Note

- Summary of Operations and Significant Accounting Policies

a .	Description of Business

As used in this annual report, unless otherwise indicated, the terms “we”, “our” and “us” refer to Ultralife Corporation (“Ultralife”) and includes 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

material reclassifications for the years ended

December 31, 2017

and

2016.

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

$292

and

$277

for the years ended

December 31, 2017

and

2016,

respectively.

g.	Inventories

Inventories are stated at the lower of cost or net realizable value with cost determined under the

first

-in,

first

-out (FIFO) method. We record provisions 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 (in years):

Building s	1 0	–	2 0
Machinery and Equipmen t	5	–	1 0
Furniture and Fixture s	3	–	1 0
Computer Hardware and Softwar e	3	–	5
Leasehold Improvement s	Lesser of useful life or lease ter m

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,

impairment is recognized.

The purchase price paid to effect an acquisition is allocated to the acquired tangible and intangible assets and liabilities at fair value. We do

not

amortize goodwill and intangible assets with indefinite lives, but instead evaluate these assets for impa

irment at least annually, or when events indicate that impairment exists. We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being utilized over their weighted-average estimated useful life.

The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the 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.

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, 2017

and

2016

were $(

) and

$86,

respectively.

k .	Revenue Recognition

Product Sales

– In general, revenues from the sale of products are recognized when products are shipped. When products are shipped with terms 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.

For products shipped under vendor managed inventory arrangements, revenue is recognized when the product is consumed by the customer, at which point title has transferred and there are

further obligations by the Company.

Deferred Revenue

–

For each source of revenues, we defer recognition if: (i) evidence of an agreement does

not

exist,( ii) delivery or service has

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

$26

and

$32

for the years ended

December 31, 2017

and

2016,

respectively.

o.	Research and Development

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

201

and

2016,

we expended

$5,142

and

$6,155,

respectively, on research and development, including

$405

and

$209,

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

$405

and

$209

of revenue relating to these activities during

2017

and

2016,

respectively.

p.	Environmental Costs

Environmental expenditures that relate to current operations are expensed. Remediation costs that relate to an existing condition

caused by 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 Decem

ber

31,

2017,

we continued to recognize a valuation allowance in the U.S. and certain U.K. operations on our net deferred tax assets to the extent that temporary tax differences and the U.S. and U.K. net operating loss and tax credit carryforwards resulting in the deferred tax asset are

not

able to be offset by 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 prior to

2015,

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

2017.

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, 2016.

r.	Concentration Related to Customers and Suppliers

During t

he year ended

December 31, 2017,

we had

one

major customer, a large defense primary contractor, which comprised

18%

and

12%

of our revenues in

2017

and

2016,

respectively. During the year ended

December 31, 2016,

another large defense primary contractor comprised

13%

of our sales; however, sales to this customer in

2017

comprised

of our sales. There were

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

2017

and

2016,

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

market activity that are significant to the fair value of the assets or liabilities.

The fair value of financial instruments approximated their carrying values at

December 31, 2017 and 2016.

The fair value of cash, trade 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

2017

include

1,035,711

outstanding in-the-money stock options that add

330,676

shares to the number of shares outstanding. Diluted earnings per share in

2016

include

1,238,804

outstanding in-the-money stock options that add

135,458

shares to the number of shares outstanding, and include

15,900

restricted stock units that add

9,538

shares outstanding. There were

unvested restricted stock units as of

December 31, 2017.

Diluted earnings per share calculations exclu

de the effect of

824,500

and

1,332,281

employee stock options in

2017

and

2016,

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

November 2015,

the Financial Accounting Standards Board (“

FASB”) issued Accounting Standards Update (“ASU”)

2015

17,

“Income Taxes: Balance Sheet Classification of Deferred Taxes”, which requires that deferred tax liabilities and assets be netted against each other and classified as non-current in a classified statement of financial position. ASU

2015

is effective for public companies for annual and interim periods beginning after

December

15,

2016.

During the

first

quarter of

2017,

we adopted ASU

2015

on a retrospective basis. As such, we reclassified

$32

and

$94

of foreign current deferred tax assets to non-current on the consolidated balance sheets as of

December 31, 2017

and

2016,

respectively. The deferred tax liabilities relate to U.S. tax obligations which cannot be netted against foreign deferred taxes. The adoption of ASU

2015

did

not

affect our consolidated statements of income.

March 2016,

the FASB issued ASU

2016

09,

“

Compensation – Stock Compensation (Topic

718

)”, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU

2016

is effective for public companies for annual and interim periods beginning after

December

15,

2016.

We adopted the new accounting standard in the

first

quarter of

2017

and will maintain our policy to estimate forfeitures expected to occur to determine stock-based compensation expense. Adoption of this new accounting standard resulted in the recognition of an increase in the Company’s gross deferred tax asset of

$1,123

and an offsetting increase in the valuation allowance. There was

impact to the Company’s retained earnings as a result of adopting this new accounting standard.

July 2015,

the FASB issued ASU

2015

11,

"Simp

lifying 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. We adopted the new accounting standard in the

first

quarter of

2017.

There was

material impact to the Company's financial statements as a result of adopting this new accounting standard.

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. The company will adopt Topic

606

effective

January 1, 2018.

Topic

606

will

not

have a material impact on our Consolidated Financial Statements.

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 standard on our Consolidated Financial Statements, but believes it

may

be significant. We have elected

not

to adopt this standard in advance of its required effective date.

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 Topic

740

effective

January 1, 2018.

Topic

740

will

not

have a material impact 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 this standard effective

January 1, 2018.

This standard will

not

have a material impact on our Consolidated Financial Statements.

January 2017,

the FASB issued ASU

2017

04,

“

Intangibles – Goodwill and Other (Topic

350

) – Simplifying the Test for Goodwill Impairment”, which eliminates the

two

-step process that required identification of potential impairment and a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. The Company is currently assessing the impact that adopting this new accounting standard will have on our Consolidated Financial Statements.

May 2017,

the FASB issued ASU

2017

09,

“

Compensation – Stock Compensation (Topic

718

) – Scope of Modification Accounting”, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic

718.

ASU

2017

is effective for fiscal years beginning after

December 15, 2017

and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU

2017

is to be applied on a prospective basis to an award modified on or after the adoption date. We do

not

intend to early adopt ASU

2017

and do

not

expect the adoption of this new accounting standard will have a material impact on our Consolidated Financial Statements.