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Section 1: 10-Q (FORM 10-Q)

cui20180331_10q.htm
 

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from _______ to ______

 

Commission File Number 0-29923

 

CUI Global, Inc.

(Exact name of registrant as specified in its charter)

 

Colorado

 

84-1463284

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

20050 SW 112th Avenue

Tualatin, Oregon 97062

 

(Address of principal executive offices and zip code)

 

(503) 612-2300

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

YES  ☒  NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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    ☐       (Do not check if a smaller reporting company)

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  ☒

 

There were 28,505,054 shares of the registrant's common stock, par value $0.001 per share, issued and outstanding as of May 7, 2018.

 

 

 

 

 

INDEX

 

 

   

Page

Part I

     

Item 1.

Financial Statements

2
 

Condensed Consolidated Balance Sheets

2
 

Condensed Consolidated Statements of Operations (Unaudited)

3
 

Condensed Consolidated Statements of Comprehensive Income and Loss (Unaudited)

4
 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

5
 

Condensed Consolidated Statements of Cash Flows (Unaudited)

6
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28
 

Overview

28
 

Results of Operations

29
 

Liquidity and Capital Resources

33

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

37

Item 4.

Controls and Procedures

38

Part II

     

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds. Common Stock Issued

39

Item 5.

Other Information

39

Item 6.

Exhibits

40
 

Exhibit Index

40
 

Signatures

40

 

1

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

CUI Global, Inc.

Condensed Consolidated Balance Sheets

 

   

March 31,

   

December 31,

 

(in thousands, except share and per share data)

 

2018

   

2017

 
   

(Unaudited)

         

Assets:

               

Current Assets:

               

Cash and cash equivalents

  $ 9,637     $ 12,646  

Trade accounts receivable, net of allowance of $140

               

and $135, respectively

    11,993       10,833  

Inventories, net of allowance of $996 and $946, respectively

    11,906       13,892  

Contract assets

    1,196       2,299  

Prepaid expenses and other

    1,691       1,606  

Total current assets

    36,423       41,276  
                 

Property and equipment, less accumulated depreciation of $4,430 and $4,155, respectively

    11,318       11,242  

Goodwill

    17,820       17,641  

Other intangible assets, less accumulated amortization of $12,681 and $11,900, respectively

    15,608       15,568  

Note receivable, less current portion

    305       317  

Restricted cash

    523        

Deposits and other assets

    1,928       1,865  

Total assets

  $ 83,925     $ 87,909  
                 

Liabilities and Stockholders' Equity:

               

Current Liabilities:

               

Accounts payable

  $ 4,494     $ 5,110  

Short-term overdraft facility

    837        

Mortgage note payable, current portion

    95       94  

Accrued expenses

    3,609       4,186  

Contract liabilities

    5,168       8,829  

Refund liabilities

    1,951       695  

Total current liabilities

    16,154       18,914  
                 

Long term mortgage note payable, less current portion

    3,231       3,256  

Long term note payable, related party

    5,304       5,304  

Derivative liability

    272       356  

Deferred tax liabilities

    1,999       2,414  

Other long-term liabilities

    190       179  

Total liabilities

    27,150       30,423  
                 

Commitments and contingencies

               
                 

Stockholders' Equity:

               

Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at March 31, 2018 or December 31, 2017

           

Common stock, par value $0.001; 325,000,000 shares authorized; 28,485,898 shares issued and outstanding at March 31, 2018 and 28,406,856 shares issued and outstanding at December 31, 2017

    28       28  

Additional paid-in capital

    169,747       169,527  

Accumulated deficit

    (109,929

)

    (108,559

)

Accumulated other comprehensive loss

    (3,071

)

    (3,510

)

Total stockholders' equity

    56,775       57,486  

Total liabilities and stockholders' equity

  $ 83,925     $ 87,909  

 

 

See accompanying notes to condensed consolidated financial statements

 

2

Table of Contents

 

 

CUI Global, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

(in thousands, except share and per share amounts)

 

For the Three Months

Ended March 31,

 
   

2018

   

2017

 
                 

Total revenues

  $ 21,966     $ 17,844  
                 

Cost of revenues

    15,389       12,160  
                 

Gross profit

    6,577       5,684  
                 

Operating expenses:

               

Selling, general and administrative

    9,201       8,554  

Depreciation and amortization

    529       552  

Research and development

    620       610  

Provision (credit) for bad debt

    6       (27

)

Other operating expenses

          5  
                 

Total operating expenses

    10,356       9,694  
                 

Loss from operations

    (3,779

)

    (4,010

)

                 

Other income

    330       46  

Interest expense

    (114

)

    (116

)

                 

Loss before taxes

    (3,563

)

    (4,080

)

                 

Income tax benefit

    (302

)

    (226

)

                 

Net loss

  $ (3,261

)

  $ (3,854

)

                 

Basic and diluted weighted average common shares outstanding

    28,488,032       20,949,251  
                 

Basic and diluted loss per common share

  $ (0.11

)

  $ (0.18

)

 

 

See accompanying notes to condensed consolidated financial statements

 

3

Table of Contents

 

 

CUI Global, Inc.

Condensed Consolidated Statements of Comprehensive Income and Loss

(Unaudited)

 

 

(in thousands)

 

For the Three Months Ended

March 31,

 
   

2018

   

2017

 

Net loss

  $ (3,261

)

  $ (3,854

)

                 

Other comprehensive income (loss)

               

Foreign currency translation adjustment

    439       289  

Comprehensive loss

  $ (2,822

)

  $ (3,565

)

 

 

See accompanying notes to condensed consolidated financial statements

 

4

Table of Contents

 

 

CUI Global, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

 

(in thousands, except share amounts)

 

Common Stock

   

 

   

 

   

Accumulated

   

 

 
   

Shares

   

Amount

   

Additional

Paid-in Capital

   

Accumulated

Deficit

   

Other

Comprehensive

Income (Loss)

   

Total

Stockholders'

Equity

 
                                                 

Balance, December 31, 2017

    28,406,856     $ 28     $ 169,527     $ (108,559

)

  $ (3,510

)

  $ 57,486  
                                                 

Cumulative effect of accounting change (1)

                      1,891             1,891  

Balance at January 1, 2018, adjusted

    28,406,856       28       169,527       (106,668

)

    (3,510

)

    59,377  

Common stock issued for compensation, services, and royalty payments

    79,042             220                   220  

Net loss for the period ended March 31, 2018

                      (3,261

)

          (3,261

)

Other comprehensive income

                            439       439  

Balance, March 31, 2018

    28,485,898     $ 28     $ 169,747     $ (109,929

)

  $ (3,071

)

  $ 56,775  

 

(1) Represents adjustment to accumulated deficit upon the adoption of Accounting Standards Codification Topic 606.

 

 

See accompanying notes to condensed consolidated financial statements

 

5

Table of Contents

 

 

CUI Global, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

(in thousands)

 

For the Three Months Ended March 31,

 
   

2018

   

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (3,261

)

  $ (3,854

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation

    264       236  

Amortization of intangibles

    466       464  

Stock issued and stock to be issued for compensation, royalties and services

    66       91  

Unrealized gain on derivative liability

    (84

)

    (33

)

Provision for (credit to) bad debt expense and returns allowances

    6       (28

)

Deferred income taxes

    (250

)

    (294

)

Inventory reserve

    58       179  

Non-cash unrealized foreign currency gains

    (295

)

    (176

)

Loss on disposal of assets

          5  
                 

(Increase) decrease in operating assets:

               

Trade accounts receivable

    (1,040

)

    (643

)

Inventories

    910       (296

)

Contract assets

    625       475  

Prepaid expenses and other current assets

    (137

)

    (371

)

Deposits and other assets

          (3

)

Increase (decrease) in operating liabilities:

               

Accounts payable

    (694

)

    1,410  

Accrued expenses

    (308

)

    (210

)

Refund liabilities

    386       40  

Contract liabilities

    385       1,526  

NET CASH USED IN OPERATING ACTIVITIES

    (2,903

)

    (1,482

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchase of property and equipment

    (154

)

    (198

)

Proceeds from sale of property and equipment

          1  

Investments in other intangible assets

    (239

)

    (71

)

Proceeds from notes receivable

          19  

NET CASH USED IN INVESTING ACTIVITIES

    (393

)

    (249

)

                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from overdraft facility

    4,982        

Payments on overdraft facility

    (4,155

)

     

Proceeds from line of credit

    1,166        

Payments on line of credit

    (1,166

)

     

Payments on capital lease obligations

    (1

)

    (3

)

Payments on mortgage note payable

    (24

)

    (22

)

Payments on contingent consideration

    (45

)

    (61

)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

    757       (86

)

                 

Effect of exchange rate changes on cash

    53       162  

Net decrease in cash, cash equivalents and restricted cash

    (2,486

)

    (1,655

)

Cash, cash equivalents and restricted cash at beginning of period

    12,646       4,617  
                 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

  $ 10,160     $ 2,962  

 

 

See accompanying notes to condensed consolidated financial statements

 

6

Table of Contents

 

CUI Global, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

 

(in thousands)

 

For the Three Months Ended March 31,

 
   

2018

   

2017

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Income taxes paid

  $ 23     $ 21  

Interest paid, net of capitalized interest

  $ 114     $ 116  
                 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

               

Common stock issued and to be issued for royalties payable pursuant to product agreements, related party

  $ 7     $ 8  

Common stock issued and to be issued for consulting services and compensation in common stock

  $ 213     $ 218  

Accrued property and equipment purchases

  $ 54     $ 122  

Accrued investment in other intangible assets

  $ 31     $ 29  

 

 

See accompanying notes to condensed consolidated financial statements

 

7

Table of Contents

 

CUI Global, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Nature of Operations

CUI Global Inc. (CUI Global) is a platform company composed of two segments, the Power and Electromechanical segment and the Energy segment, along with an "Other" category.

 

The Power and Electromechanical segment consists of the wholly owned subsidiaries: CUI, Inc. (CUI), based in Tualatin, Oregon; CUI Japan, based in Tokyo, Japan; CUI-Canada, based in Toronto, Canada; and the entity holding the corporate building, CUI Properties. All three operating subsidiaries are providers of power and electromechanical components including power supplies, transformers, converters, connectors and industrial controls for Original Equipment Manufacturers (OEMs).

 

The Power and Electromechanical segment aggregates its product offerings into two categories: power solutions - including external and embedded ac-dc power supplies, dc-dc converters and basic digital point of load modules and offering a technology architecture that addresses power and related accessories; and components - including connectors, speakers, buzzers, and industrial control solutions including encoders and sensors. These offerings provide a technology architecture that addresses power and related accessories to industries as broadly ranging as telecommunications, consumer electronics, medical and defense.

 

The Company’s Energy segment consists of the Orbital Gas Systems Ltd subsidiary (Orbital-UK) and the Orbital Gas Systems, North America, Inc. subsidiary, collectively referred to as "Orbital." Orbital has developed a portfolio of products, services and resources to offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries. Its proprietary VE® Technology enhances the capability and speed of our GasPT® Technology. VE Technology provides a superior method of penetrating the gas flow without the associated vortex vibration, thereby making it a ‘‘stand-alone’’ product for thermal sensing (thermowells) and trace-element sampling.

 

The Other category represents the remaining activities that are not included as part of the other reportable segments and primarily represents corporate activity.

 

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes condensed consolidated financial statements. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the Company's Annual Report, Form 10-K for the year ended December 31, 2017.

 

It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

 

8

 

As a result of the adoption of ASC 606 (Note 2), the following items have been reclassified from the captions in the December 31, 2017 consolidated balance sheet included in our Form 10-K for the year ended December 31, 2017 to the captions in the December 31, 2017 condensed consolidated balance sheet appearing herein:

 

Captions in December 31,

2017 consolidated balance

sheet within Form 10-K

 

Reclassified to

Captions in

December 31, 2017

condensed

consolidated

balance sheet herein

       

Costs in excess of billings

   

Contract assets

Billings in excess of costs

   

Contract liabilities

Unearned revenue

   

Contract liabilities

Unearned revenue

   

Refund liabilities

 

 

Changes in these accounts as reclassified are reflected on the condensed consolidated statement of cash flows for the three months ended March 31, 2018 and 2017.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, impairment of prepaid royalties, revenue recognition on cost-to-cost-method type contracts, inventory valuation, warranty reserves, refund liabilities/returns allowances, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - UPDATE

 

Our significant accounting policies are detailed in "Note 2 Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 14, 2018. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below:

 

Revenue Recognition

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments (“new revenue standard"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. This guidance includes the required steps to achieve the core principle that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new revenue standard was applied using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to accumulated deficit as of January 1, 2018. As a result of the adoption of this standard, certain changes have been made to the condensed consolidated balance sheets. We expect the ongoing impact of the adoption of the new standard to primarily affect the timing of revenue recognition. The most significant impact was on Power and Electromechanical segment revenue that was previously recorded as “sell through." This revenue was previously recorded upon the sale by our customers, who are distributors. Under the new accounting guidance, we will record the revenue upon sale to the distributor with an appropriate amount reserved for estimated returns and allowances as the Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. For the Power and Electromechanical segment, their revenue is based upon the transfer of goods and satisfaction of its performance obligations as of a point in time. During the transition this will have the effect of having a certain amount of revenue not recorded as revenue but as part of the cumulative effect of the accounting change. In the Energy segment, for the majority of contracts, revenue will still be measured over time using the cost to cost method. The change that most affected the transition adjustment on Energy revenue was the requirement to limit revenue recognition on contracts without an enforceable right to payment for performance completed to date. Revenue on contracts without a specific enforceable right to payment on work performed to date was "clawed back" as part of the Company's transition adjustment. The cumulative effect adjustment recorded as of January 1, 2018 was a net $1.9 million decrease to accumulated deficit due to a $2.8 million transition adjustment from the Power and Electromechanical segment partially offset by a $(0.9) million transition adjustment from the Energy segment, net of deferred tax. See Note 3 for further discussion of our revenue recognition policies.

 

9

 

 

 

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

On January 1, 2018, we adopted ASC Topic 606 and the related amendments ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for operating periods beginning after January 1, 2018 are presented under ASC 606, while comparative information has not been restated and continues to be reported in accordance with the accounting standards in effect for those periods. See Note 2 for a description of our accounting policy resulting from adoption of ASC 606. We recognized the cumulative effect of initially applying ASC 606 as an adjustment to accumulated deficit in the balance sheet as of January 1, 2018 as follows:

 

   

Balance at

December

31, 2017

   

Adjustments

Due to ASC

606

   

Balance at

January 1,

2018

 

(in thousands)

                       

Assets

                       

Inventories

  $ 13,892     $ (1,064

)

  $ 12,828  

Contract assets

    2,299       (516

)

    1,783  

Total current assets

    41,276       (1,580

)

    39,696  

Total assets

    87,909       (1,580

)

    86,329  
                         

Liabilities

                       

Contract liabilities

    8,829       (4,168

)

    4,661  

Refund liabilities

    695       870       1,565  

Total current liabilities

    18,914       (3,298

)

    15,616  

Deferred tax liabilities

    2,414       (173

)

    2,241  

Total liabilities

    30,423       (3,471

)

    26,952  
                         

Stockholders' Equity

                       

Accumulated deficit

    (108,559

)

    1,891       (106,668

)

Total stockholders' equity

    57,486       1,891       59,377  

Total liabilities and stockholders' equity

  $ 87,909     $ (1,580

)

  $ 86,329  

 

10

 

The impact of adoption on our condensed consolidated balance sheet and condensed consolidated statement of operations as of and for the period ended March 31, 2018 was as follows:

 

   

For the period ended March 31, 2018

 

(in thousands)

 

As Reported

   

Balances

Without

Adoption of

ASC 606

   

Effect of

Change

Higher /

(Lower)

 

Statement of Operations

                       

Total revenues

  $ 21,966     $ 21,704     $ 262  

Cost of revenues

    15,389       15,746       (357

)

Gross profit

    6,577       5,958       619  

Loss from operations

    (3,779

)

    (4,398

)

    619  

Loss before taxes

    (3,563

)

    (4,182

)

    619  

Income tax benefit

    (302

)

    (391

)

    89  

Net loss

  $ (3,261

)

  $ (3,791

)

    530  

Basic and diluted loss per common share

  $ (0.11

)

  $ (0.13

)

  $ 0.02  

 

   

As of March 31, 2018

 
   

As Reported

   

Balances

Without

Adoption of

ASC 606

   

Effect of

Change

Higher /

(Lower)

 

(in thousands)

                       

Assets

                       

Inventories

  $ 11,906     $ 12,548     $ (642

)

Contract assets

    1,196       1,570       (374

)

Prepaid expenses and other

    1,691       1,780       (89

)

Total current assets

    36,423       37,528       (1,105

)

Total assets

  $ 83,925     $ 85,030     $ (1,105

)

                         

Liabilities

                       

Contract liabilities

  $ 5,168     $ 9,621     $ (4,453

)

Refund liabilities

    1,951       819       1,132  

Total current liabilities

    16,154       19,475       (3,321

)

Deferred tax liabilities

    1,999       2,178       (179

)

Total liabilities

    27,150       30,650       (3,500

)

                         

Stockholders' Equity

                       

Accumulated deficit

    (109,929

)

    (112,350

)

    2,421  

Accumulated other comprehensive loss

    (3,071

)

    (3,045

)

    (26

)

Total stockholders' equity

    56,775       54,380       2,395  

Total liabilities and stockholders' equity

  $ 83,925     $ 85,030     $ (1,105

)

 

 

The adoption of ASC 606 had no impact on the Company’s cash flows from operations.

 

11

 

Power and Electromechanical segment

The Power and Electromechanical segment generates its revenue from two categories of products: power solutions - including external and embedded ac-dc power supplies, dc-dc converters and basic digital point of load modules and offering a technology architecture that addresses power and related accessories; and components - including connectors, speakers, buzzers, and industrial control solutions including encoders and sensors. These offerings provide a technology architecture that addresses power and related accessories to industries as broadly ranging as telecommunications, consumer electronics, medical and defense. The production and delivery of these products are considered single performance obligations. Revenue is recognized when we satisfy a performance obligation and this occurs upon shipment and ownership transfer of our products to our customers at a point in time.

 

Energy segment

The Energy segment subsidiaries, collectively referred to as Orbital, generate their revenue from a portfolio of products, services and resources that offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries.

 

Orbital accounts for a majority of its contract revenue proportionately over time. For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.

 

For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

 

The timing of revenue recognition for Energy products also depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer.

 

For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.

 

For certain of our revenue streams, such as call-out repair and service work, and outage services, that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.

 

12

 

Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

 

Product-type contracts (for example, sale of GasPt units) for which revenue does not qualify to be recognized over time are recognized at a point in time. Revenues from warranty and maintenance activities are recognized ratably over the term of the warranty and maintenance period.

 

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable are recognized in the period when our right to consideration is unconditional. Accounts receivable are recognized net of an allowance for doubtful accounts. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.

 

The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenue recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to both scope and/or price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Condensed Consolidated Balance Sheets.

 

Contract liabilities from our construction contracts occur when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. In the first three months of 2018, $0.9 million of revenue was recorded that was included in contract liabilities at December 31, 2017.

 

13

 

Refund liabilities and corresponding inventory adjustment

Refund liabilities primarily represent estimated future new product introduction returns and estimated future scrap returns. Future new product returns are based on a percent of current inventory of newly introduced products held by our distributor customers. The liability for estimated returns of newly introduced product is reversed to revenue as the inventory is sold. Future scrap returns are based on a percentage of total revenues. In addition to the refund liabilities recorded for future returns, the Company also records an adjustment to inventory and corresponding adjustment to cost of revenue for the Company's right to recover products from customers upon settling the refund liability.

 

Performance Obligations

Remaining Performance Obligations

Remaining performance obligations, represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of March 31, 2018, the Company's remaining performance obligations are generally expected to be filled within the next 12 months.

 

Any quarterly adjustments to net revenues, cost of revenues, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks. Changes in estimates of net revenues, cost of revenues and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. For separately priced extended warranty or product maintenance performance obligations, when estimates of total costs to be incurred on the performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

 

Performance Obligations satisfied over time

To determine the proper revenue recognition method for contracts for our Energy segment, we evaluate whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

 

For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

 

14

 

Performance Obligations satisfied at a point in time.

Revenue from goods and services transferred to customers at a single point in time accounted for 82% of revenues for the three-month period ended March 31, 2018. The majority of our revenue recognized at a point in time is in our Power and Electromechanical segment. Revenue on these contracts is recognized when the product is shipped and the customer takes ownership of the product. Determination of ownership and control transfer is determined by shipping terms delineated on the customer purchase orders.

 

Variable Consideration

The nature of our contracts gives rise to several types of variable consideration, including new product returns and scrap returns allowances primarily in our Power and Electromechanical segment. In rare instances in our Energy segment, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include new product introduction and scrap return estimates in our calculation of net revenue when there is a basis to reasonably estimate the amount of the returns. These estimates are based on historical return experience, anticipated returns and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations.

 

 

The following table presents our revenues disaggregated by revenue source for the three months ended March 31, 2018:

 

 

(in thousands)

 

Power and

Electromechanical

   

Energy

   

Total

 
                         

Distributor sales

  $ 9,617     $     $ 9,617  

Direct Sales

    7,403       4,946       12,349  

Total revenues

  $ 17,020     $ 4,946     $ 21,966  

 

 

The following table presents our revenues disaggregated by timing of revenue recognition for the three months ended March 31, 2018:

 

(in thousands)

 

Power and

Electromechanical

   

Energy

   

Total

 
                         

Revenues recognized at point in time

  $ 17,020     $ 1,047     $ 18,067  

Revenues recognized over time

          3,899       3,899  

Total revenues

  $ 17,020     $ 4,946     $ 21,966  

 

15

 

The following table presents our revenues disaggregated by region for the three months ended March 31, 2018:

 

(in thousands)

 

Power and

Electromechanical

   

Energy

   

Total

 
                         

North America

  $ 13,032     $ 1,365     $ 14,397  

Europe

    1,094       3,524       4,618  

Asia

    2,819       29       2,848  

Other

    75       28       103  

Total revenues

  $ 17,020     $ 4,946     $ 21,966  

 

 

 

4. INVENTORIES

 

Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost or market using the first-in, first-out (FIFO) method or through the moving average cost method. At March 31, 2018 and December 31, 2017, accrued liabilities included $1.1 million and $1.3 million of accrued inventory payable, respectively. At March 31, 2018 and December 31, 2017, inventory by category is valued net of reserves and consists of:

 

(in thousands)

 

March 31,

   

December 31,

 
   

2018

   

2017

 

Finished goods

  $ 7,234     $ 10,792  

Raw materials

    2,684       3,287  

Work-in-process

    2,984       759  

Inventory reserves

    (996

)

    (946

)

Total inventories

  $ 11,906     $ 13,892  

 

 

 

 

5. PREPAID EXPENSES, DEPOSITS AND OTHER

 

 

(in thousands)

 

March 31,

   

December 31,

 
   

2018

   

2017

 

Prepaid expenses and other

  $ 1,691     $ 1,606  

Deposits and other assets

  $ 1,928     $ 1,865  

 

 

During the second quarter of 2017, prepaid royalties in the amount of $1.6 million were transferred to long-term and included in Deposits and other assets from prepaid expenses due to a change in the estimated period of when those prepayments will be amortized based upon management’s assessment of future GasPT sales. At March 31, 2018 and December 31, 2017, there were $1.8 million and $1.8 million of prepaid royalties included in Deposits and other assets, respectively.

 

16

 

 

 

6. GOODWILL AND INDEFINITE-LIVED INTANGIBLES

 

The Company tests for impairment of other indefinite-lived intangible assets in the second quarter of each year and when events or circumstances indicate that the carrying amount of the intangible assets exceed their fair value and may not be recoverable.

 

The Company also tests for impairment of Goodwill in the second quarter of each year and when events or circumstances indicate that the carrying amount of Goodwill exceeds its fair value and may not be recoverable. As detailed in ASC 350-20-35-3A, in performing its testing for impairment of goodwill as of May 31, 2017, management completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. To complete the qualitative review, management follows the steps in ASC 350-20-35-3C to evaluate the fair values of the goodwill and considers all known events and circumstances that might trigger an impairment of goodwill.

 

During the fourth quarter of 2017, the Company determined that there were indicators present to suggest that it was more likely than not that the fair value of the Orbital-UK reporting unit was less than its carrying amount. The significant changes for the Orbital-UK reporting unit subsequent to the annual goodwill impairment test performed as of May 31, 2017 included a decline in the 2017 actual revenue, operating income and cash flows compared to previously forecasted results and a decline in the 2018 forecasted revenue, operating income and cash flows due in part to the longer than expected temporary halt in shipping of its GasPT product to a major customer in Italy and market uncertainty due to the continuing effects of Brexit.

 

To test the Orbital-UK reporting unit for impairment, the Company used a quantitative test. The Company estimated the fair value of the Orbital-UK reporting unit using a blend of a market approach and an income approach, which was deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the income approach, the Company determined fair value based on estimated future cash flows of the Orbital-UK reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk of the Orbital-UK reporting unit and the rate of return an outside investor would expect to earn. The Company based its cash flow projections for the Orbital-UK reporting unit using a forecast of cash flows and a terminal value developed by capitalizing an assumed stabilized cash flow figure. The forecast and related assumptions were derived from an updated financial forecast prepared during the fourth quarter of 2017. Under the market approach, appropriate valuation multiples were derived from the historical operating data of selected guideline companies. The valuation multiples were evaluated and adjusted based on the strengths and weaknesses of the Company relative to the selected guideline companies and the multiple was then applied to the appropriate operating data of the Company to arrive at an indication of fair market value. As a result of the analysis, the Company concluded that the carrying value of the Orbital-UK reporting unit exceeded its estimated fair value. The quantitative test for the Orbital-UK reporting unit resulted in an impairment for the Orbital-UK reporting unit, and the Company recorded a goodwill impairment charge of $3.2 million during the fourth quarter of 2017.

 

The remaining goodwill related to the Orbital-UK reporting unit as of March 31, 2018 and December 31, 2017 was $4.5 million, which is included in the Energy segment. As of March 31, 2018, there was also goodwill remaining for CUI Inc., CUI-Canada and CUI-Japan reporting units, which are included in the Power and Electromechanical segment.

 

The carrying value of goodwill and the activity for the three months ended March 31, 2018 are as follows:

 

(in thousands)

 

Power and

Electro -

Mechanical

   

Energy

   

Other

   

Total

 

Balance, December 31, 2017

  $ 13,092     $ 4,549     $     $ 17,641  

Currency translation adjustments

    5       174             179  

Balance, March 31, 2018

  $ 13,097     $ 4,723     $     $ 17,820  

 

17

 

 

 

7. INVESTMENT AND NOTE RECEIVABLE

 

During the three months ended March 31, 2016, CUI Global's 8.5% ownership investment in Test Products International, Inc. ("TPI"), recognized under the cost method, was exchanged for a note receivable from TPI of $0.4 million ($0.3 million balance at March 31, 2018), which was the carrying value of the investment, earning interest at 5% per annum, due June 30, 2019. The Company recorded $4 thousand and $4 thousand of interest income from the note in the three months ended March 31, 2018 and 2017, respectively. The interest receivable is settled on a quarterly basis via a non-cash offset against the finders-fee royalties earned by TPI on GasPT sales. Any remaining finders-fee royalties balance is offset against the note receivable quarterly. The Company also received a zero and $19 thousand cash payment against the note in the three months ended March 31, 2018 and 2017, respectively. CUI Global reviewed the note receivable for non-collectability as of March 31, 2018 and concluded that no allowance was necessary. For more details on this investment see Note 2 - Summary of Significant Accounting policies to CUI Global's financial statements filed in Item 8 of the Company's latest Form 10-K filed with the SEC on March 14, 2018.

 

 

8. DERIVATIVE INSTRUMENTS

 

The Company uses various derivative instruments including forward currency contracts, and interest rate swaps to manage certain exposures. These instruments are entered into under the Company’s corporate risk management policy to minimize exposure and are not for speculative trading purposes. The Company recognizes all derivatives as either assets or liabilities in the condensed consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of derivatives are recognized in earnings. For additional information on fair value of derivatives, see Note 12, “Investments and Fair Value Measurements,” of these condensed consolidated financial statements. The Company has limited involvement with derivative instruments and does not trade them. The Company has entered into one interest rate swap, which has a maturity date of ten years from the date of inception, and is used to minimize the interest rate risk on the variable rate mortgage. During the three months ended March 31, 2018 and 2017, the Company had $84 thousand and $33 thousand, respectively of unrealized gain related to the derivative liabilities.

 

Embedded Derivative Liabilities

The Company evaluates embedded conversion features pursuant to FASB Accounting Standards Codification No. 815 (“FASB ASC 815”), “Derivatives and Hedging,” which requires a periodic valuation of the fair value of derivative instruments and a corresponding recognition of liabilities associated with such derivatives.

 

 

9. STOCK-BASED PAYMENTS FOR COMPENSATION, SERVICES AND ROYALTIES

 

The Company records its stock-based compensation expense under its stock option plans and the Company also issues stock for services and royalties. A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and filed with the SEC on March 14, 2018. The Company did not grant any stock options in the three months ended March 31, 2018. For the three months ended March 31, 2018, and 2017, the Company recorded stock-based expense of $66 thousand and $91 thousand, respectively.

 

 

10. SEGMENT REPORTING

 

Operating segments are defined in accordance with ASC 280-10 as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The measurement basis of segment profit or loss is income (loss) from operations.

 

18

 

Management has identified six operating segments based on the activities of the Company in accordance with the ASC 280-10. These operating segments have been aggregated into two reportable segments, and an Other category. The two reportable segments are Power and Electromechanical and Energy. The Power and Electromechanical segment is focused on the operations of CUI, CUI-Canada and CUI Japan for the sale of internal and external power supplies, related components and industrial controls. The Power and Electromechanical segment also includes CUI Properties, LLC that owns the Company's Tualatin, Oregon facility. The Energy segment is focused on the operations of Orbital Gas Systems Ltd. and Orbital Gas Systems, North America, Inc. which includes gas related test and measurement systems, including the GasPT. The Other category represents the remaining activities that are not included as part of the other reportable segments and represents primarily corporate activity.

 

During the three months ended March 31, 2018, the Company’s total revenues consisted of 77% from the Power and Electromechanical segment and 23% from the Energy segment. During the three months ended March 31, 2017, the Company's total revenues consisted of 77% from the Power and Electromechanical segment and 23% from the Energy segment.

 

The following information represents segment activity for the three months ended March 31, 2018 and selected balance sheet items as of March 31, 2018:

 

(in thousands)

 

Power and

Electro-

Mechanical

   

Energy

   

Other

   

Total

 

Revenues from external customers

  $ 17,020     $ 4,946     $     $ 21,966  

Depreciation and amortization(1)

    364       366             730  

Interest expense

    53       2       59       114  

Profit (loss) from operations

    9       (2,524

)

    (1,264

)

    (3,779

)

Segment assets

    45,401       29,645       8,879       83,925  

Other intangible assets, net

    8,906       6,702             15,608  

Goodwill

    13,097       4,723             17,820  

Expenditures for long-lived assets (2)

    320       73             393  

 

(1) For the Power and Electromechanical segment, for the three months ended March 31, 2018, depreciation and amortization includes $201 thousand classified as cost of revenues in the Condensed Consolidated Statements of Operations.

(2) Includes purchases of property, plant and equipment and the investment in other intangible assets.

 

19

 

The following information represents segment activity for the three months ended March 31, 2017 and selected balance sheet items as of March 31, 2017:

 

(in thousands)

 

Power and

Electro-

Mechanical

   

Energy

   

Other

   

Total

 

Revenues from external customers

  $ 13,662     $ 4,182     $     $ 17,844  

Depreciation and amortization (1)

    381       319             700  

Interest expense

    54             62       116  

Loss from operations

    (534

)

    (2,264

)

    (1,212

)

    (4,010

)

Segment assets

    49,414       29,180       309       78,903  

Other intangibles assets, net

    9,082       6,785             15,867  

Goodwill

    13,089       7,128             20,217  

Expenditures for segment assets (2)

    204       65             269  

 

(1) For the Power and Electromechanical segment, depreciation and amortization totals for the three months ended March 31, 2017, include $148 thousand classified as cost of revenues in the Condensed Consolidated Statements of Operations.

(2) Includes purchases of property plant and equipment and the investment in other intangible assets.

 

The following represents revenue by country:

 

(dollars in thousands)

 

For the Three Months Ended March 31,

 
   

2018

   

2017

 
   

Amount

   

%

   

Amount

   

%

 

USA

  $ 13,807       63

%

  $ 10,113       57

%

United Kingdom

    3,360       15

%

    3,083       17

%

All Others

    4,799       22

%

    4,648       26

%

Total

  $ 21,966       100

%

  $ 17,844       100

%

 

 

 

 

11. RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 3 - Revenue from Contracts with Customers.

 

In November 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company implemented this standard in the first quarter of 2018 and accordingly has reconciled the change in cash, cash equivalents and restricted cash for the three months ended March 31, 2018 and 2017.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies whether eight specifically identified cash flow issues should be categorized as operating, investing or financing activities in the statement of cash flows. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. The Company implemented this standard in the first quarter of 2018. There were no changes necessary to the Company's cash flow presentation as a result of implementing this guidance.

 

20

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019 and early adoption is permitted for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (‘‘ASU 2016-02’’). ASU 2016-02 requires lessees to present right-of-use assets and lease liabilities (with the exception of short-term leases) on the balance sheet. The new guidance will be effective for public business entities for fiscal years beginning after December 15, 2018 including interim periods within that fiscal year. We are currently evaluating the impact of the Company’s pending adoption of ASU 2016-02 on the Company’s consolidated financial statements and will adopt the standard in 2019.

 

 

12. INVESTMENTS AND FAIR VALUE MEASUREMENTS

 

The Company’s fair value hierarchy for its cash equivalents, marketable securities and derivative instruments, including contingent consideration, as of March 31, 2018 and December 31, 2017, respectively, was as follows:

 

 

(in thousands)

                               

March 31, 2018

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Money market securities

  $ 16     $     $     $ 16  

Certificates of Deposit

    523                   523  

Total assets

  $ 539     $     $     $ 539  

Derivative instrument payable

  $     $ 272     $     $ 272  

Contingent consideration

                       

Total liabilities

  $     $ 272     $     $ 272  

 

December 31, 2017

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Money market securities

  $ 16     $     $     $ 16  

Total assets

  $ 16     $     $     $ 16  

Derivative instrument payable

  $     $ 356     $     $ 356  

Contingent consideration

                45       45  

Total liabilities

  $     $ 356     $ 45     $ 401  

 

21

 

Fair Value Measurements

       

Using Significant Unobservable Inputs (Level 3)

       

(in thousands)

 

Contingent

consideration

 

Balance at December 31, 2017

  $ 45  

Payments

    (45

)

Fair value adjustments

     

Balance at March 31, 2018

  $  

 

 

 

There were no transfers between Level 3 and Level 2 in 2018 as determined at the end of the reporting period. The contingent consideration liability is associated with the acquisition of Tectrol in March 2015 and represents the present value of the expected future contingent payment based on revenue projections of select Tectrol legacy products. The inputs used to measure contingent consideration are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal revenue forecasts. Since the valuation is not supported by market criteria, the valuation is completely dependent on unobservable inputs. During quarterly updates of the valuation, the calculation of the value is based on actual and reasonably estimated future revenues. The final amount of contingent consideration of $45 thousand was paid out during the three months ended March 31, 2018.

 

 

13. LOSS PER COMMON SHARE

 

In accordance with FASB Accounting Standards Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock method. Due to the Company’s net loss in the three months ended March 31, 2018 and March 31, 2017, the assumed exercise of stock options using the treasury stock method would have had an antidilutive effect and therefore 1.0 million shares related to stock options were excluded from the computation of diluted net loss per share for both the three months ended March 31, 2018 and 2017. Accordingly, diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2018 and 2017.

 

 

(in thousands, except share and per share amounts)

 

For the Three Months

Ended March 31,

 
   

2018

   

2017

 

Net loss

  $ (3,261

)

  $ (3,854

)

Basic and diluted weighted average number of shares outstanding

    28,488,032       20,949,251  

Basic and diluted loss per common share

  $ (0.11

)

  $ (0.18

)

 

22

 

 

 

14. CAPITALIZED INTEREST

 

The cost of constructing facilities, equipment and project assets includes interest costs incurred during the assets’ construction period. The components of interest expense and capitalized interest are as follows:

 

(in thousands)   

For the Three

Months Ended

March 31,

 
   

2018

   

2017

 

Interest cost incurred

  $ 121     $ 120  

Interest cost capitalized - property and equipment and other intangible assets

    (7

)

    (4

)

Interest expense, net

  $ 114     $ 116  

 

 

 

15. INCOME TAXES

 

The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company continues to record a full valuation allowance against the Company’s U.S. net deferred tax assets as it is not more likely than not that the Company will realize a benefit from these assets in a future period. In future periods, tax benefits and related deferred tax assets will be recognized when management concludes realization of such amounts is more likely than not.

 

A net tax benefit of $302 thousand was recorded to the income tax provision for the three months ended March 31, 2018 resulting in an effective tax rate of 8.5%. The income tax benefit primarily relates to realizable benefits on losses in certain foreign jurisdictions offset by taxes on profitable foreign operations and domestic state minimum taxes. All of our USA deferred tax assets were reduced by a full valuation allowance.

 

The Company’s total income tax benefit and effective tax rate was $226 thousand and 5.5%, respectively, for the same period in 2017. The income tax benefit for the three months ended March 31, 2017 related to realizable benefits on losses in certain foreign jurisdictions offset by taxes on profitable foreign operations and domestic state minimum taxes. All of our USA deferred tax assets were reduced by a full valuation allowance.

 

 

16. WORKING CAPITAL LINE OF CREDIT AND OVERDRAFT FACILITY

 

During the period ended March 31, 2018, the Company’s wholly owned subsidiary, CUI, Inc., maintained a two-year revolving Line of Credit (LOC) with Wells Fargo Bank with the following terms:

 

(in thousands)

       

Credit Limit

   

March 31,

2018

Balance

 

Expiration Date

 

Interest rate

$ 4,000     $ 0 (1)

June 1, 2019

 

Fixed rate at 2.25% above the LIBOR in effect on the first day of the applicable fixed-rate term, or

                 

Variable rate at 2.25% above the daily one-month LIBOR rate.

 

(1) As a result of the Company’s cash management system, checks issued but not presented to the bank for payment may create negative book cash balances. When those checks are presented for payment if there isn't sufficient cash in the bank account, the checks would be honored by the bank with a corresponding increase to CUI's draw on its line of credit. There were no negative book cash balances included in the balance on the line of credit as of March 31, 2018.

 

23

 

The line of credit is secured by the following collateral via a security agreement with CUI Inc. and CUI-Canada at March 31, 2018:

 

(in thousands)

 

CUI Inc. and CUI-Canada General intangibles, net

  $ 8,906  

CUI Inc. and CUI-Canada Accounts receivable, net

  $ 6,903  

CUI Inc. and CUI-Canada Inventory, net

  $ 7,646  

CUI Inc. and CUI-Canada Equipment, net

  $ 1,589  

 

 

The borrowing base for the line of credit is based on a percent of CUI Inc. and CUI-Canada's inventory plus a percent of CUI Inc.'s accounts receivable.

 

CUI Global, Inc., the parent company, is a payment guarantor of the LOC. Other terms included in this revolving line of credit for CUI limit capital expenditures by CUI Inc. and CUI-Canada to $1.75 million in any fiscal year. The LOC is supported by a single long-term note that does not require repayment until maturity although the Company at its option can repay and re-borrow amounts up to the LOC limit. Since the maturity date is June 1, 2019, which is more than one year in the future, the LOC is classified as long-term. The LOC contains certain financial covenants. The Company was in compliance with the financial covenants as of March 31, 2018. At March 31, 2018, there was a $0 million balance outstanding on the LOC and $4.0 million of credit was available.

 

On October 5, 2016, Orbital Gas Systems Ltd. signed a five-year agreement with the London branch of Wells Fargo Bank N.A. for a multi-currency variable rate overdraft facility with the following terms:

 

(in thousands)

       

Credit Limit

 

March 31,

2018

Balance

 

Expiration Date

 

Interest rate

£1,500

pounds

sterling

($2,100 at

March 31,

2018)

  $ 837  

October 5, 2021.

 

Base rate plus a 2.25% margin (2.5% as of March 31, 2018)

 

The London branch of Wells Fargo Bank N.A. can demand repayment of amounts on overdraft at any time. The overdraft facility is primarily secured by land, equipment, intellectual property rights, and rights to potential future insurance proceeds held by Orbital Gas Systems Ltd.

 

 

17. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The components of accumulated other comprehensive income (loss) are as follows:

 

(in thousands)

 

As of March 31,

   

As of December 31,

 
   

2018

   

2017

 

Foreign currency translation adjustment

  $ (3,071

)

  $ (3,510

)

Accumulated other comprehensive income (loss)

  $ (3,071

)

  $ (3,510

)

 

24

 

 

 

18. NOTES PAYABLE

 

Notes payable is summarized as follows:

 

 

(in thousands)

 

As of March 31,

2018

   

As of December 31,

2017

 

Mortgage note payable (1)

  $ 3,326     $ 3,350  

Acquisition Note Payable - related party (2)

    5,304       5,304  

Ending Balance

  $ 8,630     $ 8,654  

 

(1)

On October 1, 2013, the funding of the purchase of the Company’s Tualatin, Oregon corporate offices from Barakel, LLC was completed. The purchase price for this asset was $5.1 million. The purchase was funded, in part, by a promissory note payable to Wells Fargo Bank in the amount of $3.7 million plus interest at the rate of 2% above LIBOR, payable over ten years with a balloon payment due at maturity. It was secured by a deed of trust on the purchased property which was executed by CUI Properties, LLC and guaranteed by CUI Global, Inc. During the three months ended March 31, 2018, the Company made principal payments of $24 thousand against the mortgage promissory note payable. At March 31, 2018, the balance owed on the mortgage promissory note payable was $3.3 million, of which $95 thousand and $3.2 million were in current and long-term liabilities, respectively. See Note 16, Working Capital Line of Credit and Overdraft Facility, for more information on the Company's debt covenants.

 

(2)

The note payable to International Electronic Devices, Inc. (formerly CUI, Inc.) is associated with the acquisition of CUI, Inc. The promissory note is due May 15, 2020 and includes a 5% interest rate per annum, with interest payable monthly and the principal due as a balloon payment at maturity. The note contains a contingent conversion feature, such that in the event of default on the note the holder of the note can, at the holder’s option, convert the note principal into common stock at $0.001 per share. As of March 31, 2018, the Company is in compliance with all terms of this promissory note and the conversion feature is not effective.

 

 

19. CONCENTRATIONS

 

The Company's major product lines are natural gas infrastructure and high-tech solutions in the Energy segment and power and electromechanical products in the Power and Electromechanical segment. The Company had the following revenue concentrations by customer greater than 10% of consolidated revenue:

 

For the Three months ended March 31, 2018:

           

Customer

 

Segment

 

Percent

 

Digi-Key Electronics

 

Power and Electromechanical

    25

%

Future Electronics

 

Power and Electromechanical

    12

%

Total concentrations

    37

%

 

For the Three months ended March 31, 2017:

           

Customer

 

Segment

 

Percent

 

Digi-Key Electronics

 

Power and Electromechanical

    24

%

Total concentrations

    24

%

 

25

 

The Company had the following geographic revenue concentrations outside the U.S.A greater than 10% of consolidated revenue:

 

For the Three months ended March 31, 2018:

       

Country

 

Percent

 

United Kingdom

    15

%

Total concentrations

    15

%

 

For the Three months ended March 31, 2017:

       

Country

 

Percent

 

United Kingdom

    17

%

Total concentrations

    17

%

 

The Company had the following gross trade accounts receivable concentrations by customer greater than 10% of gross trade accounts receivable:

 

As of March 31, 2018

           

Customer

 

Segment

 

Percent

 

Digi-Key Electronics

 

Power and Electromechanical

    14

%

Total concentrations

    14

%

 

As of December 31, 2017

           

Customer

 

Segment

 

Percent

 

GL Industrial Services UK Ltd.

 

Power and Electromechanical

    11

%

Digi-Key Electronics

 

Energy

    10

%

Total concentrations

    21

%

 

The Company had the following geographic concentrations of gross trade accounts receivable outside of the U.S.A greater than 10% of gross trade accounts receivable:

 

As of March 31, 2018:

       

Country

 

Percent

 

United Kingdom

    24 %

 

As of December 31, 2017:

       

Country

 

Percent

 

United Kingdom

    28 %

Canada

    11 %

Total concentrations

    39 %

 

There were no supplier concentrations greater than 10% during the three months ended March 31, 2018 and March 31, 2017.

 

26

 

 

 

20. OTHER EQUITY TRANSACTIONS

 

The following shares issued during 2018 were recorded in expense using the grant-date fair value of the stock:

 

 

Date of

issuance

 

Type of

issuance

 

Expense/

Prepaid/

Cash

 

Stock

issuance

recipient

 

Reason for

issuance

 

Total no.

of shares

   

Grant date

fair value

recorded at

issuance (in

thousands)

     

January 2018

 

Vested restricted common stock

 

Expense

 

Four board members

 

Director compensation

    18,180     $ 50      
                                     

January 2018

 

Common stock

 

Expense

 

Employee

 

Approved bonus

    60,862       163   (1 )
                                     

Total other equity transactions

    79,042     $ 213      

 

(1) Bonus was accrued and expensed in 2017.

 

27

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Important Note about Forward-Looking Statements

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements as of March 31, 2018 and notes thereto included in this document and the audited consolidated financial statements in the Company’s 10-K filing for the period ended December 31, 2017 and the notes thereto. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. The Company’s actual results could differ materially from those anticipated by such forward-looking information due to factors discussed elsewhere in this Form 10-Q.

 

The statements that are not historical constitute “forward-looking statements.” Said forward-looking statements involve risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, express or implied by such forward-looking statements. These forward-looking statements are identified by their use of such terms and phrases as "expects,” “intends,” “goals,” “estimates,” “projects,” “plans,” “anticipates,” “should,” “future,” “believes,” and “scheduled.”

 

The variables which may cause differences include, but are not limited to, the following: general economic and business conditions; changes in regulatory environment; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employment benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with various government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate; therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any person that the objectives and expectations of the Company will be achieved.

 

Overview

CUI Global is a platform company dedicated to maximizing shareholder value through the acquisition and development of innovative companies, products and technologies. Through its subsidiaries, CUI Global has built a diversified portfolio of industry leading technologies that touch many markets.

 

For the three months ended March 31, 2018, CUI Global had a consolidated loss from operations of $3.8 million compared to consolidated loss from operations in the three months ended March 31, 2017 of $4.0 million. During the three months ended March 31, 2018, CUI Global had a consolidated net loss of $3.3 million, compared to a consolidated net loss in the three months ended March 31, 2017 of $3.9 million. The lower consolidated net loss for the three months ended March 31, 2018, was primarily the result of higher revenue and gross profit in the Power and Electromechanical segment related to higher overall sales from our distributors, which were partially offset by higher selling, general and administrative expenses. The Energy segment has not yet seen the increased sales of gas related metering, monitoring and control systems, including GasPts that is expected later this year, which is expected to return the Energy segment to profitability.

 

The first quarter was also remarkable for the continued development of the Power and Electromechanical Virtual Power Systems ("VPS") line of products, successfully receiving UL 9540 certification for our Intelligent Control of Energy (ICE) Block technology and our first order for an ICE Block Data Center Power Utilization Solution Valued at $2.9 Million that is expected to be delivered in the fourth quarter of 2018.

 

28

Table of Contents

 

Results of Operations

The following tables set forth, for the period indicated, certain financial information regarding revenue and costs by segment.

 

For the three months ended March 31, 2018:

 

(dollars in thousands)

 

Power and

Electro-

mechanical

   

Percent of

Segment

Revenues

   

Energy

   

Percent of

Segment

Revenues

   

Other

   

Percent of

Segment

Revenues

   

Total

   

Percent of

Total

Revenues

 
       

%

    $    

%

       

%

    $    

%

 

Total revenues

  $ 17,020       100.0

%

  $ 4,946       100.0

%

  $      

%

  $ 21,966       100.0

%

Cost of revenue

    11,791       69.3

%

    3,598       72.7

%

         

%

    15,389       70.1

%

Gross profit

    5,229       30.7

%

    1,348       27.3

%

         

%

    6,577       29.9

%

                                                                 

Operating expenses:

                                                               

Selling, general and administrative

    4,462       26.2

%

    3,475       70.3

%

    1,264      

%

    9,201       41.9

%

Depreciation and amortization

    164       1.0

%

    365       7.4

%

         

%

    529       2.4

%

Research and development

    589       3.5

%

    31       0.6

%

         

%

    620       2.8

%

Provision for bad debt

    5      

%

    1      

%

         

%

    6      

%

Other operating Expenses

         

%

         

%

         

%

         

%

Total operating expenses

    5,220       30.7

%

    3,872       78.3

%

    1,264      

%

    10,356       47.1

%

Income (loss) from operations

  $ 9      

%

  $ (2,524

)

    (51.0

)%

  $ (1,264

)

   

%

  $ (3,779

)

    (17.2

)%

 

29

Table of Contents

 

For the three months ended March 31, 2017:

 

(dollars in thousands)

 

Power and

Electro-

mechanical

   

Percent of

Segment

Revenues

   

Energy

   

Percent of

Segment

Revenues

   

Other

   

Percent of

Segment

Revenues

   

Total

   

Percent of

Total

Revenues

 
    $    

%

    $    

%

       

%

    $    

%

 

Total Revenues

  $ 13,662       100.0

%

  $ 4,182       100.0

%

  $      

%

  $ 17,844       100.0

%

Cost of revenue

    9,276       67.9

%

    2,884       69.0

%

         

%

    12,160       68.2

%

Gross Profit

    4,386       32.1

%

    1,298       31.0

%

         

%

    5,684       31.8

%

                                                                 

Operating expenses:

                                                               

Selling, general and administrative

    4,128       30.2

%

    3,214       76.8

%

    1,212      

%

    8,554       48.0

%

Depreciation and amortization

    233       1.7

%

    319       7.6

%

         

%

    552       3.1

%

Research and development

    572       4.2

%

    38       0.9

%

         

%

    610       3.4

%

Provision (credit) for bad debt

    (12

)

    (0.1

)%

    (15

)

    (0.4

)%

         

%

    (27

)

    (0.2

)%

Other operating expenses

    (1

)

   

%

    6       0.2

%

         

%

    5      

%

Total operating expenses

    4,920       36.0

%

    3,562       85.1

%

    1,212      

%

    9,694       54.3

%

Loss from operations

  $ (534

)

    (3.9

)%

  $ (2,264

)

    (54.1

)%

  $ (1,212

)

   

%

  $ (4,010

)

    (22.5

)%

 

 

Revenue

(dollars in thousands)

 

Revenues by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 17,020     $ 13,662     $ 3,358       24.6

%

Energy

    4,946       4,182       764       18.3

%

Total revenues

  $ 21,966     $ 17,844     $ 4,122       23.1

%

 

 

The revenues for the three months ended March 31, 2018 were higher than the comparable period due to higher revenues in both our Power and Electromechanical and Energy segments associated with the timing of customer project delivery schedules and sales through our distribution customers. The increased revenue in the Power and Electromechanical segment related primarily to our distributors but also included increases from our direct customers. Higher revenue in the Energy segment was primarily associated with higher revenue from our Houston facility and also from higher exchange rates on the British pound as the pound has rebounded following the initial fall following Brexit. Revenue from our UK facility in local currency terms decreased slightly from the comparable period in 2017.

 

The customer orders related to the Power and Electromechanical segment are associated with the existing product offering, continued new product introductions, continued sales and marketing programs, new customer engagements, distribution channel sales, and the addition in March 2015 of the products from CUI-Canada. In October 2017, the Company announced its first order for its new power monitoring and switching system (ICE Switch) for data centers that was delivered in the first quarter of 2018. Also in the first quarter of 2018, we received our first order for an ICE Block Data Center Power Utilization Solution Valued at $2.9 Million that is expected to be delivered in late 2018.

 

30

Table of Contents

 

The Power and Electromechanical segment and Energy segment held backlogs of customer orders of approximately $26.1 million and $17.7 million, respectively, as of March 31, 2018. These are both significant increases from December 31, 2017 backlogs of $20.2 million and $12.6 million for the Power and Electromechanical and Energy segments, respectively.

 

Cost of revenues

(dollars in thousands)

 

Cost of revenues by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 11,791     $ 9,276     $ 2,515       27.1

%

Energy

    3,598       2,884       714       24.8

%

Total cost of revenues

  $ 15,389     $ 12,160     $ 3,229       26.6

%

 

 

For the three months ended March 31, 2018, the cost of revenues as a percentage of revenue increased to 70% from 68% during the prior-year comparative period. This percentage will vary based upon the power and electromechanical product mix sold, the mix of natural gas systems sold, contract labor necessary to complete gas related projects, the competitive markets in which the Company competes, and foreign exchange rates.

 

The cost of revenues as a percentage of revenue for the Power and Electromechanical segment for the three month period ended March 31, 2018 was 69% compared to 68%, during the prior-year comparative period. Cost of revenues increased in the Power and Electromechanical segment primarily as a result of a significant royalty expense paid related to the revenues of the ICE switch recognized in the first quarter of 2018. The royalty rate is higher on the first $1.4 million of ICE product revenues. The cost of revenues as a percentage of revenue for the Energy segment for the three months ended March 31, 2018 was 73% compared to 69%, in the three months ended March 31, 2017. The higher cost percentage in the Energy segment was due to a less favorable product mix during the three months ended March 31, 2018 compared to the three months ended March 31, 2017. As previously noted, the Energy segment was affected by a temporary halt in shipments of higher margin GasPT units to an Italian customer. The Company expects gross margins to improve in 2018 as a result of the expected resumption of deliveries on the Italian contract.

 

Selling, General and Administrative Expenses

(dollars in thousands)

 

Selling, general, and administrative expense by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 4,462     $ 4,128     $ 334       8.1

%

Energy

    3,475       3,214       261       8.1

%

Other

    1,264       1,212       52       4.3

%

Total SG&A

  $ 9,201     $ 8,554     $ 647       7.6

%

 

 

Selling, General and Administrative (SG&A) expenses include such items as wages, commissions, consulting, general office expenses, business promotion expenses and costs of being a public company, including legal and accounting fees, insurance and investor relations. SG&A expenses are generally associated with the ongoing activities to reach new customers, promote new product lines including ICE, GasPT, IRIS, VE, and new product introductions.

 

31

Table of Contents

 

During the three months ended March 31, 2018, SG&A increased $0.6 million, compared to the prior-year comparative period. The increase in SG&A in the first quarter of 2018 was due to increased costs in both the Power and Electromechanical and the Energy segment, primarily due to higher selling expenses on the higher sales. In addition, higher exchange rates contributed to higher translated costs at Orbital UK in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 despite lower actual costs incurred in the local currency.

 

Depreciation and Amortization

(dollars in thousands)

 

Depreciation and amortization by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 365     $ 381     $ (16

)

    (4.2

)%

Energy

    365       319       46       14.4

%

Total depreciation and amortization

  $ 730     $ 700     $ 30       4.3

%

 

 

The depreciation and amortization expenses are associated with depreciation on buildings, furniture, equipment, vehicles, and intangible assets over the estimated useful lives of the related assets.

 

The total depreciation and amortization expense for the three months ended March 31, 2018 and 2017 included $201 thousand and $148 thousand, respectively, which was included in cost of revenues. The increase in depreciation and amortization included in cost of sales was due to increased allocation of depreciation and amortization to cost of revenues at CUI Inc. and CUI-Canada.

 

Depreciation and amortization expense in the three months ended March 31, 2018 was up slightly compared to the three months ended March 31, 2017 as a result of higher translated depreciation and amortization at our U.K. operation due to higher pound Sterling translation rates during the current period.

 

Research and Development

(dollars in thousands)

 

Research and development by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 589     $ 572     $ 17       3.0

%

Energy

    31       38       (7

)

    (18.4

)%

Total research and development

  $ 620     $ 610     $ 10       1.6

%

 

 

Research and development costs are associated with the continued research and development of new and existing technologies including advanced power technologies, ICE, GasPT, VE Technology and other products. Research and development expense was relatively flat for the three months ended March 31, 2018 and were primarily focused on the ICE technology in Power and Electromechanical Segment and GasPT and VE technologies in the Energy segment.

 

32

Table of Contents

 

Provision (Credit) for Bad Debt

(dollars in thousands)

 

Provision (credit) for bad debt by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 5     $ (12

)

  $ 17       (141.7

)%

Energy

    1       (15

)

    16       (106.7

)%

Total provision (credit) for bad debt

  $ 6     $ (27

)

  $ 33       (122.2