, it is difficult at this time to assess any impactto the Company. Accordingly, currency fluctuations could have a material adverse effect on our business, financial condition and results of operations byincreasing our expenses and reducing our income. Finally, we maintain certain domestic U.S. cash balances denominated in foreign currencies, and theU.S. dollar equivalent of these balances fluctuates with changes in the foreign exchange rates between these currencies and the U.S. dollar. 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. 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. 19 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 proceeding underthese contracts until the protests are resolved. A prolonged delay in the resolution of a protest, or a reversal of an award resulting from such a protest couldhave material adverse effects on our business, financial condition and results of operations. 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, 2018, we had approximately $63,388 of U.S. and $10,220 of U.K. net operating loss carryforwards and $1,817 of U.S. tax creditcarryforwards available to offset future taxable income. We continually assess the carrying value of these assets based on the relevant accountingstandards. As of December 31, 2018, the Company recognized the release of the valuation allowance on our net operating loss carryforwards and otherU.S. deferred tax assets on the basis of assessment by management. Based on the results of our assessment, management concluded that, due to projectedprofitability, it is more likely than not that our U.S. deferred tax assets will be fully realized. Failure to achieve our business targets could result in futurecharges to our income tax provision if any of the net operating loss or tax credit carryforwards are not utilized. See discussion in Management’sDiscussion & Analysis on Page 28. 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. 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. 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, delivery schedule or other 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 contain guidelinesfor managing contracts after they are awarded, including conditions under which contracts may be terminated, in whole or in part, at the government’sconvenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or administrative proceedingsinvolving fines, penalties, suspension of payments, or suspension or disbarment from government contracting or subcontracting for a period of time. 20 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. 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 current marketshare are not significant. However, we continue to evaluate the impact of these directives as European Union member states implement guidance, andactual 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. 21 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, 2018, we own two buildings in Newark, New York comprising approximately 250,000 square feet, which serve operations primarily inthe Battery & Energy Products operating segment. Our corporate headquarters are located in our Newark, New York facility. We also lease approximately97,000 square feet in two buildings on one campus in Shenzhen, China and approximately 25,000 square feet in six buildings in a contiguous area inNewcastle-under-Lyme, United Kingdom, which serve operations in the Battery & Energy Products operating segment. The Shenzhen, China campuslocation includes a dormitory facility. We lease approximately 32,500 square feet in a facility in Virginia Beach, Virginia, which serves operations in theCommunications Systems operating segment. We also lease sales and administrative offices, as well as manufacturing and production facilities, in India,which serve operations in the Battery & Energy Products operating segment. Our research and development efforts for our Battery & Energy Products areconducted at our Newark, New York, Newcastle-under-Lyme, United Kingdom and Shenzhen, China facilities, while our research and development effortsfor our Communications Systems products are conducted in our leased facilities in Tallahassee, Florida and in Virginia Beach, Virginia. We believe thatour facilities are adequate and suitable for our current needs. However, we may require additional manufacturing and administrative space if demand forour 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. Dreamliner Litigation In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by fire while parked at London HeathrowAirport. Following an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, a finalreport was issued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarilycaused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company. A component ofthe ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell, which Ultralife hasproduced since 2001, with wide-use in global defense and commercial applications. 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,which was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. Weimmediately referred this matter to our insurers. 22 This lawsuit has now been resolved (February 2018), the claimant has terminated the action against the Company, and the Court has acknowledged andconsented to this termination. The matter was terminated without financial consequences 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.” Holders As of February 6, 2019, there were approximately 3,600 registered holders of record of our common stock. Purchases of Equity Securities by the Issuer On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effectiveon November 1, 2018 and under which the Company was authorized to repurchase up to 2.5 million shares of its outstanding common stock over a periodnot to exceed twelve months. 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. In 2018, we repurchased a total of 105,674 shares of our common stock for an aggregate consideration of $739, excluding fees and commissions, underthe Share Repurchase Program. The following table sets forth information regarding 2018 purchases of our common stock under this program: TotalNumber ofSharesPurchased WeightedAveragePrice PaidPer Share Total Number ofSharesPurchasedAs Part ofPubliclyAnnouncedProgram MaximumNumber ofShares ThatMay Yet BePurchasedUnder theProgram November 2018 29,691 $7.26 29,691 2,470,309 December 2018 75,983 $6.89 75,983 2,394,326 Total for 2018 105,674 $6.99 105,674 2,394,326 23 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. Weacquired Accutronics to advance our strategy of commercial revenue diversification, to expand our geographic penetration, and to achieve revenuegrowth from new product development. 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 $1,659 or 1.9% to $87,190 for the year ended December 31, 2018 compared to $85,531 for the year ended December31, 2017. During 2018, we experienced revenue growth of 1.0% for our Battery & Energy products business and 6.0% for our Communications Systemsbusiness. This 2018 performance reflected a $1,405 or 3.1% increase in sales to government and defense customers and a $254 or 0.6% increase in sales toour commercial customers. The increase in government and defense sales reflects higher U.S. and international demand for our military batteries andchargers which increased $454 or 1.6% in 2018 and higher demand for our core Communications Systems products such as 20-watt amplifiers anduniversal vehicle adaptors and higher shipments of our Vehicle Amplifier-Adaptors under a contract awarded by a global defense contractor whichincreased $951 or 6.0% in 2018. The increase in our commercial business was due primarily to an 8.4% increase in our medical sales partially offset bylower demand for 9 Volt batteries. Gross margin decreased from 30.7% for the year ended December 31, 2018 to 29.3% for the year ended December 31, 2017. The 140 basis point decreasewas due primarily to product mix in both our Battery & Energy Products and Communications Systems business segments. 25 Operating expenses decreased by $728 or 3.7% to $19,028 during the year ended December 31, 2018, compared to $19,756 during the year endedDecember 31, 2017. This decrease was due primarily to strict control over discretionary spending, while focusing on the development of new products andrevenue growth. Operating expenses as a percentage of revenues decreased 130 basis points from 23.1% in 2017 to 21.8% in 2018 due to the combinationof higher revenues and lower expenses in 2018. Income tax benefit was $18,386 for the year ended December 31, 2018, compared to $1,369 for the year ended December 31, 2017. 2018 includes a non-cash tax benefit of $18,652 reflecting our release of the valuation allowance on our U.S. deferred tax assets as of December 31, 2018 based onmanagement’s assessment of a number of factors including the expectation of future sustained profitability of our business sufficient to utilize our netoperating losses and tax credits. 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 uponthe revaluation, at the newly enacted 21% Federal tax rate, of deferred tax liabilities relating to book-to-tax differences on goodwill and indefinite-livedintangible assets. Net income attributable to Ultralife for 2018 was $24,930, which includes the non-cash tax benefit of $18,652, compared to $7,648, which includes theone-time, non-cash tax benefit of $1,939, for the year ended December 31, 2017. Reported earnings per share for 2018 of $1.57 per basic share ($1.53 perdiluted share) include $0.40 from our operating performance plus $1.17 related to the tax benefit, compared to $0.49 per basic share ($0.48 per dilutedshare) for 2017, including $0.37 from our operating performance plus $0.12 related to the tax benefit. Adjusted EBITDA, defined as net income 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 $9,902 for the year endedDecember 31, 2018 compared to $9,594 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 $25,934, an increaseof $7,604 or 41.5% from the cash position of $18,330 as of December 31, 2017. The increase primarily reflects our favorable operating performance and a13.2% decrease in inventory. We had no debt as of December 31, 2018 or December 31, 2017. The opportunities for growth in 2019 from our commercial diversification strategy and government/defense customers remain strong, and we have startedthe new fiscal year with over $50 million in backlog, a 30% increase over the beginning of 2018. As a result of this starting point, other new revenueopportunities, and continued operating expense discipline, we expect to deliver profitable growth in 2019. Results of Operations Year Ended December 31, 2018 Compared With the Year Ended December 31, 2017: Year Ended December 31, Increase/ 2018 2017 (Decrease) Revenues: Battery & Energy Products $70,497 $69,789 $708 Communications Systems 16,693 15,742 951 Total 87,190 85,531 1,659 Cost of Products Sold: Battery & Energy Products 50,923 50,130 793 Communications Systems 10,684 9,169 1,515 Total 61,607 59,299 2,308 Gross Profit: Battery & Energy Products 19,574 19,659 (85)Communications Systems 6,009 6,573 (564)Total 25,583 26,232 (649)Operating Expenses 19,028 19,756 (728)Operating Income 6,555 6,476 79 Other (Income) Expense, Net (58) 181 239 Income Before Taxes 6,613 6,295 318 Income Tax Benefit (18,386) (1,369) 17,017 Net Income 24,999 7,664 17,335 Net Income Attributable to Non-Controlling Interest 69 16 53 Net Income Attributable to Ultralife $24,930 $7,648 $17,282 Net Income Attributable to Ultralife Common Shares – Basic $1.57 $0.49 $1.08 Net Income Attributable to Ultralife Common Shares – Diluted $1.53 $0.48 $1.05 Weighted Average Shares Outstanding –Basic 15,881,976 15,527,759 354,217 Weighted Average Shares Outstanding – Diluted 16,346,980 15,858,435 488,545 26 Revenues. Total revenues for the year ended December 31, 2018 amounted to $87,190, an increase of $1,659, or 1.9% from the $85,531 reported for theyear ended December 31, 2017. Battery & Energy Products revenues increased $708, or 1.0%, for the year ended December 31, 2018. Government and defense sales of this businessincreased 1.6% from 2017 and now comprise 41.8% of total segment sales versus 41.6% last year. The increase primarily reflects the higher overalldemand for batteries and chargers across our U.S. customer base. Commercial revenues of this business increased 0.6% from 2017 and now comprise58.2% of total segment sales versus 58.4% last year. The year-over-year increase primarily resulted from an 8.5% increase in medical sales due toincreased demand for our medical batteries and chargers, partially offset by 15.1% decline in 9 Volt battery sales. Communications Systems revenues increased $951 or 6.0% for the year ended December 31, 2018. Revenues attributable to fulfillment of a contract forVehicle Amplifier-Adaptors to a global prime defense contractor for the U. S. Army’s Security Force Assistance Brigades and other opportunities, as wellas higher demand for our core amplifiers and integrated solutions products were responsible for the increase. Our order backlog at December 31, 2018 was $50,944, an increase of $11,858 or 30.3% from the backlog at December 31, 2017, which was $39,086. Forour Battery & Energy Products business, the backlog decreased by $1,758 or 5.7% from $31,013 to $29,255 primarily due to the timing of orders from acertain medical customer which were subsequently received in the first week of January 2019. For our Communications Systems business, the backlogincreased by $13,616 or 168.7% to $21,689 from $8,073 resulting primarily from a $10,900 contract and an $8,300 contract, both awarded in October2018 from a global prime defense contractor for our Vehicle Amplifier-Adaptors for the U.S. Army’s Leader Radio Program and other opportunities, aswell as a $1,600 initial firm order on a $9,500 indefinite-delivery/indefinite-quantity contract also awarded in October 2018 for our vehiclecommunication kits for use by the U.S. Department of Defense. Cost of Products Sold and Gross Profit. Cost of products sold for the year ended December 31, 2018 increased $2,308, or 3.9%, from the year endedDecember 31, 2017. Consolidated cost of products sold as a percentage of total revenue increased from 69.3% for the year ended December 31, 2017 to70.7% for the year ended December 31, 2018. Correspondingly, consolidated gross margin was 29.3% for the year ended December 31, 2018, comparedwith 30.7% for the year ended December 31, 2017. The 140 basis point decline in gross margin is due primarily to product mix in both of our businesssegments. For our Battery & Energy Products segment, the cost of products sold increased $793 or 1.6%, from the year ended December 31, 2017. Battery & EnergyProducts’ gross profit for 2018 was $19,574 or 27.8% of revenues, a decrease of $85 or 0.4% from gross profit of $19,659, or 28.2% of revenues, for 2017.As a result, Battery & Energy Products’ gross margin as a percentage of revenues decreased for the year ended December 31, 2018 by 40 basis points fromthe prior year to 27.8%, reflecting product mix, including a larger concentration of government and defense sales primarily consisting of legacy productscompared to the prior year. For our Communications Systems segment, the cost of products sold increased by $1,515 or 16.5% from the year ended December 31, 2017.Communications Systems’ gross profit for the year ended December 31, 2018 was $6,009 or 36.0% of revenues, a decrease of $564 or 8.6% from grossprofit of $6,573 or 41.8% of revenues, for the year ended December 31, 2017. The 580 basis points decrease in gross margin as a percentage of revenueduring 2018 to 36.0% is primarily due to sales product mix between competitively bid large program shipments and core/flow sales. Operating Expenses. Total operating expenses for the year ended December 31, 2018 decreased $728 or 3.7% from the year ended December 31, 2017.This decrease was primarily attributable to strict control over non-revenue related discretionary spending, while continuing to focus on the developmentof new products and revenue growth. 27 Overall, operating expenses as a percentage of revenues were 21.8% for the year ended December 31, 2018 compared to 23.1% for the comparable 2017period. Amortization expense associated with intangible assets related to our acquisitions decreased to $397 for the year ended December 31, 2018 ($250in selling, general and administrative expenses and $147 in research and development costs) from $422 for the year ended December 31, 2017 ($257 inselling, general and administrative expenses and $165 in research and development costs). Research and development costs were $4,508 in 2018, adecrease of $229 or 4.8%, from $4,737 reported in 2017. The decrease primarily reflects the timing of development and testing costs associated with newproducts. Selling, general, and administrative expenses decreased $499 or 3.3%, from $15,019 for the year ended December 31, 2017 to $14,520 for theyear ended December 31, 2018. The decrease is primarily attributable to lower variable compensation expenses between periods and continued tightcontrol over discretionary spending. Other Income (Expense). Other income (expense) totaled $58 for the year ended December 31, 2018 compared to ($181) for the year ended December 31,2017. Interest and financing expense, net of interest income, decreased $120 from $183 for 2017 to $63 for 2018 due to the interest income earned on thehigher cash balances throughout 2018. Miscellaneous income (expense) amounted to $121 for 2018 compared with $2 for 2017, primarily due totransactions impacted by foreign currency fluctuation between the U. S. Dollar, Pound Sterling and Euro. Income Taxes. We recorded a tax benefit of $18,386 for the year ended December 2018 compared to $1,369 for the year ended December 31, 2017. A non-cash tax benefit of $18,652 was included in our 2018 results reflecting our release of the valuation allowance on our U.S. deferred tax assets as ofDecember 31, 2018 based on management’s assessment of a number of factors including the expectation of future sustained profitability of our businesssufficient to utilize our net operating losses and tax credits. A one-time, non-cash tax benefit of $1,939 was included in our 2017 results as a result of theTax Cut and Jobs Act requiring the revaluation, at the newly enacted 21% Federal tax rate, of deferred tax liabilities relating to book-to-tax differences ongoodwill and certain other indefinite-lived intangible assets. Excluding these one-time tax benefits, and applying the reversal of the U.S. valuationallowance at December 31, 2018, the tax provisions for 2018 and 2017 would have been $266, and $570, respectively, primarily reflecting the incomegenerated by our foreign operations and the recognition of deferred tax liabilities generated from the amortization of goodwill and certain otherindefinite-lived intangible assets for tax purposes that cannot be predicted to reverse for book purposes. As of December 31, 2018, the Company recognized the release of the valuation allowance on our net operating loss carryforwards and other U.S. deferredtax assets on the basis of management’s assessment. In evaluating the realizability of our U.S. deferred tax assets, management considered all availableevidence and concluded that positive factors, including further demonstration of sustained profitability in our core business and continued improvementin our ability to achieve internal earnings forecasts, outweighed all negative factors, including our history of operating losses (prior to 2015) andhistorical operating volatility in our core business. Our assessment also considered our expectation to utilize our domestic net operating losscarryforwards of $63,388, which expire 2019 thru 2035, and our general business tax credits of $1,817, which expire 2028 thru 2037. Based on the resultsof our assessment, management concluded that it is more likely than not that our U.S. deferred tax assets will be fully realized. Reversal of the valuationallowance on our U.S. deferred tax assets is an indicator of our positive sentiment about Ultralife’s future profitability. As of December 31, 2018 and 2017, for certain past operations in the U.K., we continue to report a valuation allowance for net operating losscarryforwards of $10,220, nearly all of which can be carried forward indefinitely. Management has concluded that the realizability of the UK net operatingloss carryforwards is not more likely than not, as utilization of the net operating losses may be limited due to the change in the past U.K. operation. Thesenet operating losses in the U.K. cannot currently be used to reduce taxable income at our other U.K. subsidiary, Accutronics Ltd. There are no otherdeferred tax assets related to the past U.K. operations. As of December 31, 2018 and 2017, we have not recognized a valuation allowance against our otherforeign deferred tax assets, as we believe that it is more likely than not that they will be realized. We will continue to evaluate the realizability of ourdeferred tax assets in future periods. Net Income Attributable to Ultralife. Net income attributable to Ultralife was $24,930, which includes the $18,652 tax benefit, compared to $7,648, whichincludes the $1,939 tax benefit, for the year ended December 31, 2017. Reported earnings per share for 2018 of $1.57 per basic share ($1.53 per dilutedshare) includes $0.40 from our operating performance plus $1.17 related to the tax benefit, compared to 2017 of $0.49 per basic share ($0.48 per dilutedshare) including $0.37 from our operating performance, plus $0.12 related to the tax benefit. Average common shares outstanding used to computediluted earnings per share increased from 15,858,435 in the 2017 period to 16,346,980 in the 2018 period, mainly due to the increase in the weightedaverage stock from $6.42 for 2017 to $8.61 for 2018 and the resulting impact on the treasury method used to calculate dilutive shares. 28 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 attributable to Ultralife before net interest expense, provision (benefit) for income taxes,depreciation and amortization, and stock-based compensation expense. We also use Adjusted EBITDA as a supplemental measure to review and assess ouroperating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ understandingof operating performance from period to period by backing out potential differences caused by variations in such items as capital structures (affectingrelative interest expense and stock-based compensation expense), the amortization of intangible assets acquired through our business acquisitions(affecting relative amortization expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relativedepreciation expense) and one-time charges/benefits relating to income taxes. We also present Adjusted EBITDA from operations because we believe it isfrequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to Netincome attributable to Ultralife, the most comparable financial measure under U.S. generally accepted accounting principles (“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 asoperating income. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance basedon our U.S. GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation tounderlying operating performance, and of stock-based compensation, which is a non-cash expense that varies widely among companies. We believe thatby presenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide informationrelating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing ouroverall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and ofour ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures. The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented 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 attributable to Ultralife or other consolidated statement of operations dataprepared 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 from continuing operations 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 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. Neithercurrent nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors toreview the following reconciliation of Adjusted EBITDA to Net income attributable to Ultralife. 29 Years ended December 31, 2018 2017 Net Income Attributable to Ultralife $24,930 $7,648 Add: Interest Expense, Net 63 183 Income Tax Benefit (18,386) (1,369)Depreciation 1,972 2,005 Amortization of Intangible Assets and Financing Fees 433 474 Stock-Based Compensation Expense 890 653 Adjusted EBIDTA $9,902 $9,594 Liquidity and Capital Resources Cash Flows and General Business Matters As of December 31, 2018, cash totaled $25,934 (including restricted cash of $351), an increase of $7,604, or 41.5%, from the beginning of the yearprimarily attributable to the Company’s operating performance and reduction in inventory in 2018. During the year ended December 31, 2018, wegenerated $10,886 of cash from operating activities as compared to $7,270 of cash for the year ended December 31, 2017, an increase of $3,616 or49.7%. In 2018, cash generated from operating activities was primarily a result of our net income of $24,999 plus non-cash expenses of depreciation,amortization, and stock-based compensation totaling $3,295, offset by a $18,643 net deferred tax benefit primarily attributable to a non-cash benefit of$18,652 relating to our release of the valuation allowance on our U.S. deferred tax assets as of December 31, 2018. Working capital changes of $1,235 for2018 increased the operating cash generated, due mainly to a $3,186 reduction in inventory. Cash used in investing activities totaled $4,185 and $1,392 in 2018 and 2017, respectively, consisting solely of capital expenditures. The year-over-yearincrease in capital expenditures was due primarily to the 2018 payment for automation equipment pertaining to our Battery & Energy Products business,including 3-Volt cell production. We generated $1,168 in cash from financing activities during 2018, compared to $1,403 from financing activities during 2017. In 2018 and 2017, wereceived $1,568 and $1,429, respectively, in funds from the issuance of common stock in connection with the exercise of stock options by ouremployees. In 2018 and 2017, we used $55 and $26, respectively, for tax withholdings related to stock-based awards. In 2018, we spent $742 (includingfees and commissions) to repurchase our common stock under the Company’s Share Repurchase Program, which commenced on November 1, 2018. Wealso received $397 in 2018 for a government grant awarded in the People’s Republic of China to fund specified future technological research anddevelopment initiatives. We continue to have significant U.S. net operating loss carryforwards available to utilize as an offset to taxable income. As of December 31, 2018, none ofour U.S. net operating loss carryforwards have expired. See Note 7 in our notes to the consolidated financial statements for additional information. As of December 31, 2018, we had made commitments to purchase approximately $2,848 of production machinery and equipment. Positive operating cash flow is expected to continue to be adequate to meet obligations for both financing and investing. 30 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 includes a$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, 2018. 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. Beginning April 2, 2018 and thereafter, the applicable margins will be determined based on thechart below. Consolidated Senior Leverage RatioApplicable BasisPoints for OvernightLIBOR LoansApplicable BasisPoints forBase Rate LoansApplicable BasisPoints for UnusedFeeLess than 1.50 to 1.00185(50)20Greater than or equal to 1.50 to 1.00 but less than 2.50 to1.00200(25)15Greater 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, 2018. 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, 2018, we had no outstanding balance under the Credit Facility and no outstanding letters of credit related to the Credit Facility. See Note 4 in the notes to consolidated financial statements for additional information. Other Matters With respect to our battery products, we typically offer warranties against any defects due to product manufacture or workmanship for up to one year 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. 31 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 our consolidated financial statements requires the application of accounting policies andthe use of estimates. The accounting policies most important to the preparation of the consolidated financial statements and estimates that requiremanagement’s most difficult, subjective or complex judgments are described below. Revenue Recognition: Effective January 1, 2018, the Company adopted Accounting Standards Update 2014-09 (Topic 606) “Revenue from Contracts with Customers”.Adoption of Topic 606 did not impact the timing of revenue recognition in our consolidated financial statements for the current or prior periods. Uponadoption, we have updated our policies to conform to the new standard. Revenues are generated from the sale of products. Performance obligations are met and revenue is recognized upon transfer of control to the customer,which is generally upon shipment. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on thedate of delivery. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and othertaxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return. For productsshipped under vendor managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which pointcontrol has transferred and there are no further obligations by the Company. Our contracts with customers generally have an original expected duration of less than one year. Pursuant to Topic 606, we have applied the practicalexpedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remainingperformance obligations. 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 recognize provisions for excess, obsolete or slow moving inventory. Inherent in our estimates of netrealizable value in determining inventory valuation are assumptions related to expectations of future demand for our products, product lifecycles, productsupport, technical obsolescence, regulatory requirements, and economic and market conditions. Estimates related to the valuation of inventory aresusceptible to changes as the underlying assumptions are continuously evaluated. If our assumptions are adversely different from those estimated bymanagement, inventory adjustments to reduce inventory values would result in an increase in inventory write-offs and a decrease in gross margins. Warranties: We generally offer standard warranties against product defects. We do not offer separate service-type warranties. We estimate future warranty costs to beincurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future costs and relatedreserves are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. 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. 32 Environmental Issues: Environmental expenditures, if any, that relate to current operations, are generally expensed. Remediation costs that relate to an existing condition causedby 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 recognized over theirestimated 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. We conducted our annual impairment test for goodwill and other indefinite-lived intangible assets as of October 1, 2018. We identified four goodwillreporting units. We performed a quantitative impairment test of goodwill using a discounted cash flow model and concluded that the fair value of eachreporting unit exceeded its respective carrying value. To estimate the fair value of the reporting units, we used significant estimates and judgments,including an assessment of our future revenue prospects, revenue growth rates and profit margins based on past results, 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, 2018 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 were identified.Fair value exceeded carrying value for all reporting units and trademarks by more than 10%. There is a possibility that our goodwill and other intangibleassets could be impaired in the future should there be a significant change in our internal forecasts and other assumptions we use in our impairmentanalysis. 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 estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of theequity award). We calculate implied volatility for stock options based on an average of historical volatility over the expected life of the awards. Thecomputation of expected term is determined based on historical experience of similar awards, giving consideration to the contractual terms of the awardsand the vesting period. 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.Our awards are generally valued using the Black-Scholes method. If required, our market based awards are valued using a Monte Carlo simulation. 33 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. Pursuant to ASC 740, the realizability of our deferred tax assets is evaluated based on all availableevidence, both positive and negative, weighted based on objective verifiability. Our assessment of the realizability of our deferred tax assets is based on anumber of factors including but not limited to the sustainability of earnings from our core business, the accuracy of our internal earnings forecasts forfuture periods, our history of operating losses, our historical operating volatility, and the general business climate. As a significant portion of our deferredtax assets is comprised of net operating loss carryforwards, our ability to utilize our net operating loss carryforwards (before expiration) is also animportant factor considered in our assessment. A valuation allowance is recognized when, based on the results of our assessment, the realizability ofdeferred tax assets is not more likely than not. As of December 31, 2018, the Company recognized the release of the valuation allowance on our net operating loss carryforwards and other U.S. deferredtax assets on the basis of management’s assessment. In evaluating the realizability of our U.S. deferred tax assets, management considered all availableevidence and concluded that positive factors, including further demonstration of sustained profitability in our core business and continued improvementin our ability to achieve internal earnings forecasts, outweighed all negative factors, including our history of operating losses (prior to 2015) andhistorical operating volatility in our core business. Our assessment also considered our expectation to utilize our domestic net operating losscarryforwards of $63,388, which expire 2019 thru 2035, and our general business tax credits of $1,817, which expire 2028 thru 2037. Based on the resultsof our assessment, management concluded that it is more likely than not that our U.S. deferred tax assets will be fully realized. As of December 31, 2018 and 2017, for certain past operations in the U.K., we continue to report a valuation allowance for net operating losscarryforwards of $10,220, nearly all of which can be carried forward indefinitely. Management has concluded that the realizability of the U.K. netoperating loss carryforwards is not more likely than not, as utilization of the net operating losses may be limited due to the change in the past U.K.operation. There are no other deferred tax assets related to the past U.K. operations. As of December 31, 2018 and 2017, we have not recognized avaluation allowance against our other foreign deferred tax assets, as we believe that it is more likely than not that they will be realized. We will continueto evaluate the realizability of our deferred tax assets in future periods. 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 the amountof depreciation and amortization expense recognized in future periods. The results of operations of acquired businesses are included in the consolidatedstatements of income and comprehensive income beginning on the respective 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 43. PageReport of Independent Registered Public Accounting Firm36 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2018 and 201738 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2018 and 201739 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2018 and 201740 Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 201741 Notes to Consolidated Financial Statements42 35 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors ofUltralife Corporation Opinions on the Financial Statements and Internal Control Over Financial ReportingWe have audited the accompanying consolidated balance sheets of Ultralife Corporation (the Company) and its subsidiaries as of December 31, 2018 and2017, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for the years thenended, and the related notes to the consolidated financial statements (collectively, the financial statements). We also have audited the Company’s internalcontrol over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally acceptedin the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reportingas of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission in 2013. Basis for OpinionsThe Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the company's internal controlover financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rulesand regulations 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 audits to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether dueto error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding theamounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial ReportingA company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on thefinancial statements. 36 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. /s/ Freed Maxick CPAs, P.C. We have served as the Company's auditor since 2016. Rochester, New YorkFebruary 7, 2019 37 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in Thousands) December 31, 2018 2017 ASSETS Current Assets: Cash $25,583 $18,241 Restricted Cash 351 89 Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $296 and $292, Respectively 16,015 14,657 Inventories, Net 22,843 26,326 Prepaid Expenses and Other Current Assets 2,429 2,603 Total Current Assets 67,221 61,916 Property, Equipment and Improvements, Net 10,744 7,570 Goodwill 20,109 20,458 Other Intangible Assets, Net 6,504 7,085 Deferred Income Taxes, Net 15,444 32 Security Deposits and Other Non-Current Assets 82 125 Total Assets $120,104 $97,186 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $9,919 $8,787 Accrued Compensation and Related Benefits 1,494 2,413 Accrued Expenses and Other Current Liabilities 3,413 2,871 Income Taxes Payable 121 168 Total Current Liabilities 14,947 14,239 Deferred Income Taxes, Net 591 3,867 Other Non-Current Liabilities 32 31 Total Liabilities 15,570 18,137 Commitments and Contingencies (Note 5) 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 – 20,053,335 Sharesand 19,670,928 Shares, Respectively; Outstanding – 15,920,585 Shares and 15,651,217 Shares,Respectively 2,005 1,966 Capital in Excess of Par Value 182,630 180,211 Accumulated Deficit (57,964) (82,894)Accumulated Other Comprehensive Loss (2,786) (1,611)Treasury Stock - at Cost; 4,132,750 Shares and 4,019,711 Shares, respectively (19,266) (18,469)Total Ultralife Corporation Equity 104,619 79,203 Non-Controlling Interest (85) (154)Total Shareholders’ Equity 104,534 79,049 Total Liabilities and Shareholders' Equity $120,104 $97,186 The accompanying notes are an integral part of these consolidated financial statements. 38 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Dollars in Thousands, Except Per Share Amounts) Year Ended December 31, 2018 2017 Revenues $87,190 $85,531 Cost of Products Sold 61,607 59,299 Gross Profit 25,583 26,232 Operating Expenses: Research and Development 4,508 4,737 Selling, General and Administrative 14,520 15,019 Total Operating Expenses 19,028 19,756 Operating Income 6,555 6,476 Other Expense (Income): Interest and Financing Expense 63 183 Miscellaneous (121) (2)Income Before Income Taxes 6,613 6,295 Income Tax Benefit 18,386 1,369 Net Income 24,999 7,664 Net Income Attributable to Non-Controlling Interest 69 16 Net Income Attributable to Ultralife Corporation 24,930 7,648 Other Comprehensive (Loss) Income: Foreign Currency Translation Adjustments (1,175) 1,469 Comprehensive Income Attributable to Ultralife Corporation $23,755 $9,117 Net Income Per Share Attributable to Ultralife Corporation Common Shareholders – Basic: $1.57 $.49 Net Income Per Share Attributable to Ultralife Corporation Common Shareholders – Diluted: $1.53 $.48 Weighted Average Shares Outstanding – Basic 15,882 15,528 Weighted Average Shares Outstanding – Diluted 16,347 15,858 The accompanying notes are an integral part of these consolidated financial statements. 39 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 31,2016 19,324,723 $1,932 $178,163 $(3,080) $(90,542) $(18,443) $(170) $67,860 Stock Option Exercises 333,305 33 1,396 1,429 Tax Withholdings onOption Exercises (26) (26)Stock-BasedCompensation -StockOptions 642 642 Stock-BasedCompensation -Restricted Stock 11 11 Vesting of RestrictedShares 12,900 1 (1) - 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 Share Repurchases (742) (742)Stock Option Exercises 382,407 39 1,529 1,568 Tax Withholdings onOption Exercises (55) (55)Stock-BasedCompensation -StockOptions 817 817 Stock-BasedCompensation -Restricted Stock 73 73 Foreign CurrencyTranslationAdjustments (1,175) (1,175)Net Income 24,930 69 24,999 Balance – December 31,2018 20,053,335 $2,005 $182,630 $(2,786) $(57,964) $(19,266) $(85) $104,534 The accompanying notes are an integral part of these consolidated financial statements. 40 ULTRALIFE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars In Thousands) Years ended December 31, 2018 2017 OPERATING ACTIVITIES: Net Income $24,999 $7,664 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 1,972 2,005 Amortization of Intangible Assets 397 422 Amortization of Financing Fees 36 52 Stock-Based Compensation 890 653 Deferred Income Tax Expense (18,643) (1,669)Changes in operating assets and liabilities: Accounts Receivable (1,511) (1,300)Inventories 3,186 (2,537)Prepaid Expenses and Other Assets 373 (673)Income taxes receivable and payable 9 (8)Accounts Payable and Other Liabilities (822) 2,661 Net Cash Provided by Operating Activities 10,886 7,270 INVESTING ACTIVITIES: Cash Paid for Property, Equipment and Improvements (4,185) (1,392)Net Cash Used in Investing Activities (4,185) (1,392) FINANCING ACTIVITIES: Proceeds from Exercise of Stock Options 1,568 1,429 Tax Withholdings on Stock-Based Awards (55) (26)Proceeds from Government Grant 397 - Cash Paid to Repurchase Treasury Stock (742) - Net Cash Provided by (Used in) Financing Activities 1,168 1,403 Effect of Exchange Rate Changes on Cash (265) 343 INCREASE (DECREASE) IN CASH 7,604 7,624 Cash, Beginning of Year 18,330 10,706 Cash, End of Year $25,934 $18,330 Supplemental Cash Flow Information: Construction in Process in Accounts Payable $1,616 $87 Income Taxes Paid $220 $345 Interest Paid $132 $102 The accompanying notes are an integral part of these consolidated financial statements. 41 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, 2018 and 2017. 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.Payment terms are generally 30 days. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. Weevaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding for longer than contractual payment terms are consideredpast due and are reviewed for collectability. We maintain reserves for potential credit losses based upon our historical experience and the aging of specificreceivables. Receivable balances are written off when collection is deemed unlikely. 42 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): Buildings 10–20 Machinery and Equipment 5–10 Furniture and Fixtures 3–10 Computer Hardware and Software 3–5 Leasehold Improvements Lesser of useful life orlease 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 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 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 recognized 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. Exchange gains and losses related to foreign currency transactions andbalances denominated in currencies other than the functional currency are recognized in net income. k.Revenue Recognition Effective January 1, 2018, the Company adopted Accounting Standards Update 2014-09 (Topic 606) “Revenue from Contracts with Customers”.Adoption of Topic 606 did not impact the timing of revenue recognition in our consolidated financial statements for the current or prior periods.Accordingly, no adjustments have been made to opening retained earnings or prior period amounts. See Note 9 for disaggregated revenue information. 43 Revenues are generated from the sale of products. Performance obligations are met and revenue is recognized upon transfer of control to the customer,which is generally upon shipment. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on thedate of delivery. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and othertaxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return. For productsshipped under vendor managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which pointcontrol has transferred and there are no further obligations by the Company. Revenues recognized from prior period performance obligations for the year ended December 31, 2018 were not material. As of December 31, 2018, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than oneyear. Pursuant to Topic 606, we have applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenuerecognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our consolidated balance sheets as of December 31, 2018 and 2017 were notmaterial. l.Warranty Reserves We generally offer standard warranties against product defects. We do not offer separate service-type warranties. We estimate future warranty costs to beincurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future costs are based onactual past experience and are generally estimated as a percentage of sales over the warranty period. Warranty costs are recorded as costs of products sold.Provision for warranty costs is recorded in other current liabilities and other long-term liabilities on our consolidated balance sheets based on the durationof the warranty. 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.Sales Commissions Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions capitalized as ofDecember 31, 2018. 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. For the years ended December 31, 2018 and 2017, we expended $4,905 and$5,142, respectively, on research and development, including $397 and $405, respectively, on customer sponsored research and development activities,which are included in cost of goods sold. We recognized $397 and $405 of revenue relating to these activities for the years ended December 31, 2018 and2017, 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. Pursuant to ASC 740, a valuation allowance is recognized when the realizability of deferred taxassets is not more likely than not, on the basis of all available evidence, both positive and negative, weighted based on objective verifiability. 44 r.Concentration Related to Customers and Suppliers We have one major customer, a large defense primary contractor, which comprised 16% and 18% of our revenues in 2018 and 2017, respectively. Therewere no other customers that comprised greater than 10% of our total revenues during these years. Currently, we do not experience significant seasonal trends in our revenues. Since a significant portion of our revenues are based on purchases from U.S.and allied country defense departments, the timing of our sales could be impacted by delays in the government budget process and the decisions 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 2018 and 2017, we do not consider this customer to be a significant credit risk. 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 the relatedassets 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, 2018 and 2017. 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 (“EPS”) is computed by dividing net income attributable to Ultralife Corporation by the weighted average shares of commonstock outstanding for the period. Diluted EPS reflects the assumed exercise and conversion of dilutive outstanding stock options and unvested restrictedstock, if any, applying the treasury stock method.For the year ended December 31, 2018, the calculation of diluted EPS included 1,127,837 stock options and 17,500 restricted stock awards. Inclusion ofthese shares resulted in 465,004 additional shares in the calculation of diluted EPS. There were 448,250 outstanding stock options as of December 31,2018 excluded from the calculation of diluted EPS, as inclusion of these shares would have been anti-dilutive. For the year ended December 31, 2017, the calculation of diluted EPS included 1,035,711 stock options. Inclusion of these shares resulted in 330,676additional shares in the calculation of diluted EPS. There were no unvested restricted stock units as of December 31, 2017. 824,500 outstanding stockoptions as of December 31, 2017 were excluded from the calculation of diluted EPS, as inclusion of these shares would have been anti-dilutive. 45 u.Stock-Based Compensation We have various stock-based employee compensation plans that are described more fully in Note 6. 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). 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 May 2014, the FASB issued ASU 2014-09 (Topic 606) “Revenue from Contracts with Customer”. Under this standard, revenue is recognized whenpromised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods orservices. The new standard will replace most existing revenue recognition guidance under GAAP and permits the use of either the retrospective orcumulative effect transition method. Topic 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periodswithin that reporting period. The Company adopted Topic 606 effective January 1, 2018. Adoption of Topic 606 did not impact the timing of revenuerecognition in our consolidated financial statements for the current or prior periods. Accordingly, no adjustments have been made to opening retainedearnings or prior period amounts. Adoption of this standard required additional disclosure which can be found in Notes 1 and 9. In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The standard is effective for fiscal yearsbeginning after December 31, 2017, and interim periods within those fiscal years, and should be applied using a retrospective transition method for eachperiod presented. The standard requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cashequivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statements of cash flows. The Company hasadopted this standard effective January 1, 2018. As a result, restricted cash has been included in the total cash amounts on the consolidated statement ofcash flows for all periods presented and the required disclosures have been included in the notes to consolidated financial statements. There was noimpact to the Company’s consolidated statements of income as a result of adopting this new accounting standard. In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receiptsand Cash Payments”. The standard makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement ofcash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standardrequires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendmentsprospectively as of the earliest date practicable. The Company has adopted this standard effective January 1, 2018. Adoption of this standard did notimpact 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. The standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard is to beapplied on a prospective basis to an award modified on or after the adoption date. The Company has adopted this standard effective January 1, 2018.Adoption of this standard did not impact our consolidated financial statements. In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory”. The new guidancerequires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, ratherthan when the asset is sold to an outside party. The standard is effective for annual reporting periods beginning after December 15, 2017, includinginterim periods within those annual reporting periods. Early adoption is permitted. The new guidance requires adoption on a modified retrospective basisthrough a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has adopted thisstandard effective January 1, 2018. Adoption of this standard did not impact our consolidated financial statements. 46 In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting BulletinNo. 118”. The standard adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC StaffAccounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which was effective immediately. TheSEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of theeffects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of theincome tax effects from the Tax Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. Refer toNote 7 for discussion of our final determination of the effects of the Tax Act on our consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires that lessees recognize a right-to-use asset and related lease liability for allsignificant financing and operating leases not considered short-term leases, and specifies where in the statement of cash flows the related lease paymentsare to be presented. The guidance is effective for years beginning after December 15, 2018 and early adoption is permitted. The Company has adoptedthe new lease standard effective January 1, 2019. The impact of adoption will be the recognition of a right-to-use asset and corresponding lease liabilityon the Company’s consolidated balance sheet. Adoption of the new lease standard will not have a significant impact on the Company’s consolidatedstatement of income. 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. Thestandard is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 and is to be applied on aprospective basis. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financialstatements. 47 Note 2 – Share Repurchase Program On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effectiveon November 1, 2018, under which the Company is authorized to purchase up to 2.5 million shares of its outstanding common stock over a period not toexceed twelve months. Under the Share Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privatelynegotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. Thetiming, manner, price and amount of any repurchase will be determined at the Company’s discretion and the Share Repurchase Program may besuspended, terminated or modified by the Company’s Board of Directors at any time for any reason and does not obligate the Company to purchase anyspecific number of shares. Under the Program, all purchases will be made in accordance with Securities Exchange Act Rule 10b-18, which sets certainrestrictions on the method, timing, price and volume of open market stock repurchases. In 2018, we repurchased a total of 105,674 shares of our common stock under the Share Repurchase Program for an aggregate consideration (includingfees and commissions) of $742. Subsequent to December 31, 2018 and through February 6, 2019, we repurchased a total of 267,100 shares of our common stock, bringing the totalpurchases under the Share Repurchase Program to 372,774 shares for an aggregate consideration of $2,697. Note 3 - Supplemental Balance Sheet Information a.Cash and Restricted Cash The Company had cash and restricted cash totaling $25,934 and $18,330 as of December 31, 2018 and 2017, respectively. December 31, December 31, 2018 2017 Cash $25,583 $18,241 Restricted Cash 351 89 Total $25,934 $18,330 As of December 31, 2018, restricted cash includes a government grant awarded in the People’s Republic of China to fund specified technological researchand development initiatives. The grant proceeds will be realized to income as a direct offset to expense as the related expenditures are incurred. For theyear ended December 31, 2018, grant proceeds of $97 were realized as an offset to expense as expenditures were incurred. Restricted cash as of December31, 2018 and 2017 includes deposits withheld by the Dutch tax authorities and third party VAT representatives in connection with a previously utilizedlogistics arrangement in the Netherlands. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements ofcash flows. b.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, 2018 2017 Raw Materials $13,274 $14,606 Work in Process 2,016 2,013 Finished Products 7,553 9,707 Total $22,843 $26,326 48 c.Property, Plant and Equipment Major classes of property, plant and equipment consisted of the following: December 31, 2018 2017 Land $123 $123 Buildings and Leasehold Improvements 8,267 7,858 Machinery and Equipment 51,261 50,852 Furniture and Fixtures 2,058 2,005 Computer Hardware and Software 5,590 5,338 Construction in Progress 4,302 535 71,601 66,711 Less – Accumulated Depreciation (60,857) (59,141)Total $10,744 $7,570 Estimated costs to complete construction-in-progress as of December 31, 2018 and 2017 were approximately $2,870 and $5,136, respectively. Depreciation expense was $1,972 and $2,005 for the years ended December 31, 2018 and 2017, respectively. d.Goodwill and Other Intangible Assets The Company performed its annual impairment tests of goodwill and other indefinite-lived intangible assets as of the first day of the fiscal fourth quarterof 2018 and 2017. 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 a relieffrom royalty approach to estimate the fair value of our trademarks, using Level 3 inputs. Significant estimates and judgments included an assessment ofour future revenue prospects, industry and market based terminal growth rates, inputs to the weighted-average cost of capital used to discount future cashflows, and royalty rates based on external market data. As a result of the impairment tests performed for 2018 and 2017, 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, 2018 and 2017: Battery &EnergyProducts Communi-cationsSystems Total Balance – January 1, 2017 $8,472 $11,493 $19,965 Effect of Foreign Currency Translation 493 - 493 Balance – December 31, 2017 8,965 11,493 20,458 Effect of Foreign Currency Translation (349) - (349)Balance – December 31, 2018 $8,616 $11,493 $20,109 49 The composition of intangible assets was: December 31, 2018 Cost AccumulatedAmortization Net Trademarks $3,405 $- $3,405 Customer Relationships 6,471 4,392 2,079 Patents and Technology 5,486 4,725 761 Distributor Relationships 377 377 - Trade Name 370 111 259 Total Other Intangible Assets $16,109 $9,605 $6,504 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 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, 2018 2017 Research and Development Expense $147 $165 Selling, General and Administrative Expense 250 257 Total $397 $422 Future amortization expense of amortizable intangible assets will be approximately $362, $349, $330, $315 and $312 for the fiscal years endingDecember 31, 2019 through 2023, respectively. Note 4 - 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 includes a$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 of creditand to fund capital expenditures and acquisitions, all subject to the terms of the Credit Agreement. The Company had no amounts drawn under the PriorCredit Agreement at the time of its expiration 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. Beginning April 2, 2018 and thereafter, the applicable margins will be determined based on thechart below. 50 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 to1.00 200 (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, 2018. 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, 2018, we had no outstanding balance under the Credit Facility and no outstanding letters of credit related to the Credit Facility. Note 5 - Commitments and Contingencies a.Indemnity Our organizational documents provide that our directors or officers will be reimbursed for all expenses, to the fullest extent permitted by law arising out oftheir performance. b.Purchase Commitments As of December 31, 2018, we have made commitments to purchase approximately $2,848 of production machinery and equipment. c.Operating Leases We lease various buildings, machinery, land, automobiles and office equipment. Rental expenses for all operating leases were approximately $716 and$660 for the years ended December 31, 2018 and 2017, respectively. Future minimum lease payments under non-cancelable operating leases as ofDecember 31, 2018 are as follows: 2019 2020 2021 2022 2023 $564 $404 $142 $- $- 51 d.China 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, other civil disturbances and the possible impact of the imposition of tariffs by the U.S. Government on 9 Volt batteries that wemanufacture in China as well as any retaliating trade policies or restrictions. Any such disruptions could depress our earnings and have other materialadverse effects on our business, financial condition and results of operations. e.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 bonuses basedupon 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. f.Product Warranties We estimate future warranty costs to be incurred for product failure rates, material usage and service costs in the development of our warranty obligations.Estimated future costs are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. Changes in ourproduct warranty liability during the years ended December 31, 2018 and 2017 were as follows: 2018 2017 Balance, January 1 $149 $172 Provision for warranties issued 7 84 Settlements made (61) (107)Balance, December 31 $95 $149 g.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 was damaged by fire while parked at London HeathrowAirport. Following an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, a finalreport was issued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarilycaused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company. A component ofthe ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell, which Ultralife hasproduced since 2001, with wide-use in global defense and commercial applications. 52 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,which was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. Weimmediately referred this matter to our insurers. This lawsuit has now been resolved (February 2018), the claimant has terminated the action against the Company, and the Court has acknowledged andconsented to this termination. The matter was terminated without financial consequences to the Company. Note 6 - Shareholders' Equity a.Stock-Based Compensation Expense We recorded non-cash stock compensation expense in each period as follows: 2018 2017 Stock Options $817 $642 Restricted Stock Grants 73 11 Total $890 $653 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 estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generallythe vesting period of the equity award). Our shareholders have approved various equity-based plans that permit the grant of stock options, restricted stock and other equity-based awards. 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 2004 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, 2018, there were 727,649 stock options outstanding under the 2004 LTIP and848,438 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. The options set forth in items(ii), (iii) and (iv) were subject to shareholder approval of an amendment to the 2004 LTIP, which approval was obtained on June 7, 2011. 53 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 theexpiration date to December 30, 2020. Pursuant to Accounting Standards Codification Topic 718, Compensation – Stock Compensation, the transactionwas accounted for as an equity award modification. During the second quarter of 2017, the Company recognized compensation cost of $193 representingthe incremental fair value of the modified award computed as of the modification date as the difference between the fair value of the modified award andthe fair value of the original award immediately before it was modified. The incremental fair value was determined using the Black-Scholes model. All such options in items (iii) and (iv) were due to expire as of the later of December 30, 2017 and five years after the initial vesting commences, but in noevent later than December 30, 2020. On July 25, 2018, the Company’s Board of Directors modified the option in item (iii) such that the option will vestimmediately upon the Company’s common stock first reaching a closing price $10.00 for 15 trading days in a 30 trading-day period. The option becamefully vested during the third quarter of 2018 and expires December 30, 2020. The transaction has been accounted for as an equity award modificationpursuant to Accounting Standards Codification Topic 718, Compensation – Stock Compensation. During the third quarter 2018, the Companyrecognized compensation cost of $182 representing the incremental fair value of the modified award computed as of the modification date as thedifference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The incremental fairvalue was determined using a Monte Carlo simulation option-pricing model consistent with the valuation methodology used to value and recognize theoriginal award. The market-based conditions for the option in item (iv) had not been met as of December 31, 2018. 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, 2018, there was $521 of total unrecognized compensation costs related to outstanding stock options, which we expect to recognizeover a weighted average period of 0.9 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, 2018 and 2017: Years Ended December 31, 2018 2017 Risk-free interest rate 2.6% 1.7%Volatility factor 46.8% 50.0%Weighted average expected life (years) 5.0 5.0 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 for the years ended December 31, 2018 and 2017. 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. 54 The following tables summarize data for the stock options issued by us: Year Ended December 31, 2018 Numberof Shares WeightedAverageExercisePricePer Share WeightedAverageRemainingContractualTerm AggregateIntrinsicValue Shares under Option – January 1 1,860,211 $5.96 Options Granted 217,500 9.68 Options Exercised (422,793) 4.49 Options Forfeited or Expired (78,831) 11.75 Shares under option – December 31 1,576,087 $6.58 3.50 $1,946 Vested and Expected to Vest - December 31 1,475,570 $6.56 3.37 $1,851 Options Exercisable – December 31 1,064,127 $5.89 2.69 $1,565 Year Ended December 31, 2017 Numberof Shares WeightedAverageExercisePricePer Share 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 Options Exercisable – December 31 1,649,594 $4.63 The following table represents additional information about stock options outstanding at December 31, 2018: Option Outstanding Options Exercisable Range ofExercise Prices Number ofOutstandingOptions –December31, 2018 Weighted-AverageRemainingContractualLife Weighted-AverageExercisePrice Number ofOptionsExercisableat December31, 2018 Weighted-AverageExercisePrice $3.22-$3.99 346,148 2.56 3.79 346,148 $3.79 $4.00-$5.99 451,023 4.72 4.94 217,979 4.72 $6.00-$9.99 528,916 3.79 7.72 300,000 6.42 $10.00-$15.00 250,000 2.00 11.00 200,000 10.00 $3.22-$15.00 1,576,087 3.50 6.58 1,064,127 $5.89 The weighted average fair value of options granted during the years ended December 31, 2018 and 2017 was $4.22 and $2.47, 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, 2018 and 2017 was $1,722 and $588, respectively. Cash received from option exercises under our stock-based compensation plans for the years ended December 31, 2018 and 2017 was $1,568 and $1,429,respectively. 55 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 of expense was recorded in 2017 relating to these awards. In September 2017,12,900 shares of the awarded restricted stock vested and the Company repurchased 3,959 shares to satisfy the statutory tax withholding on shares vestedfor certain employees. Unrecognized compensation cost related to these restricted shares was $0 at December 31, 2018 and 2017. In January 2018, 17,500 shares of restricted stock were awarded to certain of our employees. These shares vest in equal annual installments over threeyears. The weighted average grant date fair value of these awards was $7.16 per share. $73 of expense was recorded in 2018 relating to these awards.Unrecognized compensation cost related to these restricted shares was $52 at December 31, 2018. d.Reserved Shares There were 726,858 shares of common stock available for future issuance under equity compensation plans as of December 31, 2018. Note 7 - Income Taxes For the years ended December 31, 2018 and 2017, we recognized an income tax benefit of $18,386 and $1,369, respectively. Years Ended December 31, 2018 2017 Current: Federal $- $- State - - Foreign 257 300 257 300 Deferred: Federal (18,514) (1,717)State - 55 Foreign (129) (7) (18,643) (1,669)Total income tax provision $(18,386) $(1,369) The income tax benefit for 2018 primarily represents a non-cash benefit of $18,652 upon recognizing the release of the valuation allowance on our U.S.deferred tax assets as of December 31, 2018. The income tax benefit for 2017 primarily represents a one-time, non-cash benefit of $1,939 for therevaluation of deferred tax liabilities on goodwill and certain other intangible assets upon the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). As of December 31, 2018, the Company recognized the release of the valuation allowance on our net operating loss carryforwards and other U.S. deferredtax assets on the basis of management’s assessment. In evaluating the realizability of our U.S. deferred tax assets, management considered all availableevidence and concluded that positive factors, including further demonstration of sustained profitability in our core business and continued improvementin our ability to achieve internal earnings forecasts, outweighed all negative factors, including our history of operating losses (prior to 2015) andhistorical operating volatility in our core business. Our assessment also considered our expectation to utilize our domestic net operating losscarryforwards of $63,388, which expire 2019 thru 2035, and our general business tax credits of $1,817, which expire 2028 thru 2037. Based on the resultsof our assessment, management concluded that it is more likely than not that our U.S. deferred tax assets will be fully realized. As of December 31, 2018 and 2017, for certain past operations in the U.K., we continue to report a valuation allowance for net operating losscarryforwards of approximately $10,220, nearly all of which can be carried forward indefinitely. Management has concluded that the realizability of theU.K. net operating loss carryforwards is not more likely than not, as utilization of the net operating losses may be limited due to the change in the pastU.K. operation. These net operating losses in the U.K. cannot currently be used to reduce taxable income at our other U.K. subsidiary, AccutronicsLtd. There are no other deferred tax assets related to the past U.K. operations. As of December 31, 2018 and 2017, we have not recognized a valuationallowance against our other foreign deferred tax assets, as we believe that it is more likely than not that they will be realized. We will continue to evaluatethe realizability of our deferred tax assets in future periods. 56 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 assets and liabilities are as follows: Years Ended December 31, 2018 2017 Deferred Tax Assets: Property, Plant and Equipment $168 $44 Net Operating Loss Carryforwards 15,622 16,838 Tax Credit Carryforwards 1,817 1,837 Intangible Assets 1,231 1,535 Accrued Expenses, Reserves and Other 1,838 1,359 Total Deferred Tax Assets 20,676 21,613 Valuation Allowance for Deferred Tax Assets (1,942) (21,604)Net Deferred Tax Assets 18,734 9 Deferred Tax Liabilities: Other (25) (38)Intangible Assets (3,856) (3,806)Total Deferred Tax Liabilities (3,881) (3,844) Net Deferred Tax Assets (Liabilities) $14,853 $(3,835) Net deferred tax assets (liabilities) are comprised of the following balance sheet amounts: Years Ended December 31, 2018 2017 Deferred Tax Assets $15,444 $32 Deferred Tax Liabilities (591) (3,867) $14,853 $(3,835) For the year ended December 31, 2018, the valuation allowance for deferred tax assets decreased by $19,662 primarily due to the realization of the U.S.deferred tax assets as of December 31, 2018. For the year ended December 31, 2017, the valuation allowance decreased by $10,695 due to the reduction ofU.S. deferred tax assets due to the Company’s pretax income as well as the revaluation of the deferred taxes due to the enactment of the Tax Cuts and JobsAct. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Actmakes 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 35 percent to 21percent; (2) elimination of the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (3) changing rulesrelated to usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017; (4) generally eliminating U.S.federal income taxes on dividends from foreign subsidiaries for tax years beginning after December 31, 2017; and (5) implementing a territorial tax systemand imposing a transition toll tax on deemed repatriated earnings of foreign subsidiaries. The Act reduced the U.S. corporate tax rate to 21 percent, effective January 1, 2018. Deferred tax assets and liabilities were revalued from 35 percent to 21percent upon enactment of the Tax Act. 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 was 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 Act. The Company had recognized the provisional tax effects related to the revaluation of deferred tax assets andliabilities for the year ended December 31, 2017. As of December 31, 2017, we had completed the majority of our accounting for the effects of the TaxAct. As of December 31, 2018, we have completed our evaluation of the effects of the Tax Act and concluded that no revisions are necessary. 57 Effective January 1, 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. Upon adoption, the Company recognized a gross deferred tax asset of $1,123 and a corresponding valuation allowance in thesame amount resulting in no net deferred tax asset recognition. As of December 31, 2018, the Company has realized the benefit of this deferred tax assetupon release of the U.S. valuation allowance. At December 31, 2018, 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, 2018 2017 United States $6,226 $4,831 Foreign 387 1,464 $6,613 $6,295 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 from continuing operations before income taxes as follows: Years Ended December 31, 2018 2017 Statutory Income Tax Rate 21% 34%(Increase) Decrease in Tax Provision Resulting From: Equity Compensation (2.9) 0.7 Income Tax Credits (1.0) (0.9)Foreign Tax Rates 0.3 (3.8)Valuation Allowance (297.3) (20.9)Tax Rate Change - (30.8)Other 2.0 (0.1)Effective Income Tax Rate (277.9)% (21.8)% Accounting for Uncertainty in Income Taxes There were no unrecognized tax benefits related to uncertain tax positions at December 31, 2018 and 2017. 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 2000 through 2018 remain subjectto examination by the Internal Revenue Service (“IRS”) due to our net operating loss carryforwards. Our U.S. tax matters for the years 2000 through 2018remain subject to examination by various state and local tax jurisdictions due to our net operating loss carryforwards. Our tax matters for the years 2010through 2018 remain subject to examination by the respective foreign tax jurisdiction authorities. Note 8 - 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. For the years ended December 31, 2018 and 2017, the Companymatched 50% on the first 4% contributed by an employee, or a maximum of 2% of the employee’s income. For 2018 and 2017, we contributed $204 and$181, respectively, to the 401(k) plan. 58 Note 9 - Business Segment Information We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segmentincludes: Lithium 9-volt, cylindrical and various 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. 2018: Battery &EnergyProducts CommunicationsSystems Corporate Total Revenue $70,497 $16,693 $- $87,190 Segment Contribution 19,574 6,009 (19,028) 6,555 Other Income 58 58 Income Tax Benefit 18,386 18,386 Non-Controlling Interest (69) (69)Net Income Attributable to Ultralife $24,930 Total Assets $50,511 $26,875 $42,718 $120,104 Capital Expenditures $2,948 $614 $623 $4,185 Goodwill $8,616 $11,493 - $20,109 Depreciation and Amortization of Intangible Assets $1,611 $375 $383 $2,369 Stock-Based Compensation $333 $106 $451 $890 2017: Battery &EnergyProducts CommunicationsSystems Corporate Total Revenue $69,789 $15,742 $- $85,531 Segment Contribution 19,659 6,573 (19,756) 6,476 Other Expense (181) (181)Income Tax Benefit 1,369 1,369 Non-Controlling Interest (16) (16)Net Income 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 Intangible Assets $1,830 $430 $167 $2,427 Stock-Based Compensation $301 $88 $264 $653 Long-lived assets (including goodwill and intangible assets) held outside the U.S., principally in the United Kingdom and China, were $11,502 and$12,443 at December 31, 2018 and 2017, respectively. 59 U.S. and Non-U.S. Revenue Information1: 2018: TotalRevenue UnitedStates Non-UnitedStates Battery & Energy Products $70,497 $37,898 $32,599 Communications Systems 16,693 15,156 1,537 Total $87,190 $53,054 $34,136 61% 39% 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% 1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects Commercial and Government/Defense Revenue Information: 2018: TotalRevenue Commercial Government/Defense Battery & Energy Products $70,497 $41,044 $29,453 Communications Systems 16,693 - 16,693 Total $87,190 $41,044 $46,146 47% 53% 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% 60 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. 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, 2018. 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, 2018, our internal control over financial reporting was effective based on thosecriteria. Freed Maxick CPAs, P.C., an independent registered public accounting firm, which has audited and reported on the consolidated financial statementscontained in this Annual Report on Form 10-K, has audited the effectiveness of the Company's internal control over financial reporting as stated in theirreport, which is included in Part II, Item 8. ITEM 9B. OTHER INFORMATION None. 61 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 2019 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 issuanceunderequity compensation plans(excluding securities reflectedin column (a)(c) Equity compensation plans approved by securityholders 1,576,087 $6.58 726,858 Equity compensation plans not approved by securityholders - - - Total 1,576,087 $6.58 726,858 See Note 6 in the 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. 62 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: 2.2Stock Purchase Agreement Relating to Accutronics Limitedby and between Robert Andrew Phillips and Others andUltralife Corporation Exhibit 2.2 of the Form 10-K for the year ended December 31,2015, filed March 2, 20163.1Restated Certificate of Incorporation Exhibit 3.1 of the Form 10-K for the year ended December 31,2008, filed March 13, 20093.2Amended and Restated By-laws Exhibit 3.2 of the Form 8-K filed December 9, 20114.1Specimen Stock Certificate Exhibit 4.1 of the Form 10-K for the year ended December 31,2008, filed March 13, 200910.1*Amendment to the Agreement relating to rechargeablebatteries Exhibit 10.24 of our Form 10-K for the fiscal year ended June30, 1996 (this Exhibit may be found in SEC File No. 0-20852)10.2†Ultralife Corporation 2014 Long-Term Incentive Plan Appendix A to our Definitive Proxy Statement filed on April21, 201410.3†Ultralife Batteries, Inc. Amended and Restated 2004 Long-Term Incentive Plan Exhibit 99.2 of our Registration Statement on Form S-8 filedon July 26, 2004, File No. 333-11766210.4†Amendment No. 1 to Ultralife Batteries, Inc. Amended andRestated 2004 Long-Term Incentive Plan Exhibit 99.3 of our Registration Statement on Form S-8 filedAugust 18, 2006, File No. 333-13673710.5†Amendment No. 2 to Ultralife Batteries, Inc. Amended andRestated 2004 Long-Term Incentive Plan Exhibit 99.4 of our Registration Statement on Form S-8 filedNovember 13, 2008, File No. 333-15534910.6†Amendment No. 3 to Ultralife Batteries, Inc. Amended andRestated 2004 Long-Term Incentive Plan Exhibit 99.5 of our Registration Statement on Form S-8 filedNovember 13, 2008, File No. 333-15534910.7†Employment Agreement between the Registrant and MichaelD. Popielec dated December 6, 2010 Exhibit 10.40 of the Form 10-K for the year ended December31, 2010, filed March 15, 201110.8†Amendment No. 4 to Ultralife Corporation Amended andRestated 2004 Long-Term Incentive Plan Exhibit 4.5 of the Registration Statement on Form S-8 filed onJanuary 30, 2012, File No. 333-17923510.9†Amendment No. 5 to Ultralife Corporation Amended andRestated 2004 Long-Term Incentive Plan Exhibit 10.1 of the Form 8-K filed on May 26, 201110.10†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 June 30,2013, filed August 9, 201310.11†Amendment No. 6. to Ultralife Corporation Amended andRestated 2004 Long-Term Incentive Plan Appendix A of Form DEF 14A filed on April 22, 201310.12Credit and Security Agreement between Ultralife Corporationand KeyBank National Association dated May 31, 2017 Exhibit 10.1 of the Form 8-K filed on June 6, 2017 63 21Subsidiaries Filed herewith23.1Consent of Freed Maxick CPAs, P.C. Filed herewith31.1CEO 302 Certifications Filed herewith31.2CFO 302 Certifications Filed herewith32906 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 7, 2019 /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 7, 2019 /s/ Michael D. Popielec Michael D. Popielec President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 7, 2019 /s/ Philip A. Fain Philip A. Fain Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) Date: February 7, 2019 /s/Steven M. Anderson Steven M. Anderson (Director) Date: February 7, 2019 /s/ Thomas L. Saeli Thomas L. Saeli (Director) Date: February 7, 2019 /s/ Robert W. Shaw II Robert W. Shaw II (Director) Date: February 7, 2019 /s/ Ranjit C. Singh Ranjit C. Singh (Director) Date: February 7, 2019 /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 consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-117662, 333-136737, 333-155349, 333-179235 and333-203037) of our report dated February 8, 2019, relating to the consolidated financial statements and effectiveness of internal control over financialreporting of Ultralife Corporation appearing in this Annual Report on Form 10-K for the year ended December 31, 2018. /s/ Freed Maxick CPAs, P.C. Rochester, New YorkFebruary 7, 2019 Exhibit 31.1 I, 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 Act Rules13a-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 7, 2019/s/ Michael D. Popielec Michael D. Popielec President and Chief Executive Officer Exhibit 31.2 I, 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 Act Rules13a-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 7, 2019/s/ Philip A. Fain Philip A. Fain Chief Financial Officer and Treasurer Exhibit 32 Section 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, 2018 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 7, 2019/s/ Michael D. Popielec Michael D. Popielec President and Chief Executive Officer Date: February 7, 2019/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 the SecuritiesAct of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate this certification by reference. 

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