ULTRALIFE CORP 10-K

ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   Market Information   Ultralife’s common stock is listed on the NASDAQ Global Market under the symbol “ULBI.”   Holders   As of February 1, 2022, there were approximately 6,400 registered holders of record of our common stock.   Purchases of Equity Securities by the Issuer   There were no purchases of our common stock by the Company during the years ended December 31, 2021 and December 31, 2020.   Dividends   We have never declared or paid any cash dividends on our capital stock. Pursuant to our current credit facility, we are precluded from paying any dividends. We intend to retain earnings, if any, to finance future operations and expansion and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future payment of dividends will depend upon our financial condition, capital requirements and earnings, as well as upon other factors that our Board of Directors may deem relevant.     ITEM 6. [RESERVED]     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 thereto appearing in Item 8 of this Form 10-K.   The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts. All figures presented below represent results from continuing operations, unless otherwise specified.   General   We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design, manufacture, install and maintain power and communications systems including rechargeable and non-rechargeable batteries, communications and electronics systems and accessories and custom engineered systems. We sell our products internationally through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors and directly to U.S. and international defense departments.   We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes Lithium 9-volt, cylindrical, thin cell and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables. The Communications Systems segment includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges.   We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint ventures, which we believe can broaden the scope of our products and services, expand operating and market opportunities and provide the ability to enter new lines of business synergistic with our portfolio of product offerings.   In January 2016, we acquired Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., a leading independent designer and manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic devices. We acquired Accutronics to advance our strategy of commercial revenue diversification, to expand our geographic penetration, and to achieve revenue growth from new product development.   On May 1, 2019, we acquired Southwest Electronic Energy Corporation, a Texas corporation (“SWE”), and a leading designer and manufacturer of high-performance smart battery systems and battery packs to customer specifications using lithium cells. SWE serves a variety of industrial markets, including oil and gas, remote monitoring, process control and marine, which demand uncompromised safety, service, reliability and quality. We acquired SWE as a bolt-on acquisition to further support our strategy of commercial revenue diversification by providing entry to the oil and gas exploration and production, and subsea electrification markets, which were previously unserved by us. Another key benefit includes obtaining a highly valuable technical team of battery pack and charger system engineers and technicians to add to our new product development-based revenue growth initiatives in our commercial end-markets particularly asset tracking, smart metering and other industrial applications.   On December 13, 2021, we acquired Excell Battery Canada Inc., a British Columbia corporation (“Excell Canada”) and 656700 B.C. Ltd., a British Columbia corporation (“656700”) and its wholly owned subsidiary, Excell Battery Corporation USA, a Texas corporation (“Excell USA” collectively, with Excell Canada and 656700, “Excell”), which operate under the name Excell Battery Group, based in Canada with U.S. operations, Excell is a leading independent designer and manufacturer of high-performance smart battery systems, battery packs and monitoring systems to customer specifications. Excell serves a variety of industrial markets including downhole drilling, OEM industrial and medical devices, automated meter reading, and mining, marine and other mission critical applications which demand uncompromised safety, service, reliability and quality. We acquired Excell as an important component of our strategy to diversify commercial revenue and expand the end markets we serve. Acquiring Excell offers us opportunities to further scale our Battery & Energy Products business and drive the operating leverage of our business model, expand into OEM device verticals that we do not presently serve, enhance our contributed value to our customers and realize cost synergies. Furthermore, Excell possesses experienced engineering and technical resources which we plan to utilize in progressing our global new product initiatives while adding a complementary line of highly engineered products that are costly to switch out.   25     Currently, we do not experience significant seasonal sales trends in either of our operating segments, although sales to the U.S. Department of Defense and other international defense organizations can be sporadic based on the needs of those particular customers and allocated funding levels.   The COVID-19 pandemic has created significant economic disruption and uncertainty around the world. The Company continues to closely monitor the developments surrounding COVID-19 and take actions to mitigate the business risks involved. During this challenging time, we remain focused on ensuring the health and safety of our employees by implementing the protocols established by public health officials in addition to meeting the demand of our customers. As an essential supplier currently exempt from government-mandated shutdown directives, we are striving to ensure an uninterrupted flow of our mission critical products serving medical device, first responder, public safety, energy and national security customers. For 2021, we have maintained normal operations at all our facilities.   For 2021, we estimate that the net impact of COVID-19 was a reduction to sales of approximately $11,000, a reduction to operating income of approximately $4,500 and a reduction to net income of approximately $3,400 or approximately $0.21 per diluted share. Increased lead times on components from suppliers and other COVID-19 related logistics matters significantly impacted both our internal and our customers manufacturing schedules, resulting in delays in our shipments to future periods. While demand for medical batteries, especially those used in ventilators, respirators and infusion pumps, remained at a high rate in 2021, our ability to service certain large orders was impacted by overall disruptions in supply chains and operations. These disruptions also impacted our shipments in industrial and government/defense markets. We exited 2021 with a backlog of $53,166, excluding Excell, representing an increase of $13,874 million or 35.3% from year-end 2020, largely attributable to the supply chain disruptions pushing shipments into 2022.   Consolidated revenues decreased by $9,445 or 8.8% to $98,267 for the year ended December 31, 2021 compared to $107,712 for the year ended December 31, 2020.  During 2021, we experienced revenue declines of 5.2% for our Battery & Energy Products business and 29.2% for our Communications Systems business.  This 2021 performance reflected a $1,749 or 2.8% increase in sales to our commercial customers and a $11,194 or 24.7% decrease in sales to government and defense customers.  The increase in our commercial business was due primarily to a $3,878 or 26.2% increase in sales to industrial customers including those serviced by our China facility, a $3,513 or 26.9% rebound in sales to the oil and gas market and the initial sales contribution of $1,131 from Excell, partially offset by a $6,784 or a 19.7% decrease in sales to medical customers reflecting the 2020 surge in sales driven by the initial demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices attributable to COVID-19 without the supply chain disruptions experienced in 2021.   The decrease in government and defense sales primarily resulted from the fulfillment of two large orders in 2020 – shipments of our legacy BA-5390 batteries in the amount of $4,875 to the U.S. Department of Defense under a spot purchase announced in December 2019 and shipments of vehicle amplifier-adaptor systems in the amount of $5,680 to support the U.S. Army’s Network Modernization initiatives completing the delivery orders announced in October 2018. During 2021, the U.S. Department of Defense did not place an order for additional shipments of 5390 batteries, although in December 2021 we received a firm-fixed price, indefinite delivery/indefinite quantity contact not to exceed $9,900 over a three-year base period with two one-year option periods. In October 2021 we were awarded a purchase order valued at approximately $4,200 to supply a global defense prime with our Vehicle Amplifier-Adaptors for the U.S. Army’s Leader radio program. However, due to supply chain lead times, shipments will commence in 2022.   Gross margin decreased to 25.1% for the year ended December 31, 2021 from 27.1% for the year ended December 31, 2020. The 200-basis point decrease was due primarily to costs incurred for the transition of new products to high volume production in 2021, incremental costs associated with lower factory throughput due to the supply chain disruptions associated with COVID-19 and unfavorable sales product mix.   Operating expenses increased by $1,149 or 4.9% to $24,607 during the year ended December 31, 2021, compared to $23,458 during the year ended December 31, 2020. The increase in operating expenses reflects our continued investment in engineering resources for new product development, including $801 for resources dedicated to the May 2021 indefinite-delivery/indefinite-quantity contract form the U.S. Army for purchases of Conformal Wear Batteries not to exceed $168,000 during the three-year base award period with the potential for up to an additional $350,000 should the six one-year options be exercised. In addition, the 2021 period includes $564 fully attributable to Excell, including $354 of one-time direct acquisition costs reflecting customary legal, audit and due diligence fees. Both periods reflected our continued tight control over discretionary spending.   26     Other expense totaled $186 for the year-ended December 31, 2021 compared to income of $1,322 for the year ended December 31, 2020. On December 14, 2020, Ultralife was awarded a final settlement of $1,593 (net of fees) upon court approval and order authorizing distribution of settlement funds in a class action lawsuit (In Re: Lithium-Ion Batteries Antitrust Litigation, 13-MD-02420-YGR, United States District Court, Northern District of California).  Accordingly, a gain of $1,593 was recognized and was separately reported as gain on litigation settlement on the consolidated statement of income and comprehensive income for the year ended December 31, 2020. Excluding this gain in 2020, other expense totaled $271. The reduction in 2021 is a result of lower interest expense with the continued reduction of debt incurred with the financing for the SWE acquisition. This debt was paid in full in 2021.   Income tax provision was $79 for the year ended December 31, 2021 compared to $1,692 for the year-ended December 31, 2020.  Our effective tax rate was (52.3%) for 2021, as compared to 24.1% for 2020, primarily due to the geographic mix of earnings.  The income tax provision for the 2021 period is comprised of a $226 current provision for taxes expected to be paid on income primarily from our foreign operations, representing a cash-based effective tax rate of (150%) on a consolidated basis, and a $147 deferred tax benefit which represents a non-cash benefit primarily for U.S. net operating losses which are expected to fully offset future U.S. taxable income.  The income tax provision for the 2020 period is comprised of a $306 current provision for taxes on income primarily from our foreign operations, representing a cash-based effective tax rate of 4.4%, and a $1,386 deferred tax provision which primarily represents non-cash charges for U.S. taxes which are expected to be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future.    Net loss attributable to Ultralife was $234 for 2021 as compared to net income of $5,232 for 2020.  Net loss attributable to Ultralife common shareholders per diluted share was $0.01 for 2021 compared to net income of $0.33 per diluted share for 2020. Reflecting the use of net operating losses and tax credits on U.S. generated income, adjusted earnings per diluted share was a loss of $0.02 for 2021 compared to income of $0.41 for 2020.  See the section “Adjusted EPS” on page 32 for a reconciliation of adjusted EPS to EPS.   Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, plus/minus income/expense that we do not consider reflective of our continuing operations, amounted to $4,418 for the year ended December 31, 2021 compared to $11,289 for the prior year.  See the section “Adjusted EBITDA” beginning on page 31 for a reconciliation of adjusted EBITDA to net income attributable to Ultralife.   The Company’s liquidity remains solid, with cash on hand of $8,413, working capital of $47,600 and a current ratio of 3.5. As of December 31, 2020, the Company had cash on hand of $10,653, working capital of $45,790 and a current ratio of 3.4.   As we look ahead, we believe our backlog, durable customer relationships and new product initiatives anchor our view that our long-term profitable growth drivers and strategy are sound and achievable.   27     Results of Operations   Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020:       Year Ended December 31,     Increase/       2021     2020     (Decrease)   Revenues:                         Battery & Energy Products   $ 87,083     $ 91,907     $ (4,824 ) Communications Systems     11,184       15,805       (4,621 ) Total     98,267       107,712       (9,445 ) Cost of Products Sold:                         Battery & Energy Products     66,021       68,507       (2,486 ) Communications Systems     7,604       10,046       (2,442 ) Total     73,625       78,553       (4,928 ) Gross Profit:                         Battery & Energy Products     21,063       23,400       (2,337 ) Communications Systems     3,579       5,759       (2,180 ) Total     24,642       29,159       (4,517 ) Operating Expenses     24,607       23,458       1,149   Operating Income     35       5,701       (5,666 ) Other Expense (Income), Net     186       (1,322 )     1,508   Income Before Taxes     (151 )     7,023       (7,174 ) Income Tax Provision     79       1,692       (1,613 ) Net (Loss) Income     (230 )     5,331       (5,561 ) Net Income Attributable to Non-Controlling Interest     4       99       (95 ) Net (Loss) Income Attributable to Ultralife   $ (234 )   $ 5,232     $ (5,466 ) Net (Loss) Income Attributable to Ultralife Common Shares – Basic   $ (0.01 )   $ 0.33     $ (0.34 ) Net (Loss) Income Attributable to Ultralife Common Shares – Diluted   $ (0.01 )   $ 0.33     $ (0.34 )                           Weighted Average Shares Outstanding –Basic     16,036,676       15,902,108       134,568   Weighted Average Shares Outstanding – Diluted     16,036,676       16,095,676       (59,000 )     Revenues. Total revenues for the year ended December 31, 2021 amounted to $98,267, a decrease of $9,445, or 8.8% from the $107,712 reported for the year ended December 31, 2020.   Battery & Energy Products revenues decreased $4,824, or 5.2%, for the year ended December 31, 2021 as compared to the prior year.  Commercial revenues of this business increased 1,749 or 2.8% from 2020 and now comprise 73.6% of total segment sales versus 67.8% last year.  The year-over-year increase primarily resulted from a $3,878 or 26.2% increase in sales to industrial customers including those serviced by our China facility (i.e., Lithium/Thin Cell battery sales increased 104.0% and 9-volt batteries increased 15.0%), a $3,513 or 26.9% rebound in sales to the oil and gas market (i.e., downhole drilling battery sales increased 26.8%, pipeline inspection batteries increase 24.1% and marine and oceanography batteries increased 35.0%) and the initial sales contribution of $1,131 from Excell, partially offset by a $6,784 or 19.7% decrease in sales to medical customers reflecting the 2020 surge in sales driven by the initial demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices attributable to COVID-19 without the supply chain disruptions experienced in 2021.  Government and defense sales of this business decreased $6,573 or 22.2% from 2020 and now comprise 26.4% of total segment sales versus 32.2% last year.  The decrease primarily reflects the non-recurrence in 2021 of an order received in December 2019 from the U.S. Department of Defense for our legacy 5390 batteries which was completed in 2020 with the shipment of $4,875.  In addition, we experienced delayed shipments to a large global defense prime contractor attributable to supply chain disruptions which comprised a large portion of the remaining variance.   Communications Systems revenues decreased $4,621 or 29.2% for the year ended December 31, 2021 as compared to the prior year. This decrease is primarily attributable to 2020 shipments of vehicle amplifier-adaptor systems in the amount of $5,680 to support the U.S. Army’s Network Modernization initiatives completing the delivery of orders announced in October 2018. In October 2021 we were awarded a purchase order valued at approximately $4,200 to supply a global defense prime with our Vehicle Amplifier-Adaptors for the U.S. Army’s Leader radio program. However, due to supply chain lead times, shipments will commence in 2022.   28     Our order backlog at December 31, 2021 was $63,324, an increase of $24,032 or 61.2% from the backlog at December 31, 2020 which was $39,292. Excluding Excell which was purchased on December 13, 2021, the backlog exiting 2021 was $53,166 which represents an increase of $13,874 or 35.3% compared to 2020. For our Battery & Energy Products business, the backlog increased $20,744 or 60.0% to $55,346 from $34,602 when including Excell and increased $10,586 or 30.6% to $45,188 when excluding Excell. The year-over-year increase when excluding Excell is primarily driven by the demand for our medical batteries, which in some cases includes orders pushed into 2022 because of the supply chain disruptions experienced in 2021. The 2021 year-end backlog is related to orders expected to ship in the next year and does not include future shipments under the indefinite delivery/indefinite quantity U.S. Department of Defense award for our BA-5390 batteries ($9,900), BA-5790/BA-5795 batteries ($49,800) and Conformal Wearable Batteries ($168,000/$350,000). For our Communications Systems business, the backlog increased $3,288 or 70.1% to $7,978 from $4,690. The year-over-year increase is primarily a result of a purchase order valued at approximately $4,200 to supply a global defense prime with our Vehicle Amplifier-Adaptors for the U.S. Army’s Leader radio program. The 2021 year-end backlog is related to orders that are expected to ship throughout 2022.   Cost of Products Sold and Gross Profit. Cost of products sold for the year ended December 31, 2021 decreased $4,928 or 6.3% from the year ended December 31, 2020. Consolidated cost of products sold as a percentage of total revenue increased from 72.9% for the year ended December 31, 2020 to 74.9% for the year ended December 31, 2021. Correspondingly, consolidated gross margin was 25.1% for the year ended December 31, 2021, compared with 27.1% for the year ended December 31, 2020. The 200-basis point decline in gross margin is due primarily to costs incurred for the transition of new products to high volume production in 2021, incremental costs associated with lower factory throughput due to the supply chain disruptions associated with COVID-19 and unfavorable sales product mix.   For our Battery & Energy Products segment, the cost of products sold decreased $2,486 or 3.6%, from the year ended December 31, 2020. Battery & Energy Products’ gross profit for 2021 was $21,062 or 24.2% of revenues, a decrease of $2,338 or 10.0% from gross profit of $23,400, or 25.5% of revenues, for 2020. Battery & Energy Products’ gross margin decreased for the year ended December 31, 2021 by 130 basis points from the prior year to 24.2%, reflecting lower factory volume and incremental costs due to supply chain disruptions associated with COVID-19, costs associated with the transition of new products to higher volume production and unfavorable sales product mix.   For our Communications Systems segment, the cost of products sold decreased by $2,442 or 24.3% from the year ended December 31, 2020. Communications Systems’ gross profit for the year ended December 31, 2021 was $3,580 or 32.0% of revenues, a decrease of $2,179 or 37.8% from gross profit of $5,759 or 36.4% of revenues, for the year ended December 31, 2020. The 440 basis points decrease in gross margin during 2021 to 32.0% is primarily due to lower factory throughput in 2021 and sales mix between years, predominantly higher sales of Vehicle Amplifier-Adaptor systems to fulfill U.S. Army orders in 2020.   Operating Expenses. Total operating expenses for the year ended December 31, 2021 increased $1,149 or 4.9% from the year ended December 31, 2020. The increase in operating expenses reflects our continued investment in engineering resources for new product development, including $801 for resources dedicated to the May 2021 indefinite-delivery/indefinite-quantity contract form the U.S. Army for purchases of Conformal Wear Batteries not to exceed $168,000 during the three-year base award period with the potential for up to an additional $350,000 should the six one-year options be exercised. In addition, the 2021 period includes $564 fully attributable to Excell, including $354 of one-time direct acquisition costs reflecting customary legal, audit and due diligence fees. Both periods reflected our continued tight control over discretionary spending.   Overall, operating expenses as a percentage of revenues was 25.0% for the year ended December 31, 2021 compared to 21.8% for the comparable 2020 period.  Amortization expense associated with intangible assets related to our acquisitions increased to $633 for the year-ended December 31, 2021 ($515 in selling, general and administrative expenses and $118 in research and development costs) from $595 for the year ended December 31, 2020 ($471 in selling, general and administrative expenses and $124 in research and development costs).  This increase was due to our acquisition of Excell in December 2021.  Research and development costs were $6,826 in 2021, an increase of $879 or 14.8%, from $5,947 reported in 2020.  This increase is largely attributable to the hiring of engineering resources to support new product development in our Battery & Energy Products business segment, including $801 pertaining to our May 2021 Conformal Wearable Battery award from the U.S. Army.  Selling, general, and administrative expenses increased $270 or 1.5%, to $17,781 for the year ended December 31, 2021 from $17,511 for the year ended December 31, 2020.  The 2021 expenses include $564 attributable to Excell, including $354 of one-time direct acquisition costs reflecting customary legal, audit and due diligence fees.  We continued tight control over discretionary spending across the Company.   29     Other (Income) Expense. Other expense totaled $186 for the year ended December 31, 2021 compared to income of $1,322 for the year ended December 31, 2020. Other income for 2020 includes a $1,593 litigation gain (net of fees) recognized upon resolution of Ultralife’s claim in a class action lawsuit in December 2020. Interest and financing expense, net of interest income, decreased $193 or 44.4% to $242 for 2021 from $436 for 2020 due to the 2021 continued reduction and pay-off of the debt relating to the May 1, 2019 acquisition of SWE. Miscellaneous income amounted to $56 for 2021 compared to $165 for 2020, primarily due to transactions impacted by foreign currency fluctuation between the U.S. dollar, pound sterling and euro.   Income Taxes.   The income tax provision was $79 for the year ended December 31, 2021 compared to $1,692 for the year-ended December 31, 2020.  Our effective tax rate was (52.3%) for 2021, as compared to 24.1% for 2020, primarily due to the geographic mix of earnings. The income tax provision for the 2021 period is comprised of a $226 current provision for taxes expected to be paid on income primarily from our foreign operations, representing a cash-based effective tax rate of (150%) on a consolidated basis, and a $147 deferred tax benefit which represents a non-cash benefit primarily for U.S. net operating losses which are expected to fully offset future U.S. taxable income.  The income tax provision for the 2020 period is comprised of a $306 current provision for taxes on income primarily from our foreign operations, representing a cash-based effective tax rate of 4.4%, and a $1,386 deferred tax provision which primarily represents non-cash charges for U.S. taxes which are expected to be fully offset by net operating loss and tax credit carryforwards for the foreseeable future.    Net (Loss) Income Attributable to Ultralife .  Net loss attributable to Ultralife was $234 for 2021 as compared to net income of $5,232 for 2020.  Net loss attributable to Ultralife common shareholders per diluted share was $0.01 for 2021 compared to net income of $0.33 per diluted share for 2020.  Adjusted loss per diluted share was $0.02 for 2021, reflecting the exclusion of the $147 non-cash deferred tax benefit for 2021, compared to adjusted earnings per diluted share of $0.41 for 2020, excluding the $1,386 deferred tax provision which primarily represents non-cash charges for U.S. tax which are expected to be fully offset by net operating losses and tax credit carryforwards for the foreseeable future. See the section “Adjusted EPS” on page 32 for a reconciliation of adjusted EPS to EPS.  The net adverse impact of COVID-19 on EPS for 2021 was approximately $0.21.  Weighted average common shares outstanding used to compute diluted earnings per share decreased from 16,095,676 for the 2020 period to 16,036,676 for the 2021 period, mainly due to the 2021 net loss which resulted in the use of basic weighted average common shares to compute diluted earnings per share.   30     Adjusted EBITDA   In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expense/income that we do not consider reflective of our ongoing continuing operations. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ understanding of operating performance from period to period by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the amortization of intangible assets acquired through our business acquisitions (affecting relative amortization expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relative depreciation expense) and one-time charges/benefits relating to income taxes. We also present Adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to Net income (loss) attributable to Ultralife, the most comparable financial measure under GAAP.   We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with GAAP financial measures such as operating income. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of stock-based compensation, which is a non-cash expense that varies widely among companies. We believe that by presenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.   The term Adjusted EBITDA is not defined under GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation or as a substitute for net income attributable to Ultralife or other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to, the following:     a. Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business;     b. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA 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 financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and     d. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.   31     We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only on a supplemental basis. Neither current nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EBITDA to net income attributable to Ultralife.       Year ended December 31,       2021     2020   Net (loss) income attributable to Ultralife   $ (234 )   $ 5,232   Add:                 Interest and financing expense, net     242       436   Income tax provision     79       1,692   Depreciation expense     2,906       2,340   Amortization of intangible assets     633       646   Stock-based compensation expense     671       943   Non-cash purchase accounting adjustments     121       -   Adjusted EBIDTA   $ 4,418     $ 11,289         Adjusted EPS   In evaluating our business, we consider and use Adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance in addition to GAAP financial measures. We define Adjusted EPS as net income (loss) attributable to Ultralife Corporation excluding the provision for deferred taxes divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our tax provision that we expect will be offset by our U.S. net operating loss carryforwards and other tax credits for the foreseeable future. We reconcile Adjusted EPS to EPS, the most comparable financial measure under GAAP. Neither current nor potential investors in our securities should rely on Adjusted EPS as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EPS to EPS and net income attributable to Ultralife.   Adjusted EPS is calculated as follows for the periods presented:         Year Ended December 31,       2021     2020       Amount     Per Basic Share     Per Diluted Share     Amount     Per Basic Share     Per Diluted Share   Net (loss) income attributable to Ultralife Corporate   $ (234 )   $ (0.01 )   $ (0.01 )   $ 5,232     $ 0.33     $ 0.33   Deferred tax (benefit) provision     (147 )     (0.01 )     (0.01 )     1,386       0.09       0.08   Adjusted net (loss) income attributable to Ultralife Corporation   $ (381 )   $ (0.02 )   $ (0.02 )   $ 6,618     $ 0.42     $ 0.41                                                     Weighted average shares outstanding             16,037       16,037               15,902       16,096     32     Liquidity and Capital Resources   Cash Flows and General Business Matters   As of December 31, 2021, cash totaled $8,413 (including restricted cash of $84), a decrease of $2,240 from the $10,653 as of December 31, 2020, primarily attributable to $23,519 cash paid (net of $736 cash acquired) for the Excell acquisition on December 13, 2021, funded in large part by borrowings of $20,980 from the Company’s credit facilities, and cash in advance payments of approximately $3,000 made to certain vendors to secure raw material components to help service our backlog in an efficient and timely manner, partially offset by cash generated from our operations.   For the year ended December 31, 2021, we generated $4,325 cash from our operations, as compared to $21,720 cash generated from operations for the year ended December 31, 2020.  In 2021, cash generated from operating activities consisted of net loss of $230 and a deferred tax benefit of $147, offset by non-cash expenses of depreciation, amortization, and stock-based compensation totaling $4,314 and a $388 increase attributable to reduced net working capital.  For the year ended December 31, 2020, cash generated from operating activities of $21,720 was attributable to net income of $5,331, a deferred tax provision of $1,386, non-cash expenses of depreciation, amortization, and stock-based compensation totaling $3,929, and a $12,667 reduction in net working capital, partially offset by a gain of $1,593 recognized upon resolution of Ultralife’s claim in a class action lawsuit.   Cash used in investing activities was $26,333 for the year ended December 31, 2021 attributable to our acquisition of Excell for an aggregate net purchase price of 23,519, and capital expenditures of $2,814.  For the year ended December 31, 2020, cash used in investing activities was $2,981, primarily attributable to capital expenditures.   Cash provided by financing activities for the year ended December 31, 2021 was $19,642, largely representing draws on our credit facilities totaling $20,980, to finance the Excell acquisition.  For the year ended December 31, 2020, cash used in financing activities was $15,694, primarily representing the paydown of borrowings to finance the May 2019 acquisition of SWE, for which the $1,474 balance was fully paid during 2021.   We continue to have significant U.S. net operating loss carryforwards available to utilize as an offset to taxable income.  As of December 31, 2021, none of our U.S. net operating loss carryforwards have expired.  See Note 7 to the consolidated financial statements for additional information.   Going forward, we expect positive operating cash flow and the availability under our Revolving Credit Facility will be sufficient to meet our obligations for both financing and investing.       Commitments   On December 13, 2021, in connection with financing the Excell acquisition (see Note 2 to the consolidated financial statements), the Company drew down $10,000 on its Term Loan Facility and $10,980 under its Revolving Credit Facility. As of December 31, 2021, the Company had $10,000 outstanding principal on the Term Loan Facility, of which $2,000 was due to be paid over the next twelve months, and $10,980 outstanding principal on the Revolving Credit Facility. The Company is in full compliance with its debt covenants under the Credit Facilities.   As of December 31, 2021, we had made commitments to purchase approximately $630 of production machinery and equipment.   With respect to our battery products, we typically offer warranties against any defects due to product manufacture or workmanship for up to one year from the date of purchase. With respect to our communications accessory products, we typically offer a three-year warranty. We provide for a reserve for these potential warranty expenses, which is based on an analysis of historical warranty issues. There is no assurance that future warranty claims will be consistent with past history, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves would be sufficient. This could have a material adverse effect on our business, financial condition and results of operations.     Off-Balance Sheet Arrangements   We have no off-balance sheet arrangements.     Critical Accounting Policies and Estimates   The above discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires the application of accounting policies and the use of estimates. The accounting policies most important to the preparation of the consolidated financial statements and estimates that require management’s most difficult, subjective or complex judgments are described below.   33     Revenue Recognition:   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 the date of delivery. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and other taxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return. For products shipped under vendor managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which point control 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 practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance 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 includes raw materials, work in process and finished goods. We recognize provisions for excess, obsolete or slow-moving inventory. Inherent in our estimates of net realizable value in determining inventory valuation are assumptions related to expectations of future demand for our products, product lifecycles, product support, technical obsolescence, regulatory requirements, and economic and market conditions. Estimates related to the valuation of inventory are susceptible to changes as the underlying assumptions are continuously evaluated. If our assumptions are adversely different from those estimated by management, inventory adjustments to reduce inventory values would result in an increase in inventory write-offs and a decrease in gross margins.   Goodwill and Other Indefinite Lived Intangible Assets:   Under the acquisition method of accounting, the total consideration transferred to consummate the acquisition is allocated to the identified tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values as of the acquisition date with the residual amount recorded to goodwill.  We do not amortize goodwill and other intangible assets with indefinite lives, but instead evaluate these assets for impairment at least annually and whenever events or circumstances indicate that impairment may exist.   The annual impairment test for goodwill consists of a comparison of the estimated fair value for each reporting unit to which goodwill is assigned to the carrying value of the respective reporting unit.  The annual impairment test for the other intangible assets with an indefinite life consists of a comparison of the estimated fair value of each asset to the carrying value of the respective asset. If the estimated fair value of a reporting unit or other indefinite-lived intangible asset exceeds its respective carrying value, the goodwill or indefinite-lived intangible asset is considered not impaired. If carrying value of a reporting unit or indefinite-lived intangible asset exceeds its estimated fair value, the excess carrying value of the respective goodwill or indefinite-lived intangible asset is recognized as an impairment loss.   34     We conducted our annual impairment test for goodwill and other indefinite-lived intangible assets as of October 1, 2021.  We identified five goodwill reporting units and four indefinite-lived intangible assets. We performed a quantitative impairment assessment of each goodwill reporting unit and indefinite-lived intangible asset. The estimated fair value of each reporting unit was determined using a discounted cash flow model. The estimated fair value of each indefinite-lived intangible asset was determined using other income-based valuation models. Significant estimates and assumptions were used to estimate fair value, including our internal operating and cash flow forecasts, excess working capital requirements, and inputs to the weighted-average cost of capital used to discount future cash flows. Other key assumptions used to value the trademarks and customer relationships included royalty rates and attrition rates, respectively. The significant estimates and assumptions used in these valuations are subject to judgment based on sources utilized and the assessment of risks related to our internal forecasts. Based on the results of our impairment test, and consideration of qualitative factors, no impairments were identified. Estimated fair value exceeded carrying value for all reporting units and other indefinite-lived intangible assets 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 the significant estimates and assumptions used in our impairment assessment.   Impairment of Long-Lived Assets:   We assess our long-lived assets for impairment whenever events or circumstances indicate their carrying amounts may not be recoverable. This is accomplished by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate undiscounted future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated either through the assistance of an independent valuation or as the present value of expected discounted future cash flows. The discount rate used by us in our evaluation is an industry-based weighted average cost of capital. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment charge is recognized.   Income Taxes:   We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Pursuant to ASC 740, a valuation allowance is recognized when the realizability of deferred tax assets is not more likely than not, on the basis of all available evidence, both positive and negative, weighted based on objective verifiability.   As of December 31, 2021, we concluded that it is more likely than not that our U.S. deferred tax assets will be fully realized on the basis of management’s assessment.  In evaluating the realizability of our U.S. deferred tax assets, management considered all available evidence and concluded that positive factors, including our sustained profitability and continued improvement in our ability to achieve internal earnings forecasts, outweighed all negative factors, including our history of operating losses (prior to 2015) and historical operating volatility.  Our assessment also considered our ability to fully utilize before expiration our domestic net operating loss carryforwards, which expire 2022 thru 2035, and our general business tax credit carryforwards, which expire 2028 thru 2039.  As of December 31, 2021, our domestic net operating loss carryforwards and general business tax credits were $44,716 and $2,239, respectively.   As of December 31, 2021, for certain past operations in the U.K., we continue to report a valuation allowance for net operating loss carryforwards of approximately $11,000, nearly all of which can be carried forward indefinitely. Management has concluded that utilization of the U.K. net operating losses may be limited due to the change in the past U.K. operation, and that they cannot currently be used to reduce taxable income of our other U.K. subsidiary, Accutronics Ltd. As of December 31, 2021, we have not recognized a valuation allowance against our other foreign deferred tax assets, as we believe that it is more likely than not that they will be realized. We will continue to evaluate the realizability of our deferred tax assets in future periods.   35     Stock-Based Compensation:   We recognize compensation cost relating to share-based payment transactions in our financial statements. The cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). We calculate implied volatility for stock options based on an average of historical volatility over the expected life of the awards. The computation of expected term is determined based on historical experience of similar awards, giving consideration to the contractual terms of the awards and 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.   Business Combinations:   We account for businesses acquired using the acquisition method of accounting. Under this method, all acquisition-related costs are expensed as incurred, and the total consideration transferred to consummate the acquisition is allocated to the identified tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values as of the acquisition date with the residual amount recorded to goodwill. As part of this process, we identify and attribute values and estimated lives to property and equipment and intangible assets acquired. These determinations involve significant estimates and assumptions, including those with respect to future cash flows, discount rates and asset lives, and therefore require considerable judgment. These determinations affect the amount of depreciation and amortization expense recognized in future periods. The results of operations of acquired businesses are included in the consolidated statements of income and comprehensive income beginning on the respective acquisition date.   Warranties:   We generally offer standard warranties against product defects. We do not offer separate service-type 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 and related reserves are based on actual past experience and are generally estimated as a percentage of sales over the warranty period.   Environmental Issues:   Environmental expenditures, if any, that relate to current operations, are generally expensed. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated.     ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   As a smaller reporting company, we are not required to provide this information.   36