Note

- Summary of Operations and Significant Accounting Policies

Description of Business

As used in this annual report, unless otherwise indicated, the terms “we”, “our” and “us” refer to Ultralife Corporation (“Ultralife”) and includes our wholly-owned subsidiaries, ABLE New Energy Co., Limited and its wholly-owned subsidiary ABLE New Energy Co.; Ltd; Ultralife UK LTD and its wholly-owned subsidiary, Accutronics Ltd; Ultralife Batteries (UK) Ltd.; and our majority-owned joint venture Ultralife Batteries India Private Limited.

We offer products and services ranging from power solutions to communications and electronics systems. Through our engineering and collaborative approach to problem solving, we serve government, defense and commercial customers across the globe. We design, manufacture, install and maintain power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems. We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and international defense departments.

b.	Principles of Consolidation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of Ultralife Corporation, our wholly-owned subsidiaries, Ultralife Batteries (UK) Ltd., Ultralife UK LTD, and its wholly-owned subsidiary Accutronics Ltd, ABLE New Energy Co., Limited, and its wholly-owned subsidiary ABLE New Energy Co., Ltd. (“ABLE” collectively), and our majority-owned subsidiary Ultralife Batteries India Private Limited (“India JV”). Intercompany accounts and transactions have been eliminated in consolidation.

c.	Management's Use of Judgment and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the reporting period. Key areas affected by estimates include: (a) carrying value of goodwill and intangible assets; (b) reserves for deferred tax assets, excess and obsolete inventory, warranties, and bad debts; (c) valuation of assets acquired and liabilities assumed in business combinations; (d) various expense accruals; and (e) stock-based compensation. Our actual results could differ from these estimates.

d.	Reclassifications

Certain items previously reported in specific financial statement captions are reclassified to conform to the current presentation. There were no material reclassifications for the years ended

December

31,

2016

and

2015.

Cash

Our cash balances

may

at times exceed federally insured limits. We have not experienced any losses in these accounts and believe we are not exposed to any significant risk with respect to cash.

f.	Accounts Receivable and Allowance for Doubtful Accounts

We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding longer than contractual payment terms are considered past due and are reviewed individually for collectability. We maintain reserves for potential credit losses based upon our loss history and specific receivables aging analysis. Receivable balances are written off when collection is deemed unlikely. Allowance for doubtful accounts was

$277

and

$300

for the years ended

December

31,

2016

and

2015,

respectively.

Inventories

Inventories are stated at the lower of cost or market with cost determined under the

first

-in,

first

-out (FIFO) method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors.

h.	Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. Estimated useful lives are as follows:

Buildings (years)	10	–	20
Machinery and Equipment (years)	5	–	10
Furniture and Fixtures (years)	3	–	10
Computer Hardware and Software (years)	3	–	5
Leasehold Improvements	Lesser of useful life or lease term

Betterments, renewals and extraordinary repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in operating income.

i.	Long-Lived Assets, Goodwill and Intangibles

We assess all of our long-lived assets for impairment when events or circumstances indicate that their carrying amounts

may

not be recoverable. For property, plant and equipment and amortizable intangible assets, this is accomplished by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated as the present value of expected discounted future cash flows. The discount rate used by us in our evaluation is an industry-based weighted average cost of capital. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized. We did

not

record any impairments of property, plant and equipment or amortizable intangible assets in the years ended

December

31,

2016

2015.

We do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets for impairment as of

December

31,

and on an interim basis when events or circumstances indicate that impairment

may

exist. We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being recognized as expense over their weighted-average estimated useful lives.

The impairment analysis of goodwill consists

first

of a review of various qualitative factors of the identified reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, including goodwill. This review includes, but is not limited to, an evaluation of the macroeconomic, industry or market, and cost factors relevant to the reporting unit as well as financial performance and entity or reporting unit events that

may

affect the value of the reporting unit. If this review leads to the determination that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, further impairment testing is not required. However, if this review cannot support such a conclusion or we determine to do so at our discretion, we will perform quantitative impairment steps. Similarly, the analysis for indefinite-lived intangible assets consists of review of various qualitative factors to determine if it is more likely than not that the indefinite-lived intangible asset is not impaired. If such a conclusion cannot be supported or at our discretion, we will perform quantitative impairment steps.

The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the reporting unit to which it is assigned.

If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, a

second

step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. We determine the fair value of the reporting unit for goodwill impairment testing based on a discounted cash flow model. We determine the fair value of our intangibles assets with indefinite lives (trademarks) through the relief from royalty valuation approach.

impairments of long-lived intangible assets were recorded in the year ended

December

31,

2016.

While our testing indicated that the McDowell Research Corporation trademark is not impaired in

2016,

it passed by a relatively narrow margin and is most susceptible to variances in sales from current projections. Due to time delays in the awarding by government/defense customers in recent years of certain large projects in our Communications Systems segment, we recorded a partial impairment of our McDowell Research, Ltd. trademark in the year ended

December

31,

2015.

This impairment amounted to

$150.

Future amortization expense of amortizable intangible assets will be approximately

$405,

$373,

$352,

$340

and

$321

for the fiscal years ending

December

31,

2017

through

2021,

respectively.

j.	Translation of Foreign Currency

The financial statements of our foreign subsidiaries are translated from the functional currency into U.S. dollar equivalents, with translation adjustments recorded as the sole component of accumulated other comprehensive loss on the balance sheets. Exchange gains and (losses) relate to foreign currency transactions and balances denominated in currencies other than the functional currency included in net income for the years ended

December

31,

2016

and

2015

were

$86

and

$48,

respectively.

k .	Revenue Recognition

Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are recognized on the date of delivery. We will make a provision at the time the revenue is recognized for warranty costs expected to be incurred. Customers, including distributors, do not have a general right of return on products shipped.

Deferred Revenue

–

For each source of revenues, we defer recognition if: (i) evidence of an agreement does not exist,( ii) delivery or service has not occurred, (iii) the selling price is not fixed or determinable, or (iv) collectability is not reasonably assured.

l.	Warranty Reserves

We estimate future costs associated with expected product failure rates, material usage and service costs in the development of our warranty obligations. Warranty reserves, included in other current liabilities and other long-term liabilities as applicable on our Consolidated Balance Sheets, are based on historical experience of warranty claims. In the event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded.

m.	Shipping and Handling Costs

Costs incurred by us related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to these costs are reflected as revenue.

n.	Advertising Expenses

Advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income and Comprehensive Income. Such expenses amounted to

$32

and

$59

for the years ended

December

31,

2016

and

2015,

respectively.

o.	Research and Development

Research and development expenditures are charged to operations as incurred. The majority of research and development expenses pertain to salaries and benefits, developmental supplies, depreciation and other contracted services. During

2016

and

2015,

we expended

$6,155

and

$6,112,

respectively, on research and development, including

$209

and

$509,

respectively, on customer sponsored research and development activities, which are included in cost of goods sold. We recognized

$209

and

$509

of revenue relating to these activities during

2016

and

2015,

respectively.

p.	Environmental Costs

Environmental expenditures that relate to current operations are expensed. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated.

q.	Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will not be realized. As of

December

31,

2016,

we continued to recognize a valuation allowance in the U.S. and certain U.K. operations on our net deferred tax assets to the extent that temporary tax differences and the U.S. and U.K. net operating loss and tax credit carry-forwards resulting in the deferred tax asset are not able to be offset by future reversing temporary differences. The assessment of the realizability of the U.S. NOL was based on a number of historical factors including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of the end of

2016.

We concluded that these historical factors represent sufficient negative evidence and have concluded that we should record a full valuation allowance against these net deferred tax assets. We also recorded a full valuation allowance on our net deferred tax asset for the year ended

December

31,

2015.

r.	Concentration Related to Customers and Suppliers

During the year ended

December

31,

2016,

we had

two

major customers, both large defense primary contractors, which together comprised

25%

of our revenues. During the year ended

December

31,

2015,

one

of those customers comprised

23%

of our sales. There were no other customers that comprised greater than

10%

of our total revenues during these years.

Currently, we do not experience significant seasonal trends in our revenues. Since a significant portion of our revenues are based on purchases from U.S. and allied country defense departments, the timing of our sales could be impacted by delays in the government budget process and the decisions to deploy resources to support military purchases of our products.

We generally do not distribute our products to a concentrated geographical area nor is there a significant concentration of credit risks arising from individuals or groups of customers engaged in similar activities, or who have similar economic characteristics. While direct and indirect sales to the U.S. Department of Defense have been substantial during

2016

and

2015,

we do not consider this customer to be a significant credit risk. We do not normally obtain collateral on trade accounts receivable.

Certain materials and components used in our products are available only from a single or a limited number of suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or increased costs. Additionally, we

may

elect to develop relationships with a single or limited number of suppliers for materials and components that are otherwise generally available. Although we believe that alternative suppliers are available to supply materials and components that could replace materials and components currently used and that, if necessary, we would be able to redesign our products to make use of such alternatives, any interruption in the supply from any supplier that serves as a sole source could delay product shipments and have a material adverse effect on our business, financial condition and results of operations. We have experienced interruptions of product deliveries by sole source suppliers in the past.

s.	Fair Value Measurements and Disclosures

Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into

three

levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level

Quoted prices in active markets for identical assets or liabilities.

Level

Observable inputs, other than Level

prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or that we corroborate with observable market data for substantially the full term of the related assets or liabilities.

Level

Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities.

The fair value of financial instruments approximated their carrying values at

December

31,

2016

and

2015.

The fair value of cash, trade accounts receivable, trade accounts payable, and accrued liabilities approximates carrying value due to the short-term nature of these instruments.

t.	Earnings Per Share

Basic earnings per share is computed by dividing net income or loss attributable to Ultralife Corporation by the weighted average number of common shares outstanding for the period. Diluted earnings per share calculations reflect the assumed exercise and conversion of dilutive employee stock options and unvested restricted stock, if any, applying the treasury stock method. Diluted earnings per share in

2016

include

1,238,804

outstanding in-the-money stock options that add

135,458

shares to the number of shares outstanding, and include

15,900

restricted stock units that add

9,538

shares outstanding. Diluted earnings per share in

2015

include

1,312,282

outstanding in-the-money stock options that add

260,318

shares to the number of shares outstanding, and include

32,800

restricted stock units which add

15,385

shares outstanding.

Diluted earnings per share calculations exclude the effect of approximately

1,332,281

and

945,687

employee stock options in

2016

and

2015,

respectively, as such options have an exercise price in excess of the weighted average market price of the Company’s common stock.

u.	Stock-Based Compensation

We have various stock-based employee compensation plans that are described more fully in Note

The compensation cost relating to share-based payment transactions is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity award).

v.	Segment Reporting

We have

two

operating segments – Battery & Energy Products, and Communications Systems. The basis for determining our operating segments is the manner in which financial information is used in monitoring our operations. Management operates and organizes itself according to business units that comprise unique products and services across geographic locations.

w.	Recent Accounting Pronouncements

May

2014,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.

2014

(Topic

606)

“Revenue from Contracts with Customer” related to revenue from contracts with customers. Under this standard, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP and permits the use of either the retrospective or cumulative effect transition method. Topic

606

is effective for annual reporting periods beginning after

December

15,

2017,

including interim periods within that reporting period. We do not expect the adoption of Topic

606

to have a material impact on our Consolidated Financial Statements. We do not anticipate early adoption of the standard.

July

2015,

the FASB issued Accounting Standards Update No.

2015

11,

"Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory by using only the lower of cost and net realizable value. This standard is effective for fiscal years and interim periods within those years beginning after

December

15,

2016,

and must be applied on a retrospective basis. The adoption of this standard is not expected to have a material impact on our Consolidated Financial Statements.

November

2015,

the FASB issued Accounting Standards Update No.

2015

17,

“Income Taxes, Balance Sheet Classification of Deferred Taxes” which requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The new standard is effective for annual periods beginning after

December

15,

2016,

and interim periods within that reporting period. The guidance under this new statndard

may

be applied either prospectively or retrospectively to all periods presented. We will apply the standard retrospectively beginning in the

first

quarter

2017.

February

2016,

the FASB issued Accounting Standards Update No.

2016

02,

“Leases” requires that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases not considered short-term leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The guidance is effective for years beginning after

December

15,

2018

and early adoption is permitted. The Company has not yet determined the impact of this new standard on our Consolidated Financial Statements, but believes it

may

be significant. We have not yet determined whether we will adopt the standard in advance of its required effective date.

March

2016,

the FASB issued Accounting Standards Update No.

2016

09,

“Compensation – Stock Compensation (Topic

718)”

Improvements to Employee Share-Based Payment Accounting” which involves several aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures and classification on the statement of cash flows. The guidance is effective for annual periods beginning after

December

15,

2016,

and interim periods within those periods. We will adopt this standard effective

January

2017.

We do not expect this standard to have a material impact on our Consolidated Financial Statements.

October

2016,

the FASB issued Accounting Standards Update No.

2016

16,

“Income Taxes (Topic

740),

Intra-Entity Transfers of Assets Other Than Inventory”. The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to an outside party. The guidance is effective for annual reporting periods beginning after

December

15,

2017,

including interim periods within those annual reporting periods. Early adoption is permitted. The new guidance requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The company will adopt effective

January

2018

and is currently evaluating the impact this guidance will have on our Consolidated Financial Statements.

August

2016,

the FASB issued Accounting Standards Update No.

2016

15,

“Statement of Cash Flows (Topic

230),

Classification of Certain Cash Receipts and Cash Payments”. The new guidance makes

eight

targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after

December

15,

2017,

and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. The company will adopt

January

2018

and is currently evaluating the impact this guidance will have on our Consolidated Financial Statements.