ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(unaudited)

ASSETS

The accompanying notes are an integral part of these consolidated financial statements.

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands except per share amounts)

(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

ULTRALIFE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands – except share and per share amounts)

(unaudited)

The accompanying unaudited Condensed Consolidated Financial Statements of Ultralife Corporation (the “Company”) and subsidiaries 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 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes 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 Condensed Consolidated 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 Statements and related notes thereto contained in our Form 10-K for the year ended December 31, 2014.

2015.

The December 31, 2014 condensed2015 consolidated balance sheet data 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.

Our quarters end on the last Sunday of the third month in themonthly closing schedule is a 4/4/5 weekly-based cycle for each fiscal quarter, as opposed to a calendar month-based cycle for each fiscal quarter. While the actual dates for the quarter-ends will change slightly each year, we believe that there are not any material differences when making quarterly comparisons.

On January 13, 2016, Ultralife UK Limited (the “Merger Subsidiary”), a U.K. corporation and a wholly-owned subsidiary of Ultralife Corporation (the “Company”), completed the acquisition of all of the outstanding ordinary shares of Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., from Intrinsic Equity Limited, Catapult Growth Fund Limited Partnership, MJF Pension Trustees Limited, Robert Andrew Phillips and Michael Allen (collectively, the “Sellers”). There are no material relationships between the Company or Merger Subsidiary and any of the Sellers, other than pertaining to this acquisition. Accutronics is a leading independent designer and manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic devices and will be classified in the Battery & Energy Products segment.

The acquisition was completed pursuant to the terms of a Share Purchase Agreement dated January 13, 2016, with an effective date of January 1, 2016 for accounting purposes, by and among the Merger Subsidiary and the Sellers. The Merger Subsidiary paid at the time of closing an aggregate purchase price of £7,575 ($10,976) in cash, and in exchange the Merger Subsidiary received all of the outstanding shares of Accutronics ordinary stock. Monies to fund the purchase price were advanced to the Merger Subsidiary from the Company’s general corporate funds.

The purchase price was subject to adjustment based on the difference between actual and estimated amounts of working capital of Accutronics as well as the amount of net cash of Accutronics. The adjustment resulted in a final payment to the Sellers in the amount of £133 on February 24, 2016, bringing the total aggregate purchase price to £7,708 ($11,161).

The purchase price allocation was determined in accordance with the accounting treatment of a business combination in the FASB ASC Topic 805,Business Combinations. Under the guidance, the fair value of the consideration was determined and the assets acquired and liabilities assumed have been recorded at their fair values at the date of the acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.

The allocation of purchase price to the assets acquired and liabilities assumed at the date of the acquisition is presented in the table below (in thousands). Management is responsible for determining the fair value of the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered a number of factors, including reference to an analysis performed under FASB ASC Topic 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that occur. The resulting purchase price allocation is considered preliminary as it is subject to change due to events in the future and subject to audit by the Company’s independent registered accountants. The final audited purchase price allocation may include (1) changes in allocations to intangible assets such as customer contracts and relationships, trade name and intellectual property as well as goodwill, (2) changes to deferred income taxes and (3) other changes to assets and liabilities.

The goodwill included in the Company’s purchase price allocation presented above represents the value of Accutronics assembled and trained workforce, the incremental value that Accutronics 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.

During the three month period ended March 27, 2016, direct acquisition costs of $251 and increased cost of sales related to purchase accounting adjustments of $91 for inventory acquired were recorded in the Company’s Consolidated Statement of Income and Comprehensive Income. Accutronics contributed revenue of $2,486 and an operating loss of $275 during the three month period ended March 27, 2016 reflecting the purchase accounting adjustments and non-recurring costs directly related to the acquisition.

The following unaudited pro forma information presents the combined results of operations as if the acquisition of Accutronics had been completed on January 1, 2015, the beginning of the comparable prior year three month period. The unaudited pro forma results include purchase accounting adjustments to reflect the restatement of inventory to estimated fair value and the resulting increase in cost of sales for the sale of the inventory during this three month period, direct acquisition costs and the amortization of intangible assets resulting from the purchase price allocation.

The unaudited pro forma results do not reflect the realization of any expected cost savings or other synergies from the acquisition of Accutronics as a result of restructuring activities, other cost savings initiatives or sales synergies following the completion of the business combination. Accordingly, these unaudited pro forma results are presented for informational purposes only and not necessarily indicative of what the actual results of operations of the combined Company would have been if the acquisition had occurred at the beginning of the 2015 period presented, nor are they indicative of future results of operations.

Set forth below is the unaudited pro forma results of the Company and Accutronics for the three month period ended March 29, 2015 as if the acquisition occurred as of January 1, 2015 along with the reported results for the three month period ended March 27, 2016 which includes the consolidation of Accutronics (in thousands, except per share amounts).

On April 28, 2014, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on May 1, 2014 and under which the Company was authorized to repurchase up to 1.8 million shares of its outstanding common stock over a period not to exceed twelve months. The Share Repurchase Program has been extended through April 30,June 2, 2016, and the maximum number of shares authorized to be repurchased under the program has been increased to 3.4 million shares.

Share repurchases under this program are made in accordance with SEC Rule 10b-18 using a variety of methods, which may include open market purchases, privately negotiated transactions and block trades, or any combination of such methods, in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under a 10b5-1 Plan,Plans, the timing, manner, price and amount of any repurchases are determined at the Company’s discretion. The Share Repurchase Program may be suspended, terminated or modified by the Company at any time and for any reason. The Share Repurchase Program does not obligate the Company to repurchase any specific number of shares.

There were no shares repurchased during the three month period ended March 27, 2016. During the three month period ended September 27,March 29, 2015, the Company repurchased 748,58278,401 shares under this program, for a total cost (excluding fees and commissions) of $3,357.$298.

During the nine month period ended September 27, 2015, the Company repurchased 2,225,437 shares under this program for a total cost (excluding fees and commissions) of $9,162.

From the inception of the Share Repurchase Program on May 1, 2014 through October 28, 2015,March 27, 2016, the Company has repurchased 2,442,191 shares for an aggregate cost (excluding fees and commissions) of $9,877. The total remaining balance of shares authorized for repurchase under the Share Repurchase Program is 957,809 shares as of October 28, 2015.

March 27, 2016.

Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method. The composition of inventories was:

Major classes of property, equipment and improvements consisted of the following:

Depreciation expense for property, equipment and improvements was as follows:

$589 and $596 for the three-month periods ended March 27, 2016 and March 29, 2015, respectively.

a. Goodwill

The following table summarizes the goodwill activity by segment for the nine-monththree-month periods ended SeptemberMarch 27, 20152016 and September 28, 2014:March 29, 2015:

b. Intangible Assets

The composition of intangible assets was:

Amortization expense for intangible assets was as follows:

$137 and $60 for the three-month periods ended March 27, 2016 and March 29, 2015, respectively. Amortization included in research and development expenses was $51 and $32 for the three-month periods ended March 27, 2016 and March 29, 2015, respectively. Amortization included in selling, general and administrative expenses was $86 and $28 for the three-month periods ended March 27, 2016 and March 29, 2015, respectively.

The change in the cost value of total intangible assets from December 31, 20142015 to SeptemberMarch 27, 20152016 is a result of the acquisition of Accutronics and the effect of foreign currency translations.

We have financing through a Revolving Credit, Guaranty and Security Agreement dated as of May 24, 2013 (the “Credit Agreement”), and related security agreements with PNC Bank, National Association (“PNC”PNC Bank”), which provides a $20 million$20,000 secured asset-based revolving credit facility that includes a $1 million$1,000 letter of credit sub-facility (the “Credit Facility”). The Credit Agreement provides that the Credit Facility may be increased with PNC’sPNC Bank’s concurrence to an amount not to exceed $35 million, provided such increase must occur$35,000 prior to the last six months of the term whichand expires on May 24, 2017.

Our available borrowing limit under the Credit Facility is based on a borrowing base formula equal to a percentage of accounts receivable, inventory and eligible foreign in-transit inventory. Interest is payable quarterly and accrues on outstanding indebtedness under the Credit Agreement at either a LIBOR-based rate or an alternate base rate, as defined in the Credit Agreement. The applicable interest rate was 2.43% at March 27, 2016. We pay a quarterly fee on the Credit Facility’s unused availability at 0.375% per annum.

As of SeptemberMarch 27, 2015,2016, we had approximately $9,666$11,589 of borrowing capacity in addition tounder our cash on hand of $14,585,$20,000 Credit Facility with PNC Bank, and we had borrowings of $1,156 under the Credit Facility. At March 29, 2015, the Company had no outstanding borrowings or outstanding letters of credit under the Credit Facility at either September 27, 2015 or December 31, 2014.

Facility.

We recorded non-cash stock compensation expense in each period as follows:

These are more fully discussed as follows:

a. Stock Options

We have stock options outstanding from various stock-based employee compensation plans for which we record compensation expensecost relating to share-based payment transactions in our financial statements. As of SeptemberMarch 27, 2015,2016, there was $414$509 of total unrecognized compensation expensecost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.13.4 years.

The following table summarizes stock option activity for the nine-month period ended September 27, 2015:first quarter of 2016:

The following assumptions were used to value stock options granted during the first quarter of 2016:

FASB’s guidance for share-based payments requires cash flows from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options in excess of the deferred tax asset attributable to stock compensation costs for such stock options. We did not record any excess tax benefits in the first three months of 2016 or 2015. Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended SeptemberMarch 27, 2016 and March 29, 2015 was $14 and September 28, 2014 was $19 and $0,$8, respectively. Cash received from stock option exercises for the nine-month periods ended September 27, 2015 and September 28, 2014 was $28 and $11, respectively.

b. Restricted Stock Awards

AtIn September 27, 2015, our President and Chief Executive Officer held 60,000 unearned, unvested restricted stock units. These units vested subsequent to September 27, 2015 upon the satisfaction of the condition of our common stock having closed at a price of $5.00 per share or greater for 15 trading days in a 30 trading day period.

In addition,2014, 49,200 shares of restricted stock were awarded to certain of our employees in September, 2014. 16,400 shares of these awards vested in September 2015.employees. These units vest over three years and we estimated their weighted average grant date fair value to be $3.24 per share. There is $60$38 of unrecognized compensation expensecost related to these restricted shares at SeptemberMarch 27, 2015.2016.

We use the asset and liability method in accounting for income taxes. 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.

For the three-month periods ended SeptemberMarch 27, 20152016 and September 28, 2014,March 29, 2015, we recorded $130$88 and $60,$111, respectively, in income tax expense. For the nine-month periods ended September 27, 2015 and September 28, 2014, we recorded $312 and $177, respectively, in income tax expense. These areexpense, detailed as follows:

DeferredThe deferred income tax provision is primarily due to the recognition of deferred tax liabilities generated fromrelating to goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. The remaining expense in 2015 wascurrent income tax provision is primarily due to the income reported for our China operations during the periodoperation and Accutronics (U.K.) and estimated U.S. federal alternative minimum taxes, while the remaining expense in 2014 wasis primarily due to state income taxes.

Our effective consolidated tax rates for the three-month periods ended March 27, 2016 and March 29, 2015 were:

OurThe overall effective tax rate is the result of the combination of income and losses in each of our tax jurisdictions, which is particularly influenced by the fact that we have recorded a full reserve against our deferred tax assets pertaining to cumulative historical losses for our U.S. operations and our U.K. subsidiary,certain foreign subsidiaries, as management does not believe, at this time, that it is more likely than not that we will realize the benefit of these losses. Our tax rate for the nine-month period ended September 27, 2015 was 11.7%, which was different from the federal statutory rate due to the effect of the utilization of fully reserved net operating loss carryforwards (“NOL”) as well as the effect of differing foreign income tax rates, principally in China. Our tax rate for the nine-month period ended September 28, 2014 was (6.5%), which was different from the federal statutory rate due to the loss incurred and our full reserve against our NOLs, and the effect of differing foreign income tax rates, principally in China.

We have substantial NOLs available to offset taxable income in the United States. However, we remain subject to the alternative minimum tax in the United States. The alternative minimum tax limits the amount of NOL available to offset taxable income to 90% of the current year income. We recorded a provision of $26 and $48 for U.S. alternative minimum tax for the three and nine months ended September 27, 2015, respectively, and no alternative minimum tax in either the three or nine months ended September 28, 2014. The payment of the alternative minimum tax normally results in the establishment of a deferred tax asset; however, we have established a full valuation allowance for this related deferred tax asset.

As of September 27,December 31, 2015, we have foreign and domestic NOLnet operating loss (“NOL”) and credit carryforwards totaling approximately $85,200$86,800 and $1,400$1,600 available to reduce future taxable income. Included in our NOL carryforwards are foreign loss carryforwards of approximately $12,400 that can be carried forward indefinitely. The domestic NOL carryforward of $72,800$74,400 expires from 2019 through 2035.2034. The domestic NOL carryforward includes approximately $2,900$3,000 for which a benefit will be recorded in capital in excess of par value when realized.

Our unrecognized tax benefits related to uncertain tax positions at September 27,March 29, 2015 pertainin the amount of $7,296 relate to foreign taxFederal and various state jurisdictions. The following table summarizesWe recorded the activity related to our unrecognized tax benefits:

The release of uncertain tax positions in 2015 relatesrelating to the conclusion of a federal tax examination, resulting in a $21.4 million increase in the amount of our reported domestic NOL carryforward.

The total unrecognized tax benefit balances at March 29, 2015 were comprised of tax benefits that, if recognized, would result in a deferred tax asset and a corresponding increase in our valuation allowance. As a result, because the benefit would be offset by an increase in the valuation allowance, there would be no net effect on our effective tax rate or income tax provision. We recorded the release of this unrecognized tax benefit amount during 2015 upon the conclusion of a of a federal tax examination, resulting in a $21.4 million increase in the amount of our reported domestic NOL carryforward.

We are not required to accrue interest and penalties as the unrecognized tax benefits have been recorded as a decrease in our NOL. Interest and penalties would begin to accrue in the period in which the NOLs related to the uncertain tax positions are utilized. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.

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. Our U.S. tax matters for the years 20002001 through 20142015 remain subject to examination by the Internal Revenue Service (“IRS”) anddue to our NOL carryforwards. Our U.S. tax matters for the years 2001 through 2015 remain subject to examination by various state and local tax jurisdictions due to our NOL carryforwards. Our tax matters for the years 20072009 through 20142015 remain subject to examination by the respective foreign tax jurisdiction authorities.

Basic earnings per share (“EPS”) iscomputed by dividing earnings attributable to the Company’s common shareholders 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-month period ended SeptemberMarch 27, 2015, 1,026,2822016, 1,242,230 stock options and 34,20032,800 restricted stock unitsawards were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 107,000342,809 additional shares in the calculation of fully diluted earnings per share. For the nine-monthcomparable period ended September 27,March 29, 2015, 431,53297,700 stock options, and 34,200 restricted stock units were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resultedresulting in 47,0008,101 additional shares in the calculation of fully diluted earnings per share. Due to our net losses in both the three-month and nine-month periods ended September 28, 2014, no dilutive securities were considered.

There were 1,264,4221,051,750 and 2,020,588outstanding2,179,756 outstanding stock options for the three-month periods ended SeptemberMarch 27, 20152016 and September 28, 2014, respectively, that were not included in EPS as the effect would be anti-dilutive. There were 1,859,172 and 2,020,588outstanding stock options for the nine-month periods ended September 27,March 29, 2015, and September 28, 2014, respectively, that were not included in EPS as the effect would be anti-dilutive.

a. Purchase Commitments

As of SeptemberMarch 27, 2015,2016, we have made commitments to purchase approximately $358$878 of production machinery and equipment.

b. Product Warranties

We estimate future costs associated with expected product failure rates, material usage and service costs in the development of our warranty obligations. Warranty reserves are based on historical experience of warranty claims and generally will be estimated as a percentage of sales over the warranty period. In the event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded. Changes in our product warranty liability during the first ninethree months of 20152016 and 20142015 were as follows:

c. 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 such matters, other than the matters described below, will not have a material adverse effect on our financial position, results of operations or cash flows.

Dreamliner Litigation

In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by a fire while parked at London Heathrow Airport. We participated in and provided technical assistance in support of an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, as we are one of many downstream suppliers to that manufacturer. A final report was issued by the Air Accidents Investigative Branch - - UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company.

On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire. The suit was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. The suit seeks as damages USD 42 million plus other unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers. We are working with those insurers and their counsel to respond to and actively defend against this action.

A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell. Ultralife has had this cell in production since 2001, with millions of units produced and this cell is widely-used for global defense and commercial applications. This battery product has gone through rigorous safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests and Criteria, and is authorized for use in aerospace applications under Technical Standard Order C142.

On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire. The suit was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. The suit seeks as damages $42,000 plus other unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers. We are working with those insurers and their counsel to respond to and actively defend against this action, which is ongoing.

At this time, we believe that there is not a reasonable possibility that this incident will result in a material financial exposure to the Company.

Arista Power Litigation

InSince September 2011, we initiated anhave been pursuing legal action against Arista Power, Inc. (“Arista”) and our former employee, David Modeen, (“Modeen”), in the Statefor, among other things, alleged breach of New York Supreme Court, Countycertain agreements, duties and obligations, including misappropriation of Wayne, in which we allege that Arista recruited all but one of the members of its executive team from us, subsequently changed and redirected its business to compete directly with us by using our confidential information and during the summer of 2011, recruited Modeen to become an Arista employee. As more fully disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we allege that both Arista and Modeen breached agreements with us, that Arista’s employment of Modeen will inevitably lead to the disclosure and use of our trade secrets, by Arista.  We seek damages as determined at trialtortious interference, and preliminary and permanent injunctive relief.  The defendants answeredbreach of contract. On January 12, 2016, Arista filed for liquidation under Chapter 7 of the allegations set forthbankruptcy laws of the United States, without accurately identifying our ongoing lawsuit against them. Although we have not withdrawn our lawsuit, nor has it been dismissed, the Company does not intend to submit a Proof of Claim in the Complaint and assertedconnection with Arista’s bankruptcy filing, or otherwise continue pursuing its claims against us, which have since been dropped.  Arista.

We initiated the September 2011 Complaint against Arista Power to protect our shareholders, customersand employees from the unauthorized use and theft of our investments in intellectual property, trade secrets and confidential information by Arista and its employees.  Protecting our intellectual property and know-how, developed and obtained at great cost to us to form our competitive position in the marketplace and create value for our shareholders and stakeholders, is a fundamental responsibility of all our employees.

Discovery in this action is ongoing, and we plan to continue to pursue our complaint against Arista.  It is not possible to predict the outcome of this action, whether we will be granted the injunctive relief we seek, nor the monetary amount, if any, which we may be awarded should we prevail.

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables.accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication system kitssystems 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.

corporate charges.

The components of segment performance were as follows:

Three-Month Period Ended March 27, 2016:

Three-Month Period Ended September 27,March 29, 2015: