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

cui20190331_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, 2019

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES  ☒  NO ☐

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  ☐   

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 28,613,465 shares of the registrant's common stock, par value $0.001 per share, issued and outstanding as of May 15, 2019.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value. 

CUI

Nasdaq Capital Market

 

 

 

 

 

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 Statements 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

31
 

Overview

31
 

Results of Operations

32
 

Liquidity and Capital Resources

36

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

40

Item 4.

Controls and Procedures

42
 

Part II

 
     

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

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

43

Item 5.

Other Information

43

Item 6.

Exhibits

43
 

Exhibit Index

43
 

Signatures

44

 

1

 

 

 

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 amounts)

 

2019

   

2018

 
   

(Unaudited)

   

(See Note 1)

 

Assets:

               

Current Assets:

               

Cash and cash equivalents

  $ 793     $ 3,979  

Trade accounts receivable, net of allowance of $273 and $167, respectively

    13,270       14,416  

Inventories, net of allowance of $2,652 and $2,495, respectively

    11,342       13,042  

Contract assets

    2,618       1,744  

Note receivable, current portion

    309       318  

Prepaid expenses and other current assets

    1,867       1,982  

Total current assets

    30,199       35,481  
                 

Property and equipment, less accumulated depreciation of $4,130 and $4,234, respectively

    5,201       5,973  

Right of use assets - operating leases

    7,422        

Goodwill

    13,089       13,089  

Other intangible assets, less accumulated amortization of $13,789 and $13,190, respectively

    13,476       13,861  

Restricted cash

    523       523  

Convertible notes receivable

          655  

Investment - equity method

    5,278        

Deposits and other assets

    573       585  

Total assets

  $ 75,761     $ 70,167  
                 

Liabilities and Stockholders' Equity:

               

Current Liabilities:

               

Accounts payable

  $ 6,192     $ 6,480  

Short-term overdraft facility

          1,344  

Line of credit

          979  

Operating lease obligations, current portion

    975        

Accrued expenses

    5,590       4,851  

Contract liabilities

    2,453       2,226  

Refund liabilities

    2,594       2,417  

Deferred gain on leaseback, current portion

          289  

Total current liabilities

    17,804       18,586  
                 

Overdraft facility

    965        

Line of credit

    1,460        

Long term note payable, related party

    5,304       5,304  

Operating lease obligations, less current portion

    6,589        

Deferred tax liabilities

    1,922       1,922  

Deferred gain on leaseback, less current portion

          2,599  

Other long-term liabilities

    162       218  

Total liabilities

    34,206       28,629  
                 

Commitments and contingencies

               
                 

Stockholders' Equity:

               

Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at March 31, 2019 or December 31, 2018

           

Common stock, par value $0.001; 325,000,000 shares authorized; 28,581,953 shares issued and outstanding at March 31, 2019 and 28,552,886 shares issued and outstanding at December 31, 2018

    29       29  

Additional paid-in capital

    169,938       169,898  

Accumulated deficit

    (124,108

)

    (123,993

)

Accumulated other comprehensive loss

    (4,304

)

    (4,396

)

Total stockholders' equity

    41,555       41,538  

Total liabilities and stockholders' equity

  $ 75,761     $ 70,167  

 

 

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,

 
   

2019

   

2018

 
                 

Total revenues

  $ 23,009     $ 21,966  
                 

Cost of revenues

    15,282       15,389  
                 

Gross profit

    7,727       6,577  
                 

Operating expenses:

               

Selling, general and administrative

    9,587       9,201  

Depreciation and amortization

    522       529  

Research and development

    604       620  

Provision for bad debt

    106       6  

Other operating income

    (2

)

     
                 

Total operating expenses

    10,817       10,356  
                 

Loss from operations

    (3,090

)

    (3,779

)

                 

Other income (expense), net

    219       330  

Interest expense

    (85

)

    (114

)

                 

Loss before taxes

    (2,956

)

    (3,563

)

                 

Income tax expense (benefit)

    47       (302

)

                 

Net loss

  $ (3,003

)

  $ (3,261

)

                 

Basic and diluted weighted average common shares outstanding

    28,583,600       28,488,032  
                 

Basic and diluted loss per common share

  $ (0.11

)

  $ (0.11

)

 

 

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,

 
   

2019

   

2018

 

Net loss

  $ (3,003

)

  $ (3,261

)

                 

Other comprehensive income

               

Foreign currency translation adjustment

    92       439  

Comprehensive loss

  $ (2,911

)

  $ (2,822

)

 

 

See accompanying notes to condensed consolidated financial statements

 

4

Table of Contents

 

CUI Global, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2019 and 2018

(Unaudited)

 

(In thousands, except share amounts)

 

Common Stock

   

 

   

 

   

Accumulated

Other

   

Total

 
   

Shares

   

Amount

   

Additional

Paid-in Capital

   

Accumulated

Deficit

   

Comprehensive

Loss

   

Stockholders'

Equity

 
                                                 

Balance, December 31, 2018

    28,552,886     $ 29     $ 169,898     $ (123,993

)

  $ (4,396

)

  $ 41,538  
                                                 

Cumulative effect of accounting change (1)

                      2,888             2,888  
                                                 

Balance at January 1, 2019, adjusted

    28,552,886       29       169,898       (121,105

)

    (4,396

)

    44,426  

Common stock issued for compensation, services, and royalty payments

    29,067             40                   40  

Net loss for the period ended March 31, 2019

                      (3,003

)

          (3,003

)

Other comprehensive income

                            92       92  

Balance, March 31, 2019

    28,581,953     $ 29     $ 169,938     $ (124,108

)

  $ (4,304

)

  $ 41,555  

 

(1) Represents adjustment to accumulated deficit upon the adoption of Accounting Standards Codification Topic 842.

 

 

(In thousands, except share amounts)

 

Common Stock

   

 

   

 

   

Accumulated

Other

   

Total

 
   

Shares

   

Amount

   

Additional

Paid-in Capital

   

Accumulated

Deficit

   

Comprehensive

Loss

   

Stockholders'

Equity

 
                                                 

Balance, December 31, 2017

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

)

  $ (3,510

)

  $ 57,486  
                                                 

Cumulative effect of accounting change (2)

                      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 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  

 

 

(2) 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,

 
   

2019

   

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (3,003

)

  $ (3,261

)

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

               

Depreciation

    277       264  

Amortization of intangibles

    468       466  

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

    51       66  

Unrealized gain on derivative liability

          (84

)

Provision for bad debt expense and returns allowances

    106       6  

Deferred income taxes

          (250

)

Inventory reserve

    113       58  

Non-cash unrealized foreign currency gains

    (218

)

    (295

)

Gain on disposal of assets

    (2

)

     

(Increase) decrease in operating assets:

               

Trade accounts receivable

    1,130       (1,040

)

Inventories

    82       910  

Contract assets

    (841

)

    625  

Prepaid expenses, deposits and other assets

    122       (137

)

Right of use assets - operating leases

    283        

Increase (decrease) in operating liabilities:

               

Accounts payable

    (279

)

    (694

)

Operating lease obligations

    (264

)

     

Accrued expenses

    (1,143

)

    (308

)

Refund liabilities

    177       386  

Contract liabilities

    220       385  

NET CASH USED IN OPERATING ACTIVITIES

    (2,721

)

    (2,903

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of property and equipment

    (69

)

    (154

)

Proceeds from sale of property and equipment

    2        

Investments in other intangible assets

    (148

)

    (239

)

Investment in investment - equity method

    (345

)

     

NET CASH USED IN INVESTING ACTIVITIES

    (560

)

    (393

)

                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from overdraft facility

    5,272       4,982  

Payments on overdraft facility

    (5,681

)

    (4,155

)

Proceeds from line of credit

    7,916       1,166  

Payments on line of credit

    (7,436

)

    (1,166

)

Payments on financing lease obligations

    (1

)

    (1

)

Payments on mortgage note payable

          (24

)

Payments on contingent consideration

          (45

)

NET CASH PROVIDED BY FINANCING ACTIVITIES

    70       757  
                 

Effect of exchange rate changes on cash

    25       53  

Net decrease in cash, cash equivalents and restricted cash

    (3,186

)

    (2,486

)

Cash, cash equivalents and restricted cash at beginning of period

    4,502       12,646  
                 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

  $ 1,316     $ 10,160  

 

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,

 
   

2019

   

2018

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Income taxes paid

  $ 65     $ 23  

Interest paid, net of capitalized interest

  $ 85     $ 114  
                 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

               
                 

Non-cash item for January 1, 2019 adoption of ASC 842 - establishment of right-of-use assets and offsetting lease obligations

  $ 7,703     $  

Non-cash investment in investment - equity method including convertible notes receivable, certain property and equipment, other intangible assets, inventories, prepaid assets, open purchases orders, and future research and development expenditures

  $ 4,933     $  

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

  $ 3     $ 7  

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

  $ 37     $ 213  

Partial settlement of note receivable via offset against royalty payable netted with (increase) to note receivable from accrued interest

  $ 9     $ (2

)

Accrued property and equipment purchases at March 31

  $ 18     $ 54  

Accrued investment in other intangible assets at March 31

  $ 7     $ 31  

 

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, BASIS OF PRESENTATION AND COMPANY CONDITIONS

 

Nature of Operations

CUI Global Inc. (CUI Global or "the Company") 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 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 the Company's 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 on Form 10-K for the year ended December 31, 2018. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

 

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 remaining quarters or year ending December 31, 2019.

 

8

 

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, revenue recognition on cost-to-cost-method type contracts, inventory valuation, trading securities, 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.

 

Company Conditions

The continued delays in shipment of GasPTs on a significant project due to governmental delays and the related slower than expected acceptance of this new disruptive technology has caused a delay in the Company's expected profitability.

 

The Company had losses of $3.0 million and cash used in operating activities of $2.7 million during the three months ended March 31, 2019. As of March 31, 2019, the Company's accumulated deficit is $124.1 million.

 

Management believes the Company's present cash flows will not enable it to meet its obligations for twelve months from the date these financial statements are available to be issued. However, management has developed a plan to address this issue. The plan included obtaining a new long-term financing in the form of a new line of credit and utilizing the cash received from the Company's recent sale/leaseback of the Company's Tualatin headquarters. As part of this plan the Company has obtained a new line of credit from Bank of America for a $10.0 million credit facility, which closed on April 18, 2019. For more information on the Company's new line of credit, see Note 20 Subsequent Events. Including the Company's cash balance, the Company further has $12.4 million of positive working capital primarily related to trade accounts receivable and the Company's inventory less current liabilities that the Company will manage in the next twelve months. Considering the above factors and the new line of credit, management believes it is probable that management’s plans will be achieved and will enable the Company to meet its obligations for the twelve-month period from the date the financial statements are available to be issued.

 

 

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 the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019. Significant changes to the Company's accounting policies as a result of adopting Topic 842 are discussed below:

 

9

 

Adoption of new accounting standards

On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”) using the transition method of adoption. Under the transition method of adoption, comparative information has not been restated and continues to be reported under the standards in effect for those periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed The Company to carry forward the historical lease classification. The impact of adopting the new standard primarily relates to the recognition of a lease right-of-use (“ROU”) asset and current and non-current lease obligations on the condensed consolidated balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Lease ROU assets and obligations are recognized at commencement date based on the present value of lease payments over the lease term. As the Company cannot readily determine the rate implicit in the lease, the Company uses the Company's incremental borrowing rate determined by country of lease origin based on the anticipated lease term as determined at commencement date in determining the present value of lease payments. The ROU asset also excludes any accrued lease payments and unamortized lease incentives.

 

As of March 31, 2019, $7.4 million was included with non-current assets, $1.0 million with current liabilities and $6.6 million with non-current liabilities, on the condensed consolidated balance sheets as a result of the new lease standard. The change in right of use assets and lease obligations is reflected in the change in operating assets and liabilities in the Cash Flows from Operating Activities section of the Condensed Consolidated Statements of Cash Flows. Principal portion of financing lease payments are included in the Financing section of the cash flow. There was no impact on the Company's Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Comprehensive Income and Loss. Additionally, as part of the January 1, 2019 adjustment to transition to the new standard, the Company recorded a $2.9 million adjustment to accumulated deficit to recognize the deferred gain that was originally recorded as part of the December 2018 sale/leaseback of the Tualatin headquarters.

 

In August 2018, the Securities and Exchange Commission, or SEC, published Release No. 33-10532, Disclosure Update and Simplification, or DUSTR, which adopted amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, GAAP, or changes in the information environment. While most of the DUSTR amendments eliminate outdated or duplicative disclosure requirements, the final rule amends the interim financial statement requirements to include a reconciliation of changes in stockholders’ equity (deficit) in the notes or as a separate statement for each period for which a statement of comprehensive income (loss) is required to be filed. The new interim reconciliation of changes in stockholders’ equity (deficit) is included herein as a separate statement.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The guidance will be effective for the fiscal year beginning after December 15, 2018, including interim periods within that year. The Company implemented the standard as of January 1, 2019. There was no effect of this change in the Company's condensed consolidated financial statements for the period ended March 31, 2019.

 

10

 

 

 

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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 the Company satisfies a performance obligation and this occurs upon shipment and ownership transfer of the Company's products to the Company's 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 the Company's performance obligations satisfied over time, the Company recognizes 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 the Company's construction contracts, revenue is generally recognized over time as the Company's performance creates or enhances an asset that the customer controls. The Company's fixed price construction projects generally use a cost-to-cost input method to measure the Company's progress towards complete satisfaction of the performance obligation as the Company believes 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 the Company's performance does not create an asset with an alternative use to us. For those contracts which the Company has a right to payment for performance completed to date at all times throughout the Company's performance, inclusive of a cancellation, the Company recognizes revenue over time. As discussed above, these performance obligations use a cost-to-cost input method to measure the Company's progress towards complete satisfaction of the performance obligation as the Company believes it best depicts the transfer of control to the customer. However, for those contracts for which the Company does not have a right, at all times, to payment for performance completed to date, the Company recognizes revenue at the point in time when control is transferred to the customer.

 

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

 

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

 

11

 

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 the Company's 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 the Company's construction projects when revenue recognized under the cost-to-cost measure of progress exceed the amounts invoiced to the Company's customers, as the amounts cannot be billed under the terms of the Company's contracts. Such amounts are recoverable from the Company's 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 the Company seeks 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). The Company's 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 the Company's construction contracts occur when amounts invoiced to the Company's customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from the Company's customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when the Company expects to recognize such revenue.

 

12

 

Activity in the current contract liabilities for the three months ended March 31, 2019 and 2018 was as follows:

 

(in thousands)

 

Three Months

Ended March

31, 2019

   

Three Months

Ended March 31,

2018

 

Current contract liabilities - January 1

  $ 2,226     $ 4,661  

Long-term contract liabilities - January 1(1)

    129       84  

Total contract liabilities - January 1

  $ 2,355     $ 4,745  
                 

Total contract liabilities - January 1

  $ 2,355     $ 4,745  

Contract additions, net

    1,033       1,279  

Revenue recognized

    (813

)

    (908

)

Translation

    35       146  

Total contract liabilities - March 31

  $ 2,610     $ 5,262  
                 

Current contract liabilities - March 31

  $ 2,453     $ 5,168  

Long-term contract liabilities - March 31 (1)

    157       94  

Total contract liabilities - March 31

  $ 2,610     $ 5,262  

 

(1) Long-term contract liabilities are included in Other long-term liabilities on the Condensed Consolidated Balance Sheets.

 

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 the Company's 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, 2019, 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 the Company determines the Company 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 the Company determines the Company 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 the Company's 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.

 

13

 

Performance Obligations Satisfied Over Time

To determine the proper revenue recognition method for contracts for the Company's Energy segment, the Company evaluates 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 the Company's contracts, the customer contracts with the Company 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, the Company may promise to provide distinct goods or services within a contract in which case the Company separates the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, the Company allocates 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. The Company infrequently sells standard products with observable standalone sales. In cases where the Company does, the observable standalone sales are used to determine the standalone selling price. More frequently, the Company sells a customized customer specific solution, and in these cases the Company typically uses the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

 

Performance Obligations Satisfied at a Point in Time

Revenue from goods and services transferred to customers at a single point in time accounted for 81% and 82% of revenues for the three-month period ended March 31, 2019 and 2018, respectively. The majority of the Company's revenue recognized at a point in time is in the Company's 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 the Company's contracts gives rise to several types of variable consideration, including new product returns and scrap returns allowances primarily in the Company's Power and Electromechanical segment. In rare instances in the Company's Energy segment, the Company includes in the Company's contract estimates additional revenue for submitted contract modifications or claims against the customer when the Company believes the Company has an enforceable right to the modification or claim, and the amount can be estimated reliably and its realization is probable. In evaluating these criteria, the Company considers 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. The Company includes new product introduction and scrap return estimates in the Company's 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 the Company's best judgment at the time. These amounts are included in the Company's calculation of net revenue recorded for the Company's contracts and the associated remaining performance obligations.

 

14

 

The following table presents the Company's revenues disaggregated by revenue source for the three months ended March 31, 2019:

 

 

(in thousands)

 

Power and

Electromechanical

   

Energy

   

Total

 
                         

Distributor sales

  $ 9,430     $     $ 9,430  

Direct sales

    8,121       5,458       13,579  

Total revenues

  $ 17,551     $ 5,458     $ 23,009  

 

The following table presents the Company's 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 the Company's revenues disaggregated by timing of revenue recognition for the three months ended March 31, 2019:

 

(in thousands)

 

Power and

Electromechanical

   

Energy

   

Total

 
                         

Revenues recognized at point in time

  $ 17,551     $ 1,152     $ 18,703  

Revenues recognized over time

          4,306       4,306  

Total revenues

  $ 17,551     $ 5,458     $ 23,009  

 

The following table presents the Company's 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 the Company's revenues disaggregated by region for the three months ended March 31, 2019:

 

(in thousands)

 

Power and

Electromechanical

   

Energy

   

Total

 
                         

North America

  $ 13,641     $ 1,824     $ 15,465  

Europe

    889       3,563       4,452  

Asia

    3,020       19       3,039  

Other

    1       52       53  

Total revenues

  $ 17,551     $ 5,458     $ 23,009  

 

The following table presents the Company's 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, 2019 and December 31, 2018, accrued liabilities included $1.2 million and $1.7 million of accrued inventory payable, respectively. At March 31, 2019 and December 31, 2018, inventory by category is valued net of reserves and consists of:

 

   

March 31,

   

December 31,

 

(in thousands)

 

2019

   

2018

 

Finished goods

  $ 9,367     $ 10,143  

Raw materials

    3,309       4,200  

Work-in-process

    1,318       1,194  

Inventory reserves

    (2,652

)

    (2,495

)

Total inventories

  $ 11,342     $ 13,042  

 

16

 

 

 

5. GOODWILL AND INDEFINITE-LIVED INTANGIBLES

 

The Company tests for impairment of Indefinite-lived intangibles and 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. The Company’s qualitative assessment of impairment for indefinite-lived assets at May 31, 2018, followed the guidance in ASC 350-30-35-18A and 18B and determined there was no impairment of indefinite-lived intangibles at that time.

 

Under current accounting guidance, CUI Global is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance includes a number of factors to consider in conducting the qualitative assessment. The Company tests for Goodwill impairment in the second quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset 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, 2018, 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 Company's review of Goodwill as of May 31, 2018, 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 most recent impairment test performed as of December 31, 2017 included a decline in the 2018 actual revenue, operating income and cash flows compared to prior forecasts for the same period and a negative change in the 2018 forecasted revenue, operating income and cash flows for the remainder of the year 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 as of May 31, 2018, 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 second quarter of 2018. At this time, a key assumption related to the recoverability of the Orbital-UK reporting unit Goodwill is the resumption of delivery of GasPT product to one of the Company's major customers and continued strengthening of the Company's integration revenues. 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 $1.3 million during the second quarter of 2018.

 

17

 

During the fourth quarter of 2018, the Company determined 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, 2018 were driven by a slower recovery in the Energy segment than originally forecasted. Actual GasPT revenue continued to lag behind forecasted revenue as acceptance of the technology continued to be slower than anticipated and delays associated with existing customer contracts that have not yet resumed. This slower than expected recovery, led to lower 2018 Energy segment revenue, operating income and cash flows than originally forecasted.

 

To test the Orbital-UK reporting unit for impairment, the Company used a quantitative test similar to the one used at May 31, 2018 with updated financial forecasts and assumptions based on the information available at December 31, 2018. 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 $3.1 million during the fourth quarter of 2018, which was a write-off of the remaining Energy segment Goodwill. In addition, the reporting units in the Power and Electromechanical segment were also tested for impairment due to the overall decrease in market capitalization experienced in 2018.

 

As of March 31, 2019 and December 31, 2018, there was 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, 2019 are as follows:

 

(in thousands)

 

Power and

Electro -

Mechanical

   

Energy

   

Other

   

Total

 

Balance, December 31, 2018

  $ 13,089     $     $     $ 13,089  

Balance, March 31, 2019

  $ 13,089     $     $     $ 13,089  

 

 

6. INVESTMENTS

 

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, 2019 and December 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 of interest income in both the three months ended March 31, 2019 and 2018. 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. CUI Global reviewed the note receivable for non-collectability as of March 31, 2019 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 18, 2019.

 

During 2018, CUI Global made investments of $0.7 million in convertible notes receivable with Virtual Power Systems (“VPS”) to support the two companies’ continued collaboration and development of industry transforming Software Defined Power technologies. The notes accrued interest at 2% per annum and the interest was to compound annually. Unless converted into shares earlier, principal and accrued interest was to convert automatically on the maturity date (October 27, 2019) into shares of VPS common stock at the then current fair market value.

 

On March 30, 2019, the Company converted its notes receivable into common stock of VPS. In addition, the Company contributed $0.3 million of cash and $2.5 million of other assets, as well as $1.8 million of liabilities assumed. In return, the Company acquired a 21.4% ownership share of VPS. Based on current accounting guidance, the Company will record its share of VPS's income or loss under the equity method of accounting. Under the equity method of accounting, results will not be consolidated, but the Company will record 21.4% of the profit or loss of VPS as an addition to or a subtraction from the VPS investment asset. The VPS investment basis at March 31, 2019 was $5.3 million as reflected on the condensed consolidated balance sheets.

 

18

 

 

 

7. 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 sheets and measures those instruments at fair value. Changes in the fair value of derivatives are recognized in earnings. The Company has limited involvement with derivative instruments and does not trade them. In the first quarter of 2018, the Company had an interest rate swap, which had a maturity date of ten years from the date of inception, and was used to minimize the interest rate risk on the variable rate mortgage. During the three months ended March 31, 2018, the Company had $84 thousand of unrealized gain related to the interest rate swap. The Company closed out this derivative in December 2018 as part of the Company's sale/leaseback transaction and the Company does not own any derivative instruments at March 31, 2019.

 

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.

 

 

8. LEASES

 

Effective January 1, 2019, the Company implemented the new accounting guidance on leases found in ASC 842, Leases. As part of its transition, the Company elected to utilize the effective date method of implementation. Under the effective date method, the Company includes the new required disclosures for the current period and provides the disclosures required by the previous guidance found in ASC 840 for the prior year comparative periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classifications and allowed the Company to exclude leases with an initial term of 12 months or less from being recorded on the Company's condensed consolidated balance sheet; the Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. The Company also reviewed outstanding service contracts to determine if any of the Company's service contracts contained an embedded lease. The Company did not identify any new leases through this process. The new lease accounting guidance also changes the name of leases formerly referred to as Capital leases under ASC 840 to Financing leases under ASC 842.

 

In December 2018, the Company entered into a sale-lease back transaction to sell and lease back the CUI, Inc. Tualatin facility. The Company sold the Tualatin headquarters and warehouse for $8.1 million at a deferred gain of $2.9 million and has leased back the facility for approximately $53 thousand per month until December 2022. The lease includes two options to renew the term for periods of five years each at the then prevailing market rate per rentable square foot for the premises. As a result of the implementation and transition to the accounting guidance in ASC 842, the deferred gain was recognized on January 1, 2019 as a credit to retained earnings.

 

Orbital-UK has a number of operating leases on vehicles, equipment, and accommodations for visiting personnel. During the three months ended March 31, 2019, the total monthly rent on these leases was approximately $31 thousand.

 

19

 

The Company rents office and warehouse space in Houston, Texas through December 2022. During the three months ended March 31, 2019, rent expense on this lease was approximately $30 thousand per month. The lease includes two options to renew the term for periods of five years each at the then prevailing market rate per rentable square foot for the premises.

 

In March 2015, as part of the Tectrol acquisition, the Company leased the Toronto facility though March 2020. During the three months ended March 31, 2019, the monthly rent of this facility was approximately $33 thousand per month. CUIC has the option to extend the term of the lease for a further period of five years (renewal term is March 2020 to February 2025). The Company has already taken the position that the renewal is probable to be exercised so the renewal period is already included in the lease liability balance using the current monthly payment (since the new amount remains unknown).

 

Additionally, CUI Japan leases office space. During the three months ended March 31, 2019, the monthly base rent for this facility was approximately $3 thousand. There is not a specific renewal option in the lease. Renewal will be negotiated at market rates at the end of the term.

 

Consolidated rental expense was $0.4 million for the three months ended March 31, 2019 and is included in selling, general and administrative on the condensed consolidated statement of operations.

 

The following is an analysis of the right-of-use assets under operating and financing leases:

 

(In thousands)

Balance

Sheet

Classification

 

March 31, 2019

 
           

Operating lease assets

Right of use assets - operating leases

  $ 7,422  

Finance lease assets

Property and equipment, net of accumulated depreciation

    7  
           

Total right of use assets

  $ 7,429  

 

 

The following summarizes the current and long-term portion of operating lease obligations:

 

(In thousands)

 

March 31, 2019

 
         

Operating lease obligations - current portion

  $ 975  

Operating lease obligations - less current portion

    6,589  
         

Total operating lease obligations

  $ 7,564  

 

20

 

Future minimum operating lease obligations at March 31, 2019 are as follows:

 

(In thousands)

       

2019

  $ 1,107  

2020

    1,375  

2021

    1,325  

2022

    1,315  

2023

    901  

Thereafter

    3,652  
         

Interest portion

    (2,111

)

         

Total operating lease obligations

  $ 7,564  

 

Financing leases of $8 thousand of lease obligations and $7 thousand of right of use assets were deemed immaterial for further detail disclosures.

 

Total lease cost and other lease information is as follows:

 

   

Three

Months

Ended

March 31,

2019

 

(in thousands)

       

Operating lease cost

  $ 360  

Short-term lease cost

    38  

Variable lease cost

    58  

Sublease income

    (8

)

Total lease cost

  $ 448  
         

Other information

       

Cash paid for amounts included in the measurement of lease obligations:

       

Operating cash flows from operating leases

  $ (429

)

Right-of-use assets obtained in exchange for new operating lease obligations

  $ 7,703  

Weighted-average remaining lease term - operating leases (in years)

    7.6  

Weighted-average discount rate - operating leases

    6.0

%

 

 

Variable lease costs primarily include common area maintenance costs, real estate taxes and insurance costs passed through to the Company from lessors. The following lease disclosures as of December 31, 2018 were required under previous accounting guidance under ASC 840 and under the transition guidance of ASC 842:

 

There was $16 thousand of rent expense associated with this lease in 2018, and monthly rent expense in 2019 will be approximately $51 thousand per month.

 

21

 

Orbital-UK has a number of leases, on vehicles, equipment, and on accommodations for visiting personnel. During the year ended December 31, 2018, the total monthly rent on these leases was approximately $32 thousand.

 

In January 2015, the Company rented office and warehouse space in Houston, TX for its Orbital North America operations. During the year ended December 31, 2017, the monthly rent of this lease, which terminated in January 2018, was approximately $10 thousand. In November 2017, the Company relocated to another rented office and warehouse space in Houston, TX. Rent expense on this lease is approximately $30 thousand per month.

 

In March 2015, as part of the Tectrol acquisition, the Company leased the Toronto facility. During the year ended December 31, 2018, the monthly rent of this lease was approximately $34 thousand dollars per month.

 

Additionally, CUI Japan leases office space. During the year ended December 31, 2018, the monthly base rent of this lease was approximately $3 thousand.

 

Rental expense was $1.2 million in 2018 and is included in selling, general and administrative on the statement of operations.

 

Future minimum operating lease obligations as of December 31, 2018 are as follows:

 

(In thousands)

       

2019

  $ 1,482  

2020

    1,129  

2021

    1,031  

2022

    1,013  

2023

    605  

Thereafter

    3,307  

Total

  $ 8,567  

 

 

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

 

The Company records its stock-based compensation expense on options issued in the past under its stock option plans and the Company also issues stock for services and royalties. The Company's stock option plans expired in 2018 and there are no immediate plans to issue stock options. 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, 2018 and filed with the SEC on March 18, 2019. For the three months ended March 31, 2019 and 2018 the Company recorded stock-based expense of $51 thousand and $66 thousand, respectively.

 

22

 

 

 

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.

 

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 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, 2019, the Company’s total revenues consisted of 76% from the Power and Electromechanical segment and 24% from the Energy segment. 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.

 

The following information represents segment activity for the three months ended March 31, 2019 and selected balance sheet items as of March 31, 2019:

 

(in thousands)

 

Power and

Electro-

Mechanical

   

Energy

   

Other

   

Total

 

Revenues from external customers

  $ 17,551     $ 5,458     $     $ 23,009  

Depreciation and amortization(1)

    345       400             745  

Interest expense

    10       9       66       85  

Profit (loss) from operations

    1,076       (2,585

)

    (1,581

)

    (3,090

)

Segment assets

    53,659       20,565       1,537       75,761  

Other intangible assets, net

    8,337       5,139             13,476  

Goodwill

    13,089                   13,089  

Expenditures for long-lived assets (2)

    161       57             218  

 

(1)

For the Power and Electromechanical segment, for the three months ended March 31, 2019, depreciation and amortization includes $223 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.

 

23

 

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 intangibles assets, net

    8,906       6,702             15,608  

Goodwill

    13,097       4,723             17,820  

Expenditures for segment assets (2)

    320       73             393  

 

(1)

For the Power and Electromechanical segment, depreciation and amortization totals for the three months ended March 31, 2018, include $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.

 

The following represents revenue by country:

 

(dollars in thousands)

 

For the Three Months Ended March 31,

 
   

2019

   

2018

 
   

Amount

   

%

   

Amount

   

%

 

USA

  $ 14,328       62

%

  $ 13,807       63

%

United Kingdom

    3,458       15

%

    3,360       15

%

All Others

    5,223       23

%

    4,799       22

%

Total

  $ 23,009       100

%

  $ 21,966       100

%

 

 

 

11. RECENT ACCOUNTING PRONOUNCEMENTS

 

In August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements and will adopt the standard in 2020.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including requiring the disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements and will adopt the standard in 2020.

 

24

 

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 and will adopt the standard in 2020.

 

 

12. FAIR VALUE MEASUREMENTS

 

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of March 31, 2019 and December 31, 2018, respectively, was as follows:

 

 

(in thousands)

                               

March 31, 2019

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Money market securities

  $ 16     $     $     $ 16  

Certificates of deposit - restricted cash

    523                   523  

Certificate of deposit - restricted investment (1)

    400                   400  

Total assets

  $ 939     $     $     $ 939  

 

December 31, 2018

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Money market securities

  $ 16     $     $     $ 16  

Certificates of deposit - restricted cash

    523                   523  

Certificate of deposit - restricted investment (1)

    400                   400  

Convertible notes receivable

                655       655  

Total assets

  $ 939     $     $ 655     $ 1,594  

 

 

Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

       
   

Convertible

 

(in thousands)

 

Note

 

Balance at December 31, 2018

  $ 655  

Conversion to common stock of VPS

    (655

)

Balance at March 31, 2019

  $  

 

(1) Investment is a 12-month certificate of deposit classified as available for sale and included in Deposits and other assets on the balance sheet.

 

There were no transfers between Level 3 and Level 2 in 2019 as determined at the end of the reporting period. The inputs used to measure the convertible note are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal analysis. 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 recent similar transactions with the seller of the convertible notes. The convertible note receivable was converted to VPS stock in the first quarter of 2019 (see Note 6). The future value of the investment will be measured using the equity method of accounting.

 

25

 

 

 

13. LOSS PER COMMON SHARE

 

In accordance with FASB Accounting Standards Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net 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, 2019 and March 31, 2018, 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, 2019 and 2018. Accordingly, diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2019 and 2018.

 

 

(in thousands, except share and per share amounts)

 

For the Three Months

Ended March 31,

 
   

2019

   

2018

 

Net loss

  $ (3,003

)

  $ (3,261

)

Basic and diluted weighted average number of shares outstanding

    28,583,600       28,488,032  
                 

Basic and diluted loss per common share

  $ (0.11

)

  $ (0.11

)

 

 

 

14. 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. and foreign U.K. 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 income tax expense of $47 thousand was recorded to the income tax provision for the three months ended March 31, 2019, resulting in an effective tax rate of (1.6%). The income tax expense for the three months ended March 31, 2019 includes taxes on profitable foreign operations and domestic state minimum taxes. The Company has provided a full valuation on existing deferred tax assets in the United States and United Kingdom.

 

The Company's total income tax benefit and effective tax rate for the three months ended March 31, 2018 was $302 thousand resulting in an effective tax rate of 8.5%. The income tax benefit for the three months ended March 31, 2018 related to realizable benefits on losses in certain foreign jurisdictions offset by taxes on profitable foreign operations and domestic state minimum taxes. All of the Company’s United States deferred tax assets were reduced by a full valuation allowance.

 

26

 

 

 

15. OVERDRAFT FACILITY AND WORKING CAPITAL LINE OF CREDIT

 

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,

2019

Balance

 

Expiration Date

 

Interest rate

£1,500 pounds sterling ($1,953 at March 31, 2019)

  $ 965  

October 5, 2021

 

Base rate plus a 2.25% margin (2.5% as of March 31, 2019).

 

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.

 

CUI, Inc. and CUI-Canada have a line of credit (LOC) whose terms with Wells Fargo Bank are as follows:

 

 

(in thousands)

       

Credit Limit

   

March 31,

2019

Balance

 

Expiration Date

 

Interest rate

$ 5,000  (1)   $ 1,460  (2)

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)

$2 million of the line of credit is reserved to guarantee the obligation of Orbital Gas Systems Ltd. under its Overdraft Facility.

 

(2)

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, 2019.

 

The line of credit is secured by the following collateral via a security agreement with CUI Inc. and CUI-Canada at March 31, 2019:

 

(in thousands)

CUI Inc. and CUI-Canada General intangibles, net

  $ 8,337  

CUI Inc. and CUI-Canada Accounts receivable, net

  $ 8,773  

CUI Inc. and CUI-Canada Inventory, net

  $ 9,791  

CUI Inc. and CUI-Canada Equipment, net

  $ 654  

 

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.

 

27

 

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. The LOC contains certain financial covenants. Under the terms of CUI Inc./CUI-Canada's credit agreement with Wells Fargo Bank, the Company incurred a specified default limited to the breach of the EBITDA financial covenant of CUI Global as the guarantor for the fiscal quarter ended December 31, 2018. CUI Inc./CUI-Canada received a forbearance of this event of default through April 30, 2019, subject to certain terms and conditions. Under the terms of the forbearance, CUI Inc./CUI-Canada agreed to terminate the Orbital Gas Systems Ltd. overdraft facility with Wells Fargo Bank’s London branch by April 30, 2019. In April 2019, CUI Inc./CUI-Canada replaced the existing line of credit and overdraft facilities with a new two-year line of credit facility of up to $10.0 million with Bank of America Merrill Lynch. Due to the replacement of the LOC with a long-term facility, the balance of the LOC and overdraft facility were classified as long-term at March 31, 2019. Covenant compliance on the Wells Fargo LOC was not calculated as of March 31, 2019 due to the payoff of the Wells Fargo LOC.

 

 

16. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss are as follows:

 

(in thousands)

 

As of March 31,

   

As of December 31,

 
   

2019

   

2018

 

Foreign currency translation adjustment

  $ (4,304

)

  $ (4,396

)

                 

Accumulated other comprehensive loss

  $ (4,304

)

  $ (4,396

)

 

 

17. NOTES PAYABLE

 

Notes payable is summarized as follows:

 

 

(in thousands)

 

As of March 31,

2019

   

As of December 31,

2018

 

Acquisition Note Payable - related party (1)

  $ 5,304     $ 5,304  

 

 

(1)

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, 2019, the Company is in compliance with all terms of this promissory note and the conversion feature is not effective.

 

28

 

 

 

18. 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, 2019:

           

Customer

 

Segment

 

Percent

 

Digi-Key Corporation

 

Power and Electromechanical

    18

%

Future Electronics

 

Power and Electromechanical

    10

%

Total concentrations

    28

%

 

For the Three Months Ended March 31, 2018:

           

Customer

 

Segment

 

Percent

 

Digi-Key Corporation

 

Power and Electromechanical

    25

%

Future Electronics

 

Power and Electromechanical

    12

%

Total concentrations

    37

%

 

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, 2019:

       

Country

 

Percent

 

United Kingdom

    15

%

Total concentrations

    15

%

 

For the Three Months Ended March 31, 2018:

       

Country

 

Percent

 

United Kingdom

    15

%

Total concentrations

    15

%

 

The Company did not have any gross trade accounts receivable concentrations by customer greater than 10% of gross trade accounts receivable at March 31, 2019 or December 31, 2018.

 

29

 

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, 2019:

       

Country

 

Percent

 

United Kingdom

    22 %
         

Total concentrations

    22 %

 

As of December 31, 2018:

       

Country

 

Percent

 

United Kingdom

    29 %
         

Total concentrations

    29 %

 

There were no supplier concentrations greater than 10% during the three months ended March 31, 2019 and March 31, 2018.

 

 

19. OTHER EQUITY TRANSACTIONS

 

The following shares issued during the three months ended March 31, 2019 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 2019

 

Vested restricted common stock

 

Expense

 

Three board members

 

Director compensation

    29,067     $ 37  
                                 

Total other equity transactions

    29,067     $ 37  

 

30

 

 

 

20. SUBSEQUENT EVENT

 

In April 2019, the Company closed on a previously announced two-year revolving line of credit facility of up to $10.0 million with Bank of America Merrill Lynch. The new facility replaces the Company’s existing $5.0 million U.S.-based revolver and UK-based overdraft facilities with more favorable terms (see Note 15).

 

 

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, 2019 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, 2018 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, 2019, CUI Global had consolidated loss from operations of $3.1 million compared to consolidated loss from operations in the three months ended March 31, 2018 of $3.8 million. During the three months ended March 31, 2019, CUI Global had a consolidated net loss of $3.0 million compared to a consolidated net loss in the three months ended March 31, 2018 of $3.3 million. The lower consolidated losses for the three months ended March 31, 2019, was the result of higher gross profit in the Power and Electromechanical segment and slightly higher gross profit in the Energy segment for the three month period. On the strength of the Power and Electromechanical and Energy segment direct sales, consolidated revenues increased for the three month period.

 

In March 2019, the Company acquired a 21.4% share of Virtual Power Systems, which is recorded as an equity method investment.

 

31

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, 2019:

 

(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

  $ 17,551       100.0

%

  $ 5,458       100.0

%

  $      

%

  $ 23,009       100.0

%

                                                                 

Cost of revenue

    11,011       62.7

%

    4,271       78.3

%

         

%

    15,282       66.4

%

Gross profit

    6,540       37.3

%

    1,187       21.7

%

         

%

    7,727       33.6

%

                                                                 

Operating expenses:

                                                               

Selling, general and administrative

    4,752       27.1

%

    3,254       59.6

%

    1,581      

%

    9,587       41.7

%

Depreciation and amortization

    122       0.7

%

    400       7.3

%

         

%

    522       2.3

%

Research and development

    552       3.1

%

    52       1.0

%

         

%

    604       2.6

%

Provision for bad debt

    39       0.2

%

    67       1.2

%

         

%

    106       0.4

%

Other operating Expenses

         

%

    (2

)

   

%

         

%

    (2

)

   

%

Total operating expenses

    5,465       31.1

%

    3,771       69.1

%

    1,581      

%

    10,817       47.0

%

Income (loss) from operations

  $ 1,075       6.2

%

  $ (2,584

)

    (47.4

)%

  $ (1,581

)

   

%

  $ (3,090

)

    (13.4

)%

 

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

)%

 

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Table of Contents

 

Revenue

(dollars in thousands)

 

Revenues by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2019

   

2018

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 17,551     $ 17,020     $ 531       3.1

%

Energy

    5,458       4,946       512       10.4

%

Total revenues

  $ 23,009     $ 21,966     $ 1,043       4.7

%

 

The revenues for the three months ended March 31, 2019 were higher than the comparable periods due to higher revenues in both the Company's Power and Electromechanical segment and Energy segment. Higher revenues in the Power and Electromechanical segment are due to higher direct sales while sales through the Company's distribution customers were down slightly in the three month period. Higher revenues in the Energy segment in the three-month period are associated with the timing of customer project delivery schedules. Higher revenue from the Company's Houston facility was partially offset by lower revenue from the Company's UK facility.

 

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. In the first quarter of 2018, the Company received the Company's first order for an ICE Block data center power utilization solution.

 

The Power and Electromechanical segment and Energy segment held backlogs of customer orders of approximately $19.6 million and $13.4 million, respectively, as of March 31, 2019. These are both down from December 31, 2018 backlogs of $21.8 million and $15.7 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,

                 
   

2019

   

2018

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 11,011     $ 11,791     $ (780

)

    (6.6

)%

Energy

    4,271       3,598       673       18.7

%

Total cost of revenues

  $ 15,282     $ 15,389     $ (107

)

    (0.7

)%

 

For the three months ended March 31, 2019, the cost of revenues as a percentage of revenue decreased to 66% from 70% 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, 2019 was 63% compared to 69% during the prior-year comparative period. Cost of revenues as a percentage of revenue was down in the Power and Electromechanical segment due to the 2018 comparable period including a significant royalty expense incurred related to the revenues of the ICE switch. The royalty rate was 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, 2019 was 78% compared to 73% in the three months ended March 31, 2018. The higher cost percentage in the Energy segment was due to a less favorable product mix during the three months ended March 31, 2019 compared to the three months ended March 31, 2018. As previously noted, the Energy segment was affected by a halt in shipments of higher margin GasPT units to an Italian customer. The Company's gross profit will improve when GasPT deliveries increase and with continued increases in revenues from integration related solutions.

 

33

Table of Contents

 

Selling, General and Administrative Expenses

(dollars in thousands)

 

Selling, general, and administrative expense by Segment or Category

 

For the Three Months Ended

March 31,

                 
   

2019

   

2018

   

$ Change

   

% Change

 

Power and Electromechanical

  $ 4,752     $ 4,462     $ 290       6.5

%

Energy

    3,254       3,475       (221

)

    (6.4

)%

Other

    1,581       1,264       317       25.1

%

Total selling, general and administrative expense

  $ 9,587     $ 9,201     $ 386       4.2

%

 

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 accou