UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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For the quarterly period ended March 31, 20222023
OR
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For the transition period from ____________ to ____________
Commission file number:0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation of organization)
2000 Technology Parkway Newark, New York 14513 (Address of principal executive offices) (Zip Code) | 16-1387013 (I.R.S. Employer Identification No.)
(315) 332-7100 (Registrant’s telephone number, including area |
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value per share | ULBI | NASDAQ |
(Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer |
Non-accelerated filer | Smaller reporting company ☒ |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No☒
As of April 25, 2022,30, 2023, the registrant had 16,127,08216,135,358 shares of common stock outstanding.
ULTRALIFE CORPORATION AND SUBSIDIARIES
INDEX
Page | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Consolidated Financial Statements (unaudited): | 1 |
Consolidated Balance Sheets as of March 31, | 1 | |
Consolidated Statements of | 2 | |
Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, | 3 | |
Consolidated Statements of Changes in Shareholders’ Equity for the Three-Month Periods Ended March 31, | 4 | |
Notes to Consolidated Financial Statements (unaudited) | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 4. | Controls and Procedures |
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PART II. | OTHER INFORMATION | |
Item 6. | Exhibits |
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Signatures |
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PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share amounts)
(Unaudited)
March 31, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ASSETS | |||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 6,050 | $ | 8,413 | $ | 5,605 | $ | 5,713 | ||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $325 and $346, respectively | 22,909 | 20,232 | ||||||||||||||
Trade accounts receivable, net of allowance for expected credit losses of $308 and $303, respectively | 24,463 | 27,779 | ||||||||||||||
Inventories, net | 36,380 | 33,189 | 47,311 | 41,192 | ||||||||||||
Prepaid expenses and other current assets | 3,803 | 4,690 | 3,973 | 4,304 | ||||||||||||
Total current assets | 69,142 | 66,524 | 81,352 | 78,988 | ||||||||||||
Property, plant and equipment, net | 22,773 | 23,205 | 21,412 | 21,716 | ||||||||||||
Goodwill | 37,926 | 38,068 | 37,518 | 37,428 | ||||||||||||
Other intangible assets, net | 17,043 | 17,390 | 15,747 | 15,921 | ||||||||||||
Deferred income taxes, net | 11,804 | 11,472 | 12,965 | 12,069 | ||||||||||||
Other noncurrent assets | 2,701 | 2,879 | 2,160 | 2,308 | ||||||||||||
Total assets | $ | 161,389 | $ | 159,538 | $ | 171,154 | $ | 168,430 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 11,235 | $ | 9,823 | $ | 18,988 | $ | 16,074 | ||||||||
Current portion of long-term debt | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
Accrued compensation and related benefits | 1,615 | 1,842 | 2,321 | 2,890 | ||||||||||||
Accrued expenses and other current liabilities | 5,165 | 5,259 | 5,890 | 7,949 | ||||||||||||
Total current liabilities | 20,015 | 18,924 | 29,199 | 28,913 | ||||||||||||
Long-term debt | 19,981 | 18,857 | 21,126 | 19,310 | ||||||||||||
Deferred income taxes | 2,178 | 2,254 | 2,456 | 1,917 | ||||||||||||
Other noncurrent liabilities | 1,574 | 1,760 | 1,969 | 1,887 | ||||||||||||
Total liabilities | 43,748 | 41,795 | 54,750 | 52,027 | ||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
| Commitments and contingencies (Note 8) | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued | 0 | 0 | - | - | ||||||||||||
Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,560,796 shares at March 31, 2022 and 20,522,427 shares at December 31, 2021; outstanding – 16,127,082 shares at March 31, 2022 and 16,089,832 shares at December 31, 2021 | 2,056 | 2,052 | ||||||||||||||
Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,570,710shares at March 31, 2023 and 20,570,710 shares at December 31, 2022; outstanding – 16,135,358 shares at March 31, 2023 and 16,135,358shares at December 31, 2022 | 2,057 | 2,057 | ||||||||||||||
Capital in excess of par value | 186,816 | 186,518 | 187,544 | 187,405 | ||||||||||||
Accumulated deficit | (48,000 | ) | (47,832 | ) | (48,297 | ) | (47,951 | ) | ||||||||
Accumulated other comprehensive loss | (1,889 | ) | (1,653 | ) | (3,553 | ) | (3,750 | ) | ||||||||
Treasury stock - at cost; 4,433,714 shares at March 31, 2022 and 4,432,595 shares at December 31, 2021 | (21,476 | ) | (21,469 | ) | ||||||||||||
Treasury stock - at cost; 4,435,352 shares at March 31, 2023 and 4,435,352 shares at December 31, 2022 | (21,484 | ) | (21,484 | ) | ||||||||||||
Total Ultralife Corporation equity | 117,507 | 117,616 | 116,267 | 116,277 | ||||||||||||
Non-controlling interest | 134 | 127 | 137 | 126 | ||||||||||||
Total shareholders’ equity | 117,641 | 117,743 | 116,404 | 116,403 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 161,389 | $ | 159,538 | $ | 171,154 | $ | 168,430 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE INCOME (LOSS) (In Thousands except per share amounts) (Unaudited) |
Three-month period ended | Three-month period ended | |||||||||||||||
March 31, 2022 | March 31, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||
Revenues | $ | 30,373 | $ | 25,973 | $ | 31,916 | $ | 30,373 | ||||||||
Cost of products sold | 23,415 | 18,995 | 24,480 | 23,415 | ||||||||||||
Gross profit | 6,958 | 6,978 | 7,436 | 6,958 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,857 | 1,647 | 2,032 | 1,857 | ||||||||||||
Selling, general and administrative | 5,396 | 4,379 | 5,378 | 5,396 | ||||||||||||
Total operating expenses | 7,253 | 6,026 | 7,410 | 7,253 | ||||||||||||
Operating (loss) income | (295 | ) | 952 | |||||||||||||
Operating income (loss) | 26 | (295 | ) | |||||||||||||
Other (expense) income: | ||||||||||||||||
Interest and financing expense | (134 | ) | (56 | ) | (424 | ) | (134 | ) | ||||||||
Miscellaneous income | 17 | 0 | ||||||||||||||
Miscellaneous (expense) income | (70 | ) | 17 | |||||||||||||
Total other expense | (117 | ) | (56 | ) | (494 | ) | (117 | ) | ||||||||
(Loss) income before income taxes | (412 | ) | 896 | |||||||||||||
Income tax (benefit) provision | (251 | ) | 217 | |||||||||||||
Loss before income taxes | (468 | ) | (412 | ) | ||||||||||||
Income tax benefit | (133 | ) | (251 | ) | ||||||||||||
Net (loss) income | (161 | ) | 679 | |||||||||||||
Net loss | (335 | ) | (161 | ) | ||||||||||||
Net income attributable to non-controlling interest | (7 | ) | (8 | ) | (11 | ) | (7 | ) | ||||||||
Net (loss) income attributable to Ultralife Corporation | (168 | ) | 671 | |||||||||||||
Net loss attributable to Ultralife Corporation | (346 | ) | (168 | ) | ||||||||||||
Other comprehensive (loss) gain: | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | (236 | ) | 103 | 197 | (236 | ) | ||||||||||
Comprehensive (loss) income attributable to Ultralife Corporation | $ | (404 | ) | $ | 774 | |||||||||||
Comprehensive income (loss) attributable to Ultralife Corporation | $ | 149 | $ | (404 | ) | |||||||||||
Net (loss) income per share attributable to Ultralife common shareholders – basic | $ | (.01 | ) | $ | .04 | |||||||||||
Net loss per share attributable to Ultralife common shareholders – basic | $ | (.02 | ) | $ | (.01 | ) | ||||||||||
Net (loss) income per share attributable to Ultralife common shareholders – diluted | $ | (.01 | ) | $ | .04 | |||||||||||
Net loss per share attributable to Ultralife common shareholders – diluted | $ | (.02 | ) | $ | (.01 | ) | ||||||||||
Weighted average shares outstanding – basic | 16,104 | 15,973 | 16,135 | 16,104 | ||||||||||||
Potential common shares | 0 | 179 | - | - | ||||||||||||
Weighted average shares outstanding - diluted | 16,104 | 16,152 | 16,135 | 16,104 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) |
Three-month period ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net (loss) income | $ | (161 | ) | $ | 679 | |||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 816 | 730 | ||||||
Amortization of intangible assets | 328 | 154 | ||||||
Amortization of financing fees | 7 | 26 | ||||||
Stock-based compensation | 189 | 184 | ||||||
Deferred income taxes | (402 | ) | 168 | |||||
Proceeds from litigation settlement | 0 | 1,593 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,724 | ) | 1,952 | |||||
Inventories | (3,274 | ) | 367 | |||||
Prepaid expenses and other assets | 977 | 225 | ||||||
Accounts payable and other liabilities | 1,022 | (2,175 | ) | |||||
Net cash (used in) provided by operating activities | (3,222 | ) | 3,903 | |||||
INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (371 | ) | (489 | ) | ||||
Net cash used in investing activities | (371 | ) | (489 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Borrowings on revolving credit facility | 1,450 | 0 | ||||||
Payments on term loan facility | (333 | ) | (393 | ) | ||||
Proceeds from exercise of stock options | 113 | 31 | ||||||
Tax withholdings on stock-based awards | (7 | ) | (58 | ) | ||||
Net cash provided by (used in) financing activities | 1,223 | (420 | ) | |||||
Effect of exchange rate changes on cash | 7 | 15 | ||||||
(DECREASE) INCREASE IN CASH | (2,363 | ) | 3,009 | |||||
Cash, Beginning of period | 8,413 | 10,653 | ||||||
Cash, End of period | $ | 6,050 | $ | 13,662 | ||||
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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, 2020 | 20,373,519 | $ | 2,037 | $ | 185,464 | $ | (1,782 | ) | $ | (47,598 | ) | $ | (21,321 | ) | $ | 123 | $ | 116,923 | ||||||||||||||
Net income | 671 | 8 | 679 | |||||||||||||||||||||||||||||
Stock option exercises | 37,159 | 4 | 27 | (52 | ) | (21 | ) | |||||||||||||||||||||||||
Stock-based compensation – stock options | 163 | 163 | ||||||||||||||||||||||||||||||
Stock-based compensation – restricted stock | 21 | 21 | ||||||||||||||||||||||||||||||
Vesting of restricted stock | 5,833 | 1 | (1 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustments adjustments | 103 | 103 | ||||||||||||||||||||||||||||||
Balance – March 31, 2021 | 20,416,511 | $ | 2,042 | $ | 185,674 | $ | (1,679 | ) | $ | (46,927 | ) | $ | (21,380 | ) | $ | 131 | $ | 117,861 | ||||||||||||||
Balance – December 31, 2021 | 20,522,427 | $ | 2,052 | $ | 186,518 | $ | (1,653 | ) | $ | (47,832 | ) | $ | (21,469 | ) | $ | 127 | $ | 117,743 | ||||||||||||||
Net (loss) income | (168 | ) | 7 | (161 | ) | |||||||||||||||||||||||||||
Stock option exercises | 38,369 | 4 | 109 | (7 | ) | 106 | ||||||||||||||||||||||||||
Stock-based compensation – stock options | 181 | 181 | ||||||||||||||||||||||||||||||
Stock-based compensation – restricted stock | 8 | 8 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments adjustments | (236 | ) | (236 | ) | ||||||||||||||||||||||||||||
Balance – March 31, 2022 | 20,560,796 | $ | 2,056 | $ | 186,816 | $ | (1,889 | ) | $ | (48,000 | ) | $ | (21,476 | ) | $ | 134 | $ | 117,641 | ||||||||||||||
Three-month period ended | ||||||||
March 31, 2023 | March 31, 2022 | |||||||
| OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (335 | ) | $ | (161 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 762 | 816 | ||||||
Amortization of intangible assets | 209 | 328 | ||||||
Amortization of financing fees | 16 | 7 | ||||||
Stock-based compensation | 139 | 189 | ||||||
Deferred income taxes | (390 | ) | (402 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 3,365 | (2,724 | ) | |||||
Inventories | (6,026 | ) | (3,274 | ) | ||||
Prepaid expenses and other assets | 639 | 977 | ||||||
Accounts payable and other liabilities | 256 | 1,022 | ||||||
Net cash used in operating activities | (1,365 | ) | (3,222 | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (497 | ) | (371 | ) | ||||
Net cash used in investing activities | (497 | ) | (371 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
Borrowings on revolving credit facility | 2,300 | 1,450 | ||||||
Payments on term loan facility | (500 | ) | (333 | ) | ||||
Proceeds from exercise of stock options | - | 113 | ||||||
Tax withholdings on stock-based awards | - | (7 | ) | |||||
Net cash provided by financing activities | 1,800 | 1,223 | ||||||
Effect of exchange rate changes on cash | (46 | ) | 7 | |||||
DECREASE IN CASH | (108 | ) | (2,363 | ) | ||||
Cash, Beginning of period | 5,713 | 8,413 | ||||||
Cash, End of period | $ | 5,605 | $ | 6,050 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands except share amounts)
(Unaudited)
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, 2021 | 20,522,427 | $ | 2,052 | $ | 186,518 | $ | (1,653 | ) | $ | (47,832 | ) | $ | (21,469 | ) | $ | 127 | $ | 117,743 | ||||||||||||||
Net loss | (168 | ) | 7 | (161 | ) | |||||||||||||||||||||||||||
Stock option exercises | 38,369 | 4 | 109 | (7 | ) | 106 | ||||||||||||||||||||||||||
Stock-based compensation – stock options | 181 | 181 | ||||||||||||||||||||||||||||||
Stock-based compensation – restricted stock | 8 | 8 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments adjustments | (236 | ) | (236 | ) | ||||||||||||||||||||||||||||
Balance – March 31, 2022 | 20,560,796 | $ | 2,056 | $ | 186,816 | $ | (1,889 | ) | $ | (48,000 | ) | $ | (21,476 | ) | $ | 134 | $ | 117,641 | ||||||||||||||
Balance – December 31, 2022 | 20,570,710 | $ | 2,057 | $ | 187,405 | $ | (3,750 | ) | $ | (47,951 | ) | $ | (21,484 | ) | $ | 126 | $ | 116,403 | ||||||||||||||
Net loss | (346 | ) | 11 | (335 | ) | |||||||||||||||||||||||||||
Stock option exercises | - | - | - | - | - | |||||||||||||||||||||||||||
Stock-based compensation – stock options | 138 | 138 | ||||||||||||||||||||||||||||||
Stock-based compensation – restricted stock | 1 | 1 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments adjustments | 197 | 197 | ||||||||||||||||||||||||||||||
Balance – March 31, 2023 | 20,570,710 | $ | 2,057 | $ | 187,544 | $ | (3,553 | ) | $ | (48,297 | ) | $ | (21,484 | ) | $ | 137 | $ | 116,404 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
(Unaudited)
1. | BASIS OF PRESENTATION |
The accompanying unaudited Consolidated Financial Statementsconsolidated financial statements of Ultralife Corporation and its subsidiaries (the “Company” or “Ultralife”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-038-03 of Regulation S-X.S-X. Accordingly, they do not include all the information and notes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statementsconsolidated financial statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the Consolidated Financial Statementsconsolidated financial statements and related notes thereto contained in our Form 10-K10-K for the year ended December 31, 2021.2022.
The December 31, 2021 2022 consolidated balance sheet information referenced herein was derived from audited financial statements but does not include all disclosures required by GAAP.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.
RecentRecently Adopted Accounting GuidanceNot Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13,2016-13, “Financial Instruments – Credit Losses (Topic 326)326) – Measurement of Credit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets held at the reporting datadate based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adoptingadoption of this new accounting standard willdid not have a material impact on our consolidated financial statements.
2. |
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On December 13, 2021, the Company acquired all the outstanding shares of Excell for an aggregate net purchase price of $23,519 in cash.
On December 13, 2021, 1336889 B.C. Unlimited Liability Company, a British Columbia unlimited liability company and wholly-owned subsidiary of Ultralife Canada Holding Corp., a Delaware corporation (“UCHC”) and wholly-owned subsidiary of Ultralife Excell Holding Corp., a Delaware corporation (“UEHC”) and wholly-owned subsidiary of Ultralife Corporation, completed the acquisition of all issued and outstanding shares of Excell Battery Canada Inc., a British Columbia corporation (“Excell Canada”) (the “Excell Canada Acquisition”), and, concurrently, 1336902 B.C. Unlimited Liability Company, a British Columbia unlimited liability company and wholly-owned subsidiary of UCHC, completed the acquisition of all issued and outstanding shares of 656700 B.C. LTD, a British Columbia corporation and sole owner of all issued and outstanding shares of Excell Battery Corporation USA, a Texas corporation (“Excell USA”, and together with Excell Canada, “Excell Battery Group” or “Excell”) (the “Excell USA Acquisition”, and together with the Excell Canada Acquisition, the “Excell Acquisition”).
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, ruggedized computers, and mining, marine and other mission critical applications which demand uncompromised safety, service, reliability and quality.
The Excell Canada Acquisition was completed pursuant to a Share Purchase Agreement dated December 13, 2021 (the “Excell Canada Acquisition Agreement”) by and among 1336889 B.C. Unlimited Liability Company, Mark Kroeker, Randolph Peters, Brian Larsen, M. & W. Holdings Ltd., Karen Kroeker, Heather Peterson, Michael Kroeker, Nicholas Kroeker, Brentley Peters, Craig Peters, Kurtis Peters, Heather Larsen, Ian Kane, Carol Peters, and 0835205 B.C. LTD (the “Excell Canada Sellers”), Mark Kroeker in his capacity as the Excell Canada Sellers’ Representative, and Excell Canada. The Excell USA Acquisition was completed pursuant to a Share Purchase Agreement dated December 13, 2021 (the “Excell USA Acquisition Agreement”, and together with the Excell Canada Acquisition Agreement, the “Excell Acquisition Agreements”) by and among 1336902 B.C. Unlimited Liability Company, M. & W. Holdings Ltd., Ian Kane, Sanford Capital Ltd., Arcee Enterprises Inc., and 0835205 B.C. Ltd. (the “Excell USA Sellers”, and together with the Excell Canada Sellers, the “Sellers”), Mark Kroeker in his capacity as the Excell USA Sellers’ Representative, and 656700 B.C. LTD. The Excell Acquisition Agreements contain customary terms and conditions including representations, warranties and indemnification provisions. A portion of the consideration paid to the Sellers is being held in escrow for indemnification purposes for a period of twelve months from the closing date.
The Excell Acquisition was funded by the Company through a combination of cash on hand and borrowings under the Amended Credit Facilities (Note 3).
The Excell Acquisition was accounted for in accordance with the accounting treatment of a business combination pursuant to FASB ASC Topic 805, Business Combinations (“ASC 805”). Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over the estimated fair value of the separately identifiable assets acquired and liabilities assumed was allocated to goodwill. Management is responsible for determining the acquisition date fair value of the assets acquired and liabilities assumed, which requires the use of various assumptions and judgments that are inherently subjective. The purchase price allocation presented below reflects all known information about the fair value of the assets acquired and liabilities assumed as of the acquisition date. The purchase price allocation is subject to change should additional information existing as of the acquisition date about the fair value of the assets acquired and liabilities assumed becomes known. The final purchase price allocation may reflect material changes in the valuation of assets acquired and liabilities assumed, including but not limited to intangible assets, fixed assets, deferred taxes, and residual goodwill.
Cash | $ | 736 | ||
Accounts receivable | 3,570 | |||
Inventories | 3,622 | |||
Prepaid expenses and other current assets | 785 | |||
Property, plant and equipment | 429 | |||
Goodwill | 10,989 | |||
Other intangible assets | 8,870 | |||
Other noncurrent assets | 991 | |||
Accounts payable | (1,450 | ) | ||
Accrued compensation and related benefits | (540 | ) | ||
Accrued expenses and other current liabilities | (720 | ) | ||
Deferred tax liability, net | (2,223 | ) | ||
Other noncurrent liabilities | (803 | ) | ||
Net assets acquired | $ | 24,256 |
The purchase price allocation was adjusted during the three-month period ended March 31, 2022 to reflect a change in the estimated fair value of certain other intangible assets acquired. The measurement period adjustment resulted in a $40 increase in other intangible assets acquired, a $10 increase in deferred tax liabilities and a $30 decrease to goodwill. The adjusted purchase price allocation is reflected in the consolidated balance sheet as of March 31, 2022.
The goodwill included in the Company’s purchase price allocation presented above represents the value of Excell’s assembled and trained workforce, the incremental value that Excell engineering and technology will bring to the Company and the revenue growth which is expected to occur over time which is attributable to increased market penetration from future new products and customers. The goodwill acquired in connection with the acquisition is not deductible for income tax purposes.
Other intangible assets were valued using the income approach which requires a forecast of all expected future cash flows and the use of certain assumptions and estimates. The following table summarizes the estimated fair value and annual amortization for each of the identifiable intangible assets acquired.
Annual Amortization | ||||||||||||||||||||||||||||
Estimated Fair Value | Amortization Period (Years) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||||||||||||||||||||||
Customer relationships | $ | 4,100 | 15 | $ | 273 | $ | 273 | $ | 273 | $ | 273 | $ | 273 | |||||||||||||||
Trade name | 3,150 | Indefinite | - | - | - | - | - | |||||||||||||||||||||
Customer contracts | 1,140 | 15 | 76 | 76 | 76 | 76 | 76 | |||||||||||||||||||||
Backlog | 360 | 1 | 360 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Technology | 120 | 7 | 17 | 17 | 17 | 17 | 17 | |||||||||||||||||||||
Total | $ | 8,870 | $ | 726 | $ | 366 | $ | 366 | $ | 366 | $ | 366 | ||||||||||||||||
We acquired right-of-use assets and assumed lease liabilities of $960 for Excell’s operating facilities. Right-of-use assets are classified as other noncurrent assets, and current and long-term lease liabilities are classified as accrued expenses and other current liabilities and other noncurrent liabilities, respectively, on the Company’s consolidated balance sheet.
The operating results and cash flows of Excell are reflected in the Company’s consolidated financial statements from the date of acquisition. Excell is included in the Battery & Energy Products segment.
For the three months ended March 31, 2022, Excell contributed revenue of $6,436 and net income of $394, inclusive of amortization expense of $182 on acquired identifiable intangible assets and a $55 increase in cost of products sold attributable to the fair market value step-up of acquired inventory sold during the period.
| DEBT |
On December 13, 2021, Ultralife, Southwest Electronic Energy Corporation, a Texas corporation and wholly owned subsidiary of Ultralife (“SWE”), CLB, INC., a Texas corporation and wholly owned subsidiary of SWE (“CLB”), Ultralife Excell Holding Corp., a Delaware corporation and wholly owned subsidiary of Ultralife (“UEHC”), Ultralife Canada Holding Corp., a Delaware corporation and wholly owned subsidiary of UEHC UCHC(“UCHC”), and Excell Battery Corporation USA, a Texas corporation and wholly owned subsidiary of UEHC (“Excell USA”), as borrowers, entered into the Second Amendment Agreement with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to amend the Credit and Security Agreement dated May 31, 2017 as amended by the First Amendment Agreement by and among Ultralife, SWE, CLB and KeyBank dated May 1, 2019 ((the “Credit Agreement”). On November 28, 2022, Ultralife, SWE, CLB, UEHC, UCHC, Excell USA, and Excell Battery Canada ULC, a British Columbia unlimited liability corporation and wholly owned subsidiary of UCHC (“Excell Canada”), entered into that certain Third Amendment Agreement with KeyBank, to further amend the “CreditCredit Agreement to, among other things, facilitate the joinder of Excell Canada as a guarantor under the Credit Agreement and to replace the LIBOR benchmark thereunder with SOFR (the “Third Amendment Agreement”, and together with the Second Amendment Agreement and the Credit Agreement, the “Amended Credit Agreement”).
The Amended Credit Agreement, among other things, provides for a 5-year,5-year, $10,000 senior secured term loan (the “Term Loan Facility”) and extends the term of the $30,000 senior secured revolving credit facility (the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Amended Credit Facilities”) through May 30, 2025. Up to six months prior to May 30, 2025, the Revolving Credit Facility may be increased to $50,000 with the Bank’s concurrence.
Upon closing of the Excell Acquisition on December 13, 2021, the Company drew down the full amount of the Term Loan Facility and $10,980 under the Revolving Credit Facility.
As of March 31, 2022, 2023, the Company had $9,667$7,667 outstanding principal on the Term Loan Facility, $2,000 of which is included in current portion of long-term debt on the consolidated balance sheet, and $12,430$15,630 outstanding on the Revolving Credit Facility. As of March 31, 2022, 2023, total unamortized debt issuance costs of $116,$171, including placement, renewal and legal fees associated with the Amended Credit Agreement, are classified as a reduction of long-term debt on the balance sheet. Debt issuance costs are amortized to interest expense over the term of the Amended Credit Facilities.
The remaining availability under the Revolving Credit Facility is subject to certain borrowing base limits based on trade receivables and inventories.
The Company is required to repay the borrowings under the Term Loan Facility in equal consecutive monthly payments commencing on February 1, 2022, in arrears, together with applicable interest. All unpaid principal and accrued and unpaid interest with respect to the Term Loan Facility is due and payable in full on January 1, 2027. All unpaid principal and accrued and unpaid interest with respect to the Revolving Credit Facility is due and payable in full on May 30, 2025. The Company may voluntarily prepay principal amounts outstanding at any time subject to certain restrictions.
In addition to the customary affirmative and negative covenants, the Company must maintain a consolidated senior leverage ratio,Consolidated Senior Leverage Ratio, as defined in the Amended Credit Agreement, of equal to or less than 3.5 to 1.0 for the fiscal quarters ending December 31, 2022 and March 31, 2023, and equal to or less than 3.0 to 1.0 for the fiscal quarters ending June 30, 2023 and thereafter. The Company was in full compliance with its covenants under the Amended Credit Agreement as of March 31, 2023.
Borrowings under the Amended Credit Facilities are secured by substantially all the assets of the Company and its subsidiaries.
Interest will accrueUpon the effectiveness of the Third Amendment Agreement, interest accrues on outstanding indebtedness under the Amended Credit Facilities at the BaseDaily Simple SOFR Rate, or the Overnight LIBOR Rate, as selected by the Company,plus an index spread adjustment of 0.10%, plus the applicable margin. The Base Rate is the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 50 basis points, and (c) the Overnight LIBOR Rate plus one hundred basis points. The applicable margin ranges from zero to negative 50 basis points for the Base Rate and from 185 to 215 basis points for the Overnight LIBOR Rate and areis determined based on the Company’s senior leverage ratio. The Second Amendment Agreement includes standard market provisions permitting the Bank to transition from LIBOR to a SOFR based rate, in its discretion
The Company must pay a fee of 0.15% to 0.25% based on the average daily unused availability under the Revolving Credit Facility.
Payments must be made by the Company to the extent borrowings exceed the maximum amount then permitted to be drawn on the Amended Credit Facilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated, and the Bank will have other customary remedies including resort to the security interest the Company provided to the Bank.
| EARNINGS PER SHARE |
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) attributable to Ultralife by the weighted average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method. For the three-monththree-month period ended March 31, 2022, 2023, there were no outstanding awards included in the calculation of diluted weighted average shares outstanding and 0no potential common shares included in the calculation of diluted EPS, as no securities were dilutive. There were 1,420,611 outstanding stock options and 2,500 unvested restricted stock awards not included in the calculation of diluted EPS for the three-month period ended March 31, 2023, as the effect would be antidilutive. For the comparable three-month period ended March 31, 2022, there were 1,204,490 outstanding stock options and 11,664 unvested restricted stock awards not included in the calculation of diluted EPS for the three-month period ended March 31, 2022, as the effect would be antidilutive. For the comparable three-month period ended March 31, 2021, 459,650 stock options and 20,832 restricted stock awards were included in the calculation of diluted weighted average shares outstanding resulting in 178,781 additional shares in the calculation of diluted EPS. There were 668,917 outstanding stock options for the three-month period ended March 31, 2021 that were not included in the calculation of diluted EPS, as the effect would be antidilutive.
| SUPPLEMENTAL BALANCE SHEET INFORMATION |
Fair Value Measurements and Disclosures
The fair value of financial instruments approximated their carrying values at March 31, 2022 2023 and December 31, 2021. 2022. The fair value of cash, accounts receivable, accounts payable, accrued liabilities, and the current portion of long-term debt approximates carrying value due to the short-term nature of these instruments.
Cash
The composition of the Company’s cash was as follows:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash | $ | 5,968 | $ | 8,329 | $ | 5,524 | $ | 5,634 | ||||||||
Restricted cash | 82 | 84 | 81 | 79 | ||||||||||||
Total | $ | 6,050 | $ | 8,413 | $ | 5,605 | $ | 5,713 | ||||||||
As of March 31, 2022 2023 and December 31, 2021, 2022, restricted cash included $82$81 and $84,$79, respectively, of euro-denominated deposits withheld by the Dutch tax authorities and third-partythird-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.
Inventories, Net
Inventories are stated at the lower of cost or net realizable value, net of obsolescence reserves, with cost determined under the first-in, first-outfirst-in, first-out (FIFO) method. The composition of inventories, net was:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Raw materials | $ | 23,673 | $ | 21,660 | $ | 32,960 | $ | 29,200 | ||||||||
Work in process | 3,521 | 4,227 | 4,594 | 2,757 | ||||||||||||
Finished goods | 9,186 | 7,302 | 9,757 | 9,235 | ||||||||||||
Total | $ | 36,380 | $ | 33,189 | $ | 47,311 | $ | 41,192 | ||||||||
Property, Plant and Equipment, Net
Major classes of property, plant and equipment consisted of the following:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Land | $ | 1,273 | $ | 1,273 | $ | 1,273 | $ | 1,273 | ||||||||
Buildings and leasehold improvements | 15,443 | 15,442 | 15,605 | 15,572 | ||||||||||||
Machinery and equipment | 64,137 | 63,780 | 64,132 | 63,981 | ||||||||||||
Furniture and fixtures | 2,654 | 2,588 | 2,825 | 2,845 | ||||||||||||
Computer hardware and software | 7,586 | 7,579 | 7,687 | 7,744 | ||||||||||||
Construction in process | 704 | 761 | 1,642 | 1,245 | ||||||||||||
| 91,797 | 91,423 | 93,164 | 92,660 | |||||||||||||
Less: Accumulated depreciation | (69,024 | ) | (68,218 | ) | (71,752 | ) | (70,944 | ) | ||||||||
Property, plant and equipment, net | $ | 22,773 | $ | 23,205 | $ | 21,412 | $ | 21,716 | ||||||||
Depreciation expense for property, plant and equipment was $816$762 and $730$816 for the three-monththree-month periods ended March 31, 2023 and March 31, 2022, and March 31, 2021, respectively.
Goodwill
The following table summarizes the goodwill activity by segment for the three-monththree-month period ended March 31, 2022.2023.
Battery & Energy | Communications | |||||||||||
Products | Systems | Total | ||||||||||
Balance – December 31, 2021 | $ | 26,575 | $ | 11,493 | $ | 38,068 | ||||||
Measurement period adjustment (1) | (30 | ) | 0 | (30 | ) | |||||||
Effect of foreign currency translation | (112 | ) | 0 | (112 | ) | |||||||
Balance – March 31, 2022 | $ | 26,433 | $ | 11,493 | $ | 37,926 | ||||||
| Battery & | ||||||||||||
Energy | Communications | |||||||||||
Products | Systems | Total | ||||||||||
Balance – December 31, 2022 | $ | 25,935 | $ | 11,493 | $ | 37,428 | ||||||
Effect of foreign currency translation | 90 | - | 90 | |||||||||
Balance – March 31, 2023 | $ | 26,025 | $ | 11,493 | $ | 37,518 | ||||||
|
|
Other Intangible Assets, Net
The composition of other intangible assets was:
at March 31, 2022 | at March 31, 2023 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Cost | Amortization | Net | Cost | Amortization | Net | |||||||||||||||||||
Customer relationships | $ | 13,170 | $ | 5,614 | $ | 7,556 | $ | 13,021 | $ | 6,166 | $ | 6,855 | ||||||||||||
Patents and technology | 5,637 | 5,137 | 500 | 5,577 | 5,214 | 363 | ||||||||||||||||||
Trade names | 4,659 | 458 | 4,201 | 4,637 | 555 | 4,082 | ||||||||||||||||||
Trademarks | 3,413 | 0 | 3,413 | 3,405 | - | 3,405 | ||||||||||||||||||
Other | 1,500 | 127 | 1,373 | 1,500 | 458 | 1,042 | ||||||||||||||||||
Total other intangible assets | $ | 28,379 | $ | 11,336 | $ | 17,043 | $ | 28,140 | $ | 12,393 | $ | 15,747 | ||||||||||||
at December 31, 2021 | at December 31, 2022 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Cost | Amortization | Net | Cost | Amortization | Net | |||||||||||||||||||
Customer relationships | $ | 13,214 | $ | 5,484 | $ | 7,730 | $ | 12,970 | $ | 5,992 | $ | 6,978 | ||||||||||||
Patents and technology | 5,667 | 5,126 | 541 | 5,557 | 5,171 | 386 | ||||||||||||||||||
Trade names | 4,670 | 436 | 4,234 | 4,629 | 522 | 4,107 | ||||||||||||||||||
Trademarks | 3,413 | 0 | 3,413 | 3,404 | - | 3,404 | ||||||||||||||||||
Other | 1,490 | 18 | 1,472 | 1,500 | 454 | 1,046 | ||||||||||||||||||
Total other intangible assets | $ | 28,454 | $ | 11,064 | $ | 17,390 | $ | 28,060 | $ | 12,139 | $ | 15,921 | ||||||||||||
The change in the cost of total intangible assets from December 31, 2021 2022 to March 31, 2022 2023 is a result of measurement period adjustment for the Excell Acquisition (Note 2) and the effect of foreign currency translations.
Amortization expense for intangible assets was $328$209 and $154$328 for the three-monththree-month periods ended March 31, 2023 and March 31, 2022, and March 31, 2021, respectively. Amortization included in selling, general and administrative expenses was $302$185 and $121$302 for the three-monththree-month periods ended March 31, 2023 and March 31, 2022, and March 31, 2021, respectively. Amortization included in research and development expenses was $26$24 and $33$26 for the three-monththree-month periods ended March 31, 2023 and March 31, 2022, and March 31, 2021, respectively.
| STOCK-BASED COMPENSATION |
We recorded non-cash stock compensation expense in each period as follows:
Three-month period ended | Three-month period ended | |||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Stock options | $ | 181 | $ | 163 | $ | 138 | $ | 181 | ||||||||
Restricted stock grants | 8 | 21 | 1 | 8 | ||||||||||||
Total | $ | 189 | $ | 184 | $ | 139 | $ | 189 | ||||||||
We have stock options outstanding from various stock-based employee compensation plans for which we record compensation cost relating to share-based payment transactions in our financial statements. As of March 31, 2022, 2023, there was $670$553 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.11.2 years.
The following table summarizes stock option activity for the three-monththree-month period ended March 31, 2022:2023:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2022 | 1,306,824 | $ | 6.87 | |||||||||||||
Granted | 0 | 0 | ||||||||||||||
Exercised | (58,750 | ) | 3.81 | |||||||||||||
Forfeited or expired | (43,584 | ) | 6.75 | |||||||||||||
Outstanding at March 31, 2022 | 1,204,490 | $ | 7.02 | 4.31 | $ | 154 | ||||||||||
Vested and expected to vest at March 31, 2022 | 1,086,934 | $ | 7.03 | 4.16 | $ | 152 | ||||||||||
Exercisable at March 31, 2022 | 644,453 | $ | 7.13 | 2.96 | $ | 145 | ||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2023 | 1,425,693 | $ | 6.72 | |||||||||||||
Granted | 12,500 | 4.07 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited or expired | (17,582 | ) | $ | 7.57 | ||||||||||||
Outstanding at March 31, 2023 | 1,420,611 | $ | 6.69 | 3.58 | $ | 0 | ||||||||||
Vested and expected to vest at March 31, 2023 | 1,295,019 | $ | 6.75 | 3.40 | $ | 0 | ||||||||||
Exercisable at March 31, 2023 | 911,553 | $ | 7.09 | 2.29 | $ | 0 | ||||||||||
Cash received from stock option exercises under our stock-based compensation plans for the three-monththree-month periods ended March 31, 2023 and March 31, 2022 was $0 and March 31, 2021 was $113, and $31, respectively.
In October 2020, 5,000 shares of restricted stock were awarded to an employee at a weighted-average grant date fair value of $6.08 per share. In April 2019, 20,000 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $11.12 per share. All outstandingOutstanding restricted shares vest in equal annual installments over three (3)(3) years. Unrecognized compensation cost related to theseoutstanding restricted shares was $9 at March 31, 2022, which is expected to be recognized over a weighted average period of 1.4 years.2023 was $2.
| INCOME TAXES |
Our effective tax rate for the three-monththree-month periods ended March 31, 2023 and March 31, 2022 was 28.4% and March 31, 2021 was (60.9%) and 24.2%60.9%, respectively. The period-over-period change was primarily attributable to the geographic mix of our operating results and the larger impact of permanent and discrete adjustments on a smaller amount of pretax loss.in the prior year.
As of December 31, 2021, 2022, we have domestic net operating loss (“NOL”) carryforwards of $44,716,$40,952, which expire 2022 thru 2037,2025 through 2035, and domestic tax credits of $2,239,$2,600, which expire 2028 thru 2039, through 2042, available to reduce future taxable income. As of March 31, 2022, 2023, management has concluded it is more likely than not that these domestic NOL and credit carryforwards will be fully utilized.
As of March 31, 2022, 2023, for certain past operations in the U.K., we continue to report a valuation allowance for NOL carryforwards of approximately $11,000,$10,000, nearly all of which can be carried forward indefinitely. Utilization of the net operating losses may be limited due to the change in the past U.K. operation and cannot currently be used to reduce taxable income at our other U.K. subsidiary, Accutronics Ltd. There are no other deferred tax assets related to the past U.K. operations.
As of March 31, 2022, 2023, we have not recognized a valuation allowance against our other foreign deferred tax assets, as realization is considered to be more likely than not.
As of March 31, 2022, 2023, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations, other than earnings generated in the U.K.
There were 0no unrecognized tax benefits related to uncertain tax positions at March 31, 2022 2023 and December 31, 2021.2022.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. In August 2020, the Internal Revenue Service (“IRS”) completed its examination of the Company’s federal tax returns for 2016-2018 with no material adjustments identified. Our U.S. tax matters for 2019-20212019-2022 remain subject to IRS examination. Our U.S. tax matters for 2002,20052005-2007-2007 and 2011-20152011-2015 also remain subject to IRS examination due to the remaining availability of NOLnet operating loss carryforwards generated in those years. Our U.S. tax matters for 2002,20052005-2007-2007 and 2011-20212011-2022 remain subject to examination by various state and local tax jurisdictions. Our tax matters for the years 20112013 through 20212022 remain subject to examination by the respective foreign tax jurisdiction authorities.
| OPERATING LEASES |
The Company has operating leases predominantly for operating facilities. As of March 31, 2022, 2023, the remaining lease terms on our operating leases range from approximately one (1) (1) year to ten (10)nine (9) years. Lease terms include renewal options reasonably certain of exercise. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants.
The components of lease expense for the current and prior-year comparative periods were as follows:
Three-month period ended March 31, | Three-month period ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Operating lease cost | $ | 233 | $ | 187 | $ | 241 | $ | 233 | ||||||||
Variable lease cost | 24 | 19 | 28 | 24 | ||||||||||||
Total lease cost | $ | 257 | $ | 206 | $ | 269 | $ | 257 | ||||||||
Supplemental cash flow information related to leases was as follows:
Three-month period ended March 31, | Three-month period ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | �� | |||||||||||||||
Operating cash flows from operating leases | $ | 227 | $ | 181 | $ | 226 | $ | 227 | ||||||||
Right-of-use assets obtained in exchange for lease liabilities: | $ | 0 | $ | 0 | $ | - | $ | - | ||||||||
Supplemental consolidated balance sheet information related to leases was as follows:
Balance sheet classification | March 31, 2022 | December 31, 2021 | Balance sheet classification | March 31, 2023 | December 31, 2022 | |||||||||||||
Assets: | ||||||||||||||||||
Operating lease right-of-use asset | Other noncurrent assets | $ | 2,401 | $ | 2,581 | Other noncurrent assets | $ | 2,039 | $ | 2,187 | ||||||||
Liabilities: | ||||||||||||||||||
Current operating lease liability | Accrued expenses and other current liabilities | $ | 869 | $ | 867 | Accrued expenses and other current liabilities | $ | 906 | $ | 895 | ||||||||
Operating lease liability, net of current portion | Other noncurrent liabilities | 1,558 | 1,743 | Other noncurrent liabilities | 1,130 | 1,307 | ||||||||||||
Total operating lease liability | Total operating lease liability | $ | 2,427 | $ | 2,610 | Total operating lease liability | $ | 2,036 | $ | 2,202 | ||||||||
Weighted-average remaining lease term (years) | Weighted-average remaining lease term (years) | 4.4 | 4.5 | Weighted-average remaining lease term (years) | 4.7 | 4.7 | ||||||||||||
Weighted-average discount rate | Weighted-average discount rate | 4.5 | % | 4.5 | % | Weighted-average discount rate | 4.5 | % | 4.5 | % | ||||||||
Future minimum lease payments as of March 31, 2022 2023 are as follows:
Maturity of operating lease liabilities | ||||||||
2022 | $ | 664 | ||||||
2023 | 897 | 697 | ||||||
2024 | 464 | 519 | ||||||
| 2025 | 140 | 215 | ||||||
| 2026 | 142 | 217 | ||||||
| 2027 | 142 | 217 | ||||||
Thereafter | 288 | 426 | ||||||
Total lease payments | 2,737 | 2,291 | ||||||
Less: Imputed interest | (310 | ) | (255 | ) | ||||
Present value of remaining lease payments | $ | 2,427 | $ | 2,036 | ||||
| COMMITMENTS AND CONTINGENCIES |
Purchase Commitments
As of March 31, 2022, 2023, we have made commitments to purchase approximately $953$873 of production machinery and equipment.
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 our product warranty liability during the firstthree months of 20222023 and 20212022 were as follows:
Three-month period ended March 31, | Three-month period ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Accrued warranty obligations – beginning | $ | 133 | $ | 149 | $ | 323 | $ | 133 | ||||||||
Accruals for warranties issued | 18 | 45 | 84 | 18 | ||||||||||||
Settlements made | (31 | ) | (23 | ) | (21 | ) | (31 | ) | ||||||||
Accrued warranty obligations – ending | $ | 120 | $ | 171 | $ | 386 | $ | 120 | ||||||||
Contingencies and Legal Matters
We are subject to legal proceedings and claims that arise from time to time in the normal course of business. We believe that the final disposition of any such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, recognizing that legal matters are subject to inherent uncertainties, there exists the possibility that ultimate resolution of these matters could have a material adverse impact on the Company’s financial position, results of operations or cash flows. We are not aware of any such situations at this time.
| 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. For products shipped under vendor managedvendor-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. 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.
Revenues recognized from prior periodSeparately priced extended warranty contracts are offered on certain Communications Systems products for a duration of up to eight (8) years. Extended warranties are treated as separate performance obligations forand recognized to revenue evenly over the three-month periods ended March 31, 2022 and 2021 were term of the respective contract. Revenue not material. yet recognized on extended warranty contracts is recorded as deferred revenue on the consolidated balance sheet.
DeferredAs of March 31, 2023, there was deferred revenue unbilledon extended warranty contracts of $985, comprised of $164 expected to be recognized as revenue within one (1) year and deferred contract costs recordedclassified as accrued expenses and other current liabilities on our consolidated balance sheetssheet, and $821 expected to be recognized as revenue over the remaining duration of the respective contracts and classified as other noncurrent liabilities on our consolidated balance sheet.
As of December 31, 2022, there was deferred revenue on extended warranty contracts of $682, comprised of $119 expected to be recognized as revenue within one (1) year and classified as accrued expenses and other current liabilities on our consolidated balance sheet, and $563 expected to be recognized as revenue over the remaining duration of the respective contracts and classified as other noncurrent liabilities on our consolidated balance sheet.
As of March 31, 2022 2023 and December 31, 2021 were not material. As of March 31, 2022, and December 31, 2021, the Company had no other unsatisfied performance obligations for contracts with an original expected duration of greater 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.
| BUSINESS SEGMENT INFORMATION |
We report our results in 2two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes:includes Lithium 9-volt,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:includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance.
Three-month period ended March 31, 2022:2023:
| Battery & Energy Products | Communications Systems | Corporate | Total | ||||||||||||
Revenues | $ | 29,150 | $ | 1,223 | $ | - | $ | 30,373 | ||||||||
Segment contribution | 6,721 | 237 | (7,253 | ) | (295 | ) | ||||||||||
Other expense | (117 | ) | (117 | ) | ||||||||||||
Tax benefit | 251 | 251 | ||||||||||||||
Non-controlling interest | (7 | ) | (7 | ) | ||||||||||||
Net loss attributable to Ultralife | $ | (168 | ) | |||||||||||||
Battery & Energy Products | Communications Systems | Corporate | Total | |||||||||||||
Revenues | $ | 28,470 | $ | 3,446 | $ | - | $ | 31,916 | ||||||||
Segment contribution | 6,512 | 924 | (7,410 | ) | 26 | |||||||||||
Other expense | (494 | ) | (494 | ) | ||||||||||||
Tax benefit | 133 | 133 | ||||||||||||||
Non-controlling interest | (11 | ) | (11 | ) | ||||||||||||
Net loss attributable to Ultralife | $ | (346 | ) | |||||||||||||
Three-month period ended March 31, 2021:2022:
Battery & Energy Products | Communications Systems | Corporate | Total | Battery & Energy Products | Communications Systems | Corporate | Total | |||||||||||||||||||||||||
Revenues | $ | 22,111 | $ | 3,862 | $ | - | $ | 25,973 | $ | 29,150 | $ | 1,223 | $ | - | $ | 30,373 | ||||||||||||||||
Segment contribution | 5,436 | 1,542 | (6,026 | ) | 952 | 6,721 | 237 | (7,253 | ) | (295 | ) | |||||||||||||||||||||
Other expense | (56 | ) | (56 | ) | (117 | ) | (117 | ) | ||||||||||||||||||||||||
Tax provision | (217 | ) | (217 | ) | ||||||||||||||||||||||||||||
Tax benefit | 251 | 251 | ||||||||||||||||||||||||||||||
Non-controlling interest | (8 | ) | (8 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||||||
Net income attributable to Ultralife | $ | 671 | $ | (168 | ) | |||||||||||||||||||||||||||
The following tables disaggregate our business segment revenues by major source and geography.
Commercial and Government/Defense Revenue Information:
Three-month period ended March 31, 2022:2023:
Total Revenue | Commercial | Government/ Defense | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||
Battery & Energy Products | $ | 29,150 | $ | 23,260 | $ | 5,890 | $ | 28,470 | $ | 22,219 | $ | 6,251 | ||||||||||||
Communications Systems | 1,223 | 0 | 1,223 | 3,446 | - | 3,446 | ||||||||||||||||||
Total | $ | 30,373 | $ | 23,260 | $ | 7,113 | $ | 31,916 | $ | 22,219 | $ | 9,697 | ||||||||||||
| 77 | % | 23 | % | 70 | % | 30 | % | |||||||||||||||||
Three-month period ended March 31, 2021:2022:
Total Revenue | Commercial | Government/ Defense | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||
Battery & Energy Products | $ | 22,111 | $ | 14,345 | $ | 7,766 | $ | 29,150 | $ | 22,594 | $ | 6,556 | ||||||||||||
Communications Systems | 3,862 | 0 | 3,862 | 1,223 | - | 1,223 | ||||||||||||||||||
Total | $ | 25,973 | $ | 14,345 | $ | 11,628 | $ | 30,373 | $ | 22,594 | $ | 7,779 | ||||||||||||
| 55 | % | 45 | % | 74 | % | 26 | % | |||||||||||||||||
U.S. and Non-U.S. Revenue Information1:
Three-month period ended March 31, 2022:2023:
Total Revenue | United States | Non-United States | Total Revenue | United States | Non-United States | |||||||||||||||||||
Battery & Energy Products | $ | 29,150 | $ | 14,540 | $ | 14,610 | $ | 28,470 | $ | 13,768 | $ | 14,702 | ||||||||||||
Communications Systems | 1,223 | 1,152 | 71 | 3,446 | 2,877 | 569 | ||||||||||||||||||
Total | $ | 30,373 | $ | 15,692 | $ | 14,681 | $ | 31,916 | $ | 16,645 | $ | 15,271 | ||||||||||||
| 52 | % | 48 | % | 52 | % | 48 | % | |||||||||||||||||
Three-month period ended March 31, 2021:2022:
Total Revenue | United States | Non-United States | Total Revenue | United States | Non-United States | |||||||||||||||||||
Battery & Energy Products | $ | 22,111 | $ | 12,590 | $ | 9,521 | $ | 29,150 | $ | 14,540 | $ | 14,610 | ||||||||||||
Communications Systems | 3,862 | 1,468 | 2,394 | 1,223 | 1,152 | 71 | ||||||||||||||||||
Total | $ | 25,973 | $ | 14,058 | $ | 11,915 | $ | 30,373 | $ | 15,692 | $ | 14,681 | ||||||||||||
| 54 | % | 46 | % | 52 | % | 48 | % | |||||||||||||||||
1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, changes in economic conditions including inflation and supply chain disruptions affecting our business, revenues and earnings adversely; the continued impact of COVID-19 causing delays in the manufacture and the related supply chain disruptions ondelivery of our business, operating results and financial condition;mission critical products to end customers; our reliance on certain key customers; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; the unique risks associated with our efforts to develop new commercial applications forChina operations; breaches in information systems security and other disruptions in our products;information technology systems; potential disruptions in our supply of raw materials and components; fluctuations in the price of oil and the resulting impact on the demand for downhole drilling; the unique risks associated with our China operations; potential disruptions in our supply of raw materials and components; our ability to retain top management and key personnel; possible breaches in information systems security and other disruptions in our information technology systems; our resources being overwhelmed by our growth; possible future declines in demand for the products that use our batteries or communications systems; potential costs attributable to the warranties we supply with our products and services; safety risks, including the risk of fire; variability in our quarterly and annual results and the price of our common stock; rising interest rates increasing the cost of our entrance into new end-markets which could leadvariable borrowings; purchases by our customers of product quantities not meeting the volume expectations in our supply agreements; potential costs attributable to additional financial exposure;the warranties we supply with our products and services; our inability to comply with changes to the regulations for the shipment of our products; our customers’ demand falling short of volume expectations inability to utilize our supply agreements;net operating loss carryforwards; our exposureentrance into new end-markets which could lead to foreign currency fluctuations;additional financial exposure; negative publicity concerning Lithium-ion batteries; possible impairments of our goodwill and other intangible assets; our abilityexposure to utilize our net operating loss carryforwards;foreign currency fluctuations; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; known and unknown environmental matters; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; our ability to comply with government regulations regarding the use of “conflict minerals”; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk factors or to publicly announce the results of any revisions to any of the forward-lookingforward looking statements contained in this Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2021 to reflect new information or risks, future events or other developments.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements and notes thereto in Part I, Item 1 of this Form 10-Q, and the consolidated financial statements and notes thereto and risk factors in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
The financial information in this MD&A is presented in thousands of dollars, except for share and per share amounts, unless otherwise specified.
General
We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems related to those product lines. We continually evaluate ways to grow, including the design, development and sale of new products, expansion of our sales force to penetrate new markets and territories, as well as seeking opportunities to expand through acquisitions.
We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and foreign defense departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTI™AMTITM, ABLE™ABLETM, ACCUTRONICS™, ACCUPRO™, ENTELLION™, SWE Southwest Electronic Energy Group™, SWE DRILL-DATA™, SWE SEASAFE™, Excell Battery Group and Criterion Gauge brands. We have sales, operations and product development facilities in North America, Europe and Asia.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes:includes Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes:includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. Seecharges (See Note 1110 in the notes to the consolidated financial statements of this Form 10-Q.statements.)
Our website address is www.ultralifecorporation.com. We make available free of charge via a hyperlink on our website (see Investor Relations link on the website) our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written request to the attention of Philip A. Fain, CFO, Treasurer and Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
COVID-19
The COVID-19 pandemic and other illnesses has createdcaused and may continue to create significant economic and social disruption and uncertainty around the world. The Company continues to closely monitorworld, may impact 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 and meeting the demandthat of our customers.suppliers and customers causing delays in the manufacture and delivery of our mission critical products to end customers, and may disrupt business with our collaborative business partners and service providers, which may continue to adversely impact our operating results.As we enter the third year of the pandemic, our workforce, customers and vendors still face the risk of the emergence of new strains, availability of effective treatment, and potential regulatory and macroeconomic effects stemming from such impacts. Except for certain situations in China, lockdowns, shelter-in-place restrictions, and vaccine mandates, prevalent during the initial stages of the pandemic, have now been lifted for most companies. While we have maintained normal business operations at all our facilities with the exception of the well-publicized shutdowns in China which impacted our Shenzhen facility in the first quarter of 2022, the related supply chain disruptions including increased lead times on key components experienced within our business and by our customers impactedand vendors, continue to impact our work schedules and timing of shipments. The continuinglingering impact of these conditions on our business and financial results, potentially exacerbated by the emergence of new strains, is uncertain and will depend on many evolving factors which we continue to monitor but cannot predict, includingpredict. These factors include the resistance to treatments and current vaccinations, the duration and scope of theany new pandemic and its variants, the resulting actions taken by governments, businesses and individuals, and the flow-through impact on operations and supply chains. Potential effects of COVID-19 that may continue to adversely impact our future business include limited availability and/or increased cost of raw materials and components used in our products, reduced demand and/or pricing for our products, inability of our customers to pay for our products or remain solvent, and reduced availability of our workforce. Prolonged adverse effects of COVID-19 on our business could result in the impairment of long-lived assets including goodwill and other intangible assets. Further, we cannot predict all possible adverse effects the COVID-19 pandemic may cause. Consequently, there may be adverse effects in addition to those described above. We will continue to closely monitor the developments surrounding COVID-19 and take actions when possible to mitigate the business risks involved and the potential effects of COVID-19 on our business.
Overview
Consolidated revenues of $31,916 for the three-month period ended March 31, 2023, increased by $1,543 or 5.1%, over $30,373 for the three-month period ended March 31, 2022, increased by $4,400 or 16.9%, over $25,973 for the three-month period ended March 31, 2021, reflecting our December 13, 2021 acquisitionan increase in government/defense sales of Excell Battery Group (“Excell”) and increased sales in our medical, oil & gas and industrial battery markets,24.7% partially offset by lower revenuesa 1.7% decline in commercial sales. During the first quarter of 2023, the Company experienced a cybersecurity ransomware attack which impacted our ability to process orders, ship products, provide services to our customers and effectively manage our sales and operating planning process over a several-week period for government/defense which continuedour Newark, NY location and an even longer period for our Virginia Beach, VA location. While production and shipping have been resumed in both locations, considerable time during the first quarter was devoted to be impacted by supply chain challenges. Excluding Excell, commercial revenuesdata restoration, systems recovery, systems security augmentation, and regulatory reporting of $16,824the attack. Management continues to work on its cybersecurity insurance claim covering the cost of engaging external cybersecurity experts and the business interruption impact. The Company’s deductible for the quarter-ended March 31, 2022 increased $2,479 or 17.3% over the year-earlier period, and government/defense revenuesits cyber-insurance policy of $7,113 decreased $4,515 or 38.8% from the 2021 period.$100 is included in first quarter results. No ransom was paid.
Gross profit was $6,958,$7,436, or 22.9%23.3% of revenue, for the three-month period ended March 31, 2022,2023, compared to $6,978,$6,958, or 26.9%22.9% of revenue, for the same quarter a year ago. The 400-basis40-basis point declineimprovement primarily reflects the lower salesresulted from higher factory volume for our Communications Systems resulting in lower factory throughputbusiness and incremental costs in 2022price realization, tempered by the inefficiencies associated with the cybersecurity attack, lingering supply chain disruptions including rapid increases in the cost of some key components in advance of price realization from customers, and the transition of a multitude of new products to higher volume production. material costs across both business segments.
Operating expenses increased to $7,410 for the three-month period ended March 31, 2023, compared to $7,253 for the three-month period ended March 31, 2022,2022. The increase of $157 or 2.2% was primarily attributable to the recording of the $100 deductible on our cyber insurance policy for expenses incurred during the quarter and continued investment in new product development. Operating expenses were 23.2% of revenue compared to $6,02623.9% of revenue for the year-earlier period.
Operating income for the three-month period ended March 31, 2021. The increase of $1,2272023 was $26, or 20.4% was primarily attributable to our acquisition of Excell which contributed operating expenses of $1,058. Excluding Excell, operating expenses increased by $169 or 2.8% reflecting our continued investment in new product development, including approximately $360 for engineering resources and test materials 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. Operating expenses as a percentage of sales increased 70 basis points from 23.2% for the first quarter of 2021 to 23.9% for the current quarter.
Operating loss for the three-month period ended March 31, 2022 was ($295), or (1.0%)0.01% of revenues, compared to operating incomeloss of $952,$295, or 3.7%(1.0%) of revenues, for the year-earlier period. The decreaseincrease in operating income primarily resulted from lower salesthe 181.8% revenue increase for our Communications Systems segment, a reduction in gross margin due to supply chain disruptions, including rapid increases in the cost of some key components in advance of price realization from customers, and the transition of new products to high volume manufacturing, higher new product development costs to support our organic growth initiatives, and $125 of acquisition accounting adjustments and one-time expenses related to the acquisition of Excell.segment.
Net loss attributable to Ultralife was ($346), or ($0.02) per share – basic and diluted, for the three-month period ended March 31, 2023, compared to ($168), or ($0.01) per share – basic and diluted, for the three-month period ended March 31, 2022, compared to net income attributable to Ultralife of $671, or $0.04 per share – basic and diluted, for the three-month period ended March 31, 2021.2022.
Adjusted EBITDA, defined as net income (loss) income attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $1,155, or 3.6% of revenues, for the first quarter of 2023, compared to $1,103, or 3.6% of revenues, for the first quarter of 2022, compared to $2,012, or 7.8% of revenues, for the first quarter of 2021.2022. See the section “Adjusted EBITDA” beginning on Page 2119 for a reconciliation of Adjustedadjusted EBITDA to net income attributable to Ultralife.
Looking forward, as we balanceWe are focused on fulfilling orders that were held back in the impact of current supply chain disruptions, we continuefirst quarter due to advance new product development initiatives, receive early acceptance ofthe cybersecurity attack and meeting increased demand from our new product rollouts,medical and transition new productsgovernment/defense customers while satisfying ongoing demand from other commercial end markets, particularly oil and gas. Our goal for 2023 remains to production, thereby retaining the view that our long-termdeliver high-quality, profitable growth drivers, strategy,through execution of operational improvements, and expectations remain sound and achievable.to generate incremental cash flow to pay down our acquisition debt.
Results of Operations
Three-Month Periods Ended March 31, 20222023 and March 31, 20212022
Revenues. Consolidated revenues for the three-month period ended March 31, 20222023 were $30,373,$31,916, an increase of $4,400,$1,543, or 16.9%5.1%, over $25,973$30,373 for the three-month period ended March 31, 2021.2022. Overall, commercialgovernment/defense sales increased 62.1% while government/defense sales decreased 38.8% from24.7% partially offset by 1.7% decline in commercial sales. During the 2021 period. Revenues for the 2022 period include Excell which was acquired byfirst quarter of 2023, the Company on December 13, 2021.experienced a cybersecurity ransomware attack which impacted our ability to process orders, ship products, provide services to our customers and effectively manage our sales and operating planning process over a several week period for our Newark, NY location and an even longer period for our Virginia Beach, VA location. A large portion of our time during the quarter was devoted to data restoration, systems security augmentation, and regulatory reporting of the attack, all of which were successfully accomplished with no ransom paid.
Battery & Energy Products revenues increased $7,039,decreased $680, or 31.8%2.3%, from $22,111 for the three-month period ended March 31, 2021 to $29,150 for the three-month period ended March 31, 2022. The increase was attributable2022 to the $6,436 revenue contribution from the acquisition of Excell, and a 17.3% increase in commercial sales excluding Excell, partially offset by a 24.2% reduction in government/defense sales. The increase in commercial sales, excluding Excell, was driven by a 30.5% increase in industrial market sales including our new Thionyl Chloride and thin cell battery cells, a 20.0% increase in oil & gas market sales reflecting the recent rebound in the energy sector, and a 8.4% increase in medical battery sales due to the high demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices. The decline in government/defense sales was primarily due to supply chain disruptions experienced by our customers which pushed out sales to future periods.
Communications Systems revenues decreased $2,639, or 68.3%, from $3,862$28,470 for the three-month period ended March 31, 20212023. The decrease was primarily attributable to the impact of the cybersecurity attack, which was reflected in a decline in medical sales and government sales of 18.5% and 4.7%, respectively, compared to the year earlier period. These declines were partially offset by a 21.3% increase in oil & gas market sales.
Communications Systems sales increased $2,223, or 181.8%, from $1,223 for the three-month period ended March 31, 2022. This decrease is2022 to $3,446 for the three-month period ended March 31, 2023. The cybersecurity event negatively impacted 2023 first quarter sales of Communication Systems by approximately $2,000.
Communications Systems sales increased $2,223, or 181.8%, from $1,223 for the three-month period ended March 31, 2022 to $3,446 for the three-month period ended March 31, 2023. The increase was primarily attributablerelated to supply chain disruptions including extended lead times for components and the push out of certain orders by our customers which delayed approximately $1,600 of sales to future periods and the placement and fulfillment of anshipments under a vehicle-amplifier adaptor order from an internationalwith a global defense contractor received in July 2022, partially offset by the impact of the cybersecurity attack.
Our total backlog at March 31, 2023 was $108.1 million, with $96.1 million due to ship over the remaining nine months of 2023 representing a 30.2% increase over the comparable $73.8 million for the same period last year. Total backlog decreased $2.9 million or 2.6% compared to the backlog of $111.0 million at December 31, 2022, which was the highest in the first quarter of 2021 which is not expected to reoccur until later in 2022.Company’s history.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $23,415$24,480 for the quarter ended March 31, 2022,2023, an increase of $4,420,$1,065, or 23.3%4.5%, from the $18,995$23,415 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increaseddecreased from 73.1% for the three-month period ended March 31, 2021 to 77.1% for the three-month period ended March 31, 2022. Correspondingly, consolidated gross margin decreased from 26.9%2022 to 76.7% for the three-month period ended March 31, 2021, to2023. Correspondingly, consolidated gross margin increased from 22.9% for the three-month period ended March 31, 2022, to 23.3% for the three-month period ended March 31, 2023, primarily reflecting lowerhigher factory volume for our Communications Systems segment, incremental costs in 2022business, tempered by the inefficiencies associated with the cybersecurity event, lingering supply chain disruptions including rapid increases in the cost of some key componentsand higher material costs in advance of price realization from customers across both business segments and the transition of a multitude of new products to higher volume production. production for our Battery & Energy Products segment.
For our Battery & Energy Products segment, gross profit for the first quarter of 20222023 was $6,721, an increase$6,512, a decrease of $1,285$209 or 23.6% over3.1% from gross profit of $5,436$6,721 for the first quarter of 2021.2022. Battery & Energy Products’ gross margin of 23.1%22.9% decreased by 150 basis20-basis points from the 24.6%23.1% gross margin for the year-earlier period, primarily reflecting sales mix, incrementalinefficiencies resulting from the cybersecurity attack as well as lingering supply chain disruptions, higher material and logistics costs, associated withand continued investments in the transition of new products to higherhigh volume production, and higher materials and logistics costs on incoming materials in advance ofpartially offset by improved price realization from customers.realization.
For our Communications Systems segment, gross profit for the first quarter of 20222023 was $237$924 or 19.4%26.8% of revenues, compared to gross profit of $1,542$237 or 39.9%19.4% of revenues for the first quarter of 2021.2022. The decline740-basis point increase in gross margin was primarily due to lowerhigher factory volume partially offset by inefficiencies resulting infrom the under-absorption of factory costs and unfavorable sales mix.cybersecurity attack.
Operating Expenses. Operating expenses for the three-month period ended March 31, 20222023 were $7,253,$7,410, an increase of $1,227$157 or 20.4%2.2% from the $6,026$7,253 for the three-month period ended March 31, 2021.2022. The increase is primarily attributable to the acquisitionrecording of Excell, which contributed operatingthe $100 deductible on our cyber insurance policy for expenses of $1,058 inincurred during the first quarter including $182 of intangible asset amortization. Excluding Excell, operating expenses increased $169 or 2.8% due to ourand continued investment in new product development, including approximately $360 for engineering resources and test materials dedicated to the May 2021 indefinite-delivery/indefinite-quantity contract from 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.development. Both periods reflected continued tight control over discretionary spending.
Overall, operating expenses as a percentagewere 23.2% of revenues were 23.9%revenue for the quarter ended March 31, 20222023 compared to 23.2%23.9% of revenue for the quarter ended March 31, 2021.2022. Amortization expense associated with intangible assets related to our acquisitions was $209 for the first quarter of 2023 ($185 in selling, general and administrative expenses and $24 in research and development costs), compared with $328 for the first quarter of 2022 ($302 in selling, general, and administrative expenses and $26 in research and development costs), compared with $154 for the first quarter of 2021 ($121 in selling, general, and administrative expenses and $33 in research and development costs). Research and development costs were $1,857$2,032 for the three-month period ended March 31, 2022,2023, an increase of $210$175 or 12.8%9.4%, from $1,647$1,857 for the three-months ended March 31, 2021.2022. The increase is largely attributable to the hiring of engineering resources and the purchase of test materials to supportan increase in new product development in our Battery & Energy ProductsCommunications Systems business including those resourcesto aggressively pursue both government/defense major programs and materials dedicated to our Conformal Wearable Battery contract.commercial opportunities. Selling, general, and administrative expenses increased $1,017 or 23.2%, to $5,396were essentially flat year over year, decreasing from $5,378 for the first quarter of 20222023 from $4,379 for the first quarter of 2021. The increase is largely attributable to the December 2021 acquisition of Excell which contributed $985 of selling, general and administrative expenses, including intangible asset amortization of $182,$5,396 for the first quarter of 2022. The remainder2023 first quarter amount includes $70recognition of one-time non-recurring costs resulting from the acquisition of Excell.$100 deductible associated with our cyber insurance policy.
Other Expense. Other expense totaled $494 for the three-month period ended March 31, 2023 compared to $117 for the three-month period ended March 31, 2022 compared to $56 for the three-month period ended March 31, 2021.2022. Interest and financing expense net of interest income, increased $78,$290, or 139.3%216.4%, from $56$134 for the first quarter of 20212022 to $134$424 for the comparable period in 2022.2023. The increase is primarily due to the financing of theour acquisition of Excell acquisition.in December 2021 and rising interest rates. Miscellaneous income which primarily represents gains and losses on foreign currency transactions,(expense) amounted to ($70) for the first quarter of 2023 compared to $17 for the first quarter of 2022, compared with $0 for the first quarter of 2021, which primarily reflects the translation of U.S.-denominated transactionsattributable to foreign exchange gains and balances of Accutronics (U.K.) for the respective periods. The U.S. dollar strengthened against the Pound Sterling by 1.5% during the 2022 first quarter, whereas the U.S. dollar weakened against the Pound Sterling by 0.9% during the 2021 first quarter.loss due to fluctuations in foreign currency exchange rates.
Income Taxes. For the three-month period ended March 31, 2022,2023, Ultralife recognized an income tax benefit of $133, comprised of a current provision of $257 and deferred benefit of $390, compared to a benefit of $251 comprised of a current provision of $151 and deferred benefit of $402 compared to a provision of $217 ($49 current, $168 deferred) for the three-month period ended March 31, 2021.2022. Our effective tax rate was 28.4% for the first quarter of 2023 as compared to 60.9% for the first quarter of 2022, as compared to 24.2% for the first quarter of 2021, primarily attributable to the geographic mix of our operating results including income taxes incurred on our Excell Canada results, and the larger impact of permanent and discrete adjustments on a smaller amount of pretax loss.in the prior year. See Note 76 to the consolidated financial statements in Item 1 of Part I of this Form 10-Q for additional information regarding our income taxes.
Net (Loss)Loss Income Attributable to Ultralife. Net loss attributable to Ultralife was ($346), or ($0.02) per share – basic and diluted, for the three-month period ended March 31, 2023, compared to ($168), or ($0.01) per share – basic and diluted, for the three-month period ended March 31, 2022, compared to net income of $671, or $0.04 per share – basic and diluted, for the three-month period ended March 31, 2021.2022. Weighted average shares outstanding used to compute basic and diluted earnings per share decreasedincreased from 16,152,160 for the first quarter of 2021 to 16,103,599 for the first quarter of 2022.2022 to 16,135,358 for the first quarter of 2023. The decreaseincrease is attributable to there beingthe exercise of stock options and the vesting of restricted stock since the first quarter of 2022. There was no dilutive effect of outstanding stock awards for the first quarterquarters of 2022 and 2023 due to the net loss recognized for the period, as compared to the inclusion of 178,781 potential shares in the computation of diluted EPS for the first quarter of 2021, partially offset by the effect of stock option exercises since the first quarter of 2021.these periods.
Adjusted EBITDA
In evaluating our business, we consider and use Adjustedadjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjustedadjusted EBITDA as net income (loss) attributable to Ultralife before interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expense/income that we do not consider reflective of our ongoing continuing operations. We also use Adjustedadjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We believe the use of Adjustedadjusted 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 Adjustedadjusted 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 Adjustedadjusted EBITDA to net income (loss) attributable to Ultralife, the most comparable financial measure under GAAP.
We use Adjustedadjusted EBITDA in our decision-making processes relating to the operation of our business together with GAAP financial measures such as operating income (loss). We believe that Adjustedadjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolatingeliminating 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 Adjustedadjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjustedadjusted 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 Adjustedadjusted 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 Adjustedadjusted EBITDA is not defined under GAAP and is not a measure of operating income (loss), operating performance or liquidity presented in accordance with GAAP. Our Adjustedadjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjustedadjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to, the following:
● | Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business; |
● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and |
● | While stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and |
● | Other companies may calculate |
We compensate for these limitations by relying primarily on our GAAP results and using Adjustedadjusted EBITDA only on a supplemental basis. Neither current nor potential investors in our securities should rely on Adjustedadjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjustedadjusted EBITDA to net income (loss)loss attributable to Ultralife.
Adjusted EBITDA is calculated as follows for the periods presented:
Three-month period ended | Three-month period ended | |||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net (loss) income attributable to Ultralife | $ | (168 | ) | $ | 671 | |||||||||||
Net loss attributable to Ultralife | $ | (346 | ) | $ | (168 | ) | ||||||||||
Add: | ||||||||||||||||
Interest expense | 134 | 56 | 424 | 134 | ||||||||||||
Income tax (benefit) provision | (251 | ) | 217 | |||||||||||||
Income tax benefit provision | (133 | ) | (251 | ) | ||||||||||||
Depreciation expense | 816 | 730 | 762 | 816 | ||||||||||||
Amortization of intangible assets | 328 | 154 | 209 | 328 | ||||||||||||
Stock-based compensation expense | 189 | 184 | 139 | 189 | ||||||||||||
Cyber insurance deductible | 100 | - | ||||||||||||||
Non-cash purchase accounting adjustments | 55 | - | - | 55 | ||||||||||||
Adjusted EBITDA | $ | 1,103 | $ | 2,012 | $ | 1,155 | $ | 1,103 | ||||||||
Liquidity and Capital Resources
As of March 31, 2022,2023, cash totaled $6,050$5,605 (including restricted cash of $82)$81), a decrease of $2,363$108 as compared to $8,413$5,713 of cash held at December 31, 2021,2022, primarily attributable to cash used in operations primarily caused by increases inthe cybersecurity attack experienced during the quarter and the procurement of inventory and accounts receivable.amidst challenging supply chain conditions.
During the three-month period ended March 31, 2022, we2023, cash used $3,222 fromin our operations was $1,365 as compared to the generation of cash of $3,903 from operations$3,222 for the three-month period ended March 31, 2021. The net2022. For the 2023 period, cash used in the 2022 period was largely attributable to cashcomprised of $3,274 used to procure inventory to enhance our ability to service our backlog requested by customers to ship in 2022 amidst challenging supply conditions. Thea $335 net loss and a $1,766 increase in inventory along with the timing of collections and disbursements resulted in net cash of $3,999 used for working capital. In addition to the increase in working capital, the use of cash from operating activities in the first quarter of 2022 reflects the net loss of $161, including purchase accounting adjustments of $55, andpartially offset by non-cash expensesitems totaling $938$736 for depreciation, amortization, stock-based compensation, and deferred taxes. The increase in working capital was driven by a $6,026 increase in inventory attributable to the cybersecurity attack as well as procurement of inventory to proactively manage our supply chain, reduce lead times and the impact of potential cost increases on components and raw materials, and enhance our position to service customer orders, partially offset by the timing of cash collections and disbursements.
Cash used in investing activities for the three months ended March 31, 20222023 was $371$497 for capital expenditures, primarily reflecting investments in equipment for new products transitioning to high-volume manufacturing.
Net cashCash provided by financing activities for the three months ended March 31, 20222023 was $1,223, consisting of$1,800, attributable to draws fromon our credit facility forprimarily caused by the sales impact of the cybersecurity attack as well as the advance purchase of certain critical raw materials, requiring cash-in-advance payment terms by the vendors, partially offset by $333$500 of principle payments againston our term loan balance and $7 of tax withholdings for stock awards, partially offset by proceeds of $113 from stock options exercises.during the quarter.
We continue to have significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 76 to the Consolidated Financial Statementsconsolidated financial statements of this Form 10-Q for additional information.
Going forward, we expect positive operating cash flow and the availability under our Revolving Credit Facility will be sufficient to meet our general funding requirements for the foreseeable future.
To provide flexibility in accessing the capital market, the Company filed a shelf registration statement on Form S-3 on March 30, 2021, which was declared effective by the SEC on April 2, 2021. Under this registration statement, upon the filing of an appropriate supplemental prospectus, we may offer and sell certain of our securities from time to time in one or more offerings, at our discretion, of up to an aggregate offering price of $100 million. We intend to use the net proceeds resulting from any sales of our securities for general corporate purposes which may include, but are not limited to, potential acquisitions of complementary businesses or technologies, strategic capital expenditures to expand and protect our competitive position, and investments in the development of transformational, competitively-differentiated products for attractive growth markets.
Commitments
As of March 31, 2022,2023, the Company had $12,430$15,630 outstanding borrowings on the Revolving Credit Facility and $9,667$7,667 on the Term Loan Facility. The Company was in full compliance with all covenants under the Credit Facilities as of March 31, 2022.2023.
As of March 31, 2022,2023, we had made commitments to purchase approximately $953$873 of production machinery and equipment.
Critical Accounting Policies
Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with GAAP, but they also reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Operations and Significant Accounting Policies”) to the Consolidated Financial Statementsconsolidated financial statements in our 20212022 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.
During the first quarter of 2022,2023, there were no significant changes in the manner in which our significant accounting policies were applied or in which related assumptions and estimates were developed.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit Index | Exhibit Description | Incorporated by Reference from | |||
31.1 | Filed herewith | ||||
31.2 | Filed herewith | ||||
32 | Furnished herewith | ||||
101.INS | Inline XBRL Instance Document | Filed herewith | |||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | |||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |
Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 20222023 and December 31, 2021,2022, (ii) Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three months ended March 31, 20222023 and 2021,2022, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 20222023 and 2021,2022, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 20222023 and 2021,2022, and (v) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ULTRALIFE CORPORATION | |||||
| (Registrant) | |||||
Date: | By: | /s/ | Michael | ||
| Michael | |||||
| President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: | By: | /s/ | Philip A. Fain | ||
| Philip A. Fain | |||||
| Chief Financial Officer and Treasurer | |||||
| (Principal Financial Officer and | |||||
| Principal Accounting Officer) |