Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
CUI Global Inc. and subsidiaries,
(collectively, “CUI Global” or “the Company”) is a platform company composed of two segments: Power and Electromechanical
segment and Energy segment, along with an "Other" category.
The Power and Electromechanical
segment is comprised of the following wholly owned subsidiaries of CUI Global Inc.: CUI, Inc. (CUI), based in Tualatin, Oregon;
CUI Japan, based in Tokyo, Japan; CUI-Canada, based in Toronto, Canada, and the administrative entity, CUI Properties. All
three subsidiaries are providers of power and electromechanical components including power supplies, transformers,
converters, connectors and industrial controls for Original Equipment Manufacturers (OEMs).
The Power and Electromechanical segment
defines its product offerings into two categories: components including connectors, speakers, buzzers, test and measurement devices,
and control solutions including encoders and sensors; and power solutions, which includes Novum. These offerings provide a technology
architecture that addresses power and related accessories to industries as broadly ranging as consumer electronics, medical and
defense.
The Energy segment is made up of the
following wholly-owned subsidiaries of CUI Global Inc.: Orbital Gas Systems Limited (Orbital) based in Staffordshire, United
Kingdom and Orbital Gas Systems, North America, Inc. based in Houston, Texas. The Energy segment provides natural gas
infrastructure and advanced technology, including metering, odorization, remote telemetry units
(‘‘RTU’’) and a diverse range of personalized gas engineering solutions to the gas utilities, power
generation, emissions, manufacturing and automotive industries.
The Other category represents the remaining
activities that are not included as part of the other reportable segments and primarily represents corporate activity.
Basis of Presentation
The accompanying interim unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial
information, which includes condensed consolidated financial statements. Accordingly, they do not include all the information and
notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction
with the Company's Annual Report, Form 10-K for the year ended December 31, 2015.
It is management's opinion that all material
adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation.
Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim period are
not necessarily indicative of the results to be expected for the year ending December 31, 2016.
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.
Reclassifications
Certain amounts from the prior periods
have been reclassified to the current period presentation included on the condensed consolidated statements of operations: for
the three and nine months ended September 30, 2015, $41 thousand and $90 thousand, respectively, of depreciation and amortization
was reclassified to cost of revenues from SG&A. On the condensed consolidated statement of cash flows, for the nine months
ended September 30, 2015, a cash in-flow of $237 thousand was reclassified from accrued expenses to stock and options issued and
to be issued for compensation, royalties and services for accrued stock compensation. Also, purchases of property and equipment
were decreased by $88 thousand and investments in other intangibles were increased by $1 thousand with the offsetting $87 thousand
use of cash reclassified to increase (decrease) in accounts payable in operating activities for the nine months ended September
30, 2015.
Revisions
The following immaterial revisions made
to prior financial statements were related to sales of raw material components to a vendor that in turn, sold finished goods inventory
to the Company that included the raw material components that we had sold to the vendor. For the three and nine months ended September 30,
2015, total revenues and cost of revenues were both decreased by $83 thousand and $399 thousand, respectively, which is the amount
of sales of raw material components to the vendor. In addition, at December 31, 2015, $246 thousand was reclassified from
prepaid expenses to raw materials inventory related to inventory sold to the vendor that had not yet been processed by the vendor.
On the cash flow, for the nine months ended September 30, 2015, $274 thousand was reclassified from a use of cash for an increase
in prepaid expenses to a use of cash for an increase in inventory. These revisions had no effect on gross profit, operating and
net loss or net cash flows used in operating activities.
2. INVENTORY
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 September 30, 2016 and December 31, 2015, accrued liabilities included $0.8 million and $1.7
million, respectively, of accrued inventory payable. At September 30, 2016 and December 31, 2015, inventory by category
is valued net of reserves and consists of:
(in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
(1)
|
|
Finished goods
|
|
$
|
8,986
|
|
|
$
|
8,278
|
|
Raw materials
|
|
|
3,221
|
|
|
|
3,637
|
|
Work-in-process
|
|
|
812
|
|
|
|
889
|
|
Inventory reserves
|
|
|
(743
|
)
|
|
|
(483
|
)
|
Total inventories
|
|
$
|
12,276
|
|
|
$
|
12,321
|
|
|
(1)
|
At December 31, 2015, CUI-Canada inventory reserves
of $97 thousand were reclassified from raw materials to inventory reserves and $246 thousand of prepaid expenses at CUI Inc. were
reclassified to raw materials inventory.
|
3. GOODWILL AND INDEFINITE-LIVED
INTANGIBLES
The Company
tests for goodwill impairment in the second quarter of each year and whenever events or circumstances indicate that the carrying
amount of the asset exceeds its fair value and may not be recoverable. The Company performed a qualitative and quantitative analysis
of goodwill and a qualitative analysis of its indefinite-lived intangibles at May 31, 2016, and determined there was no impairment
of goodwill or indefinite-lived intangibles. Under the quantitative analysis, the fair value of each reporting unit exceeded its
carrying amount by at least 5%.
As detailed in ASC 350-20-35-3A, in performing
its testing for impairment of goodwill, management completes 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. Periodically, as was done at
May 31, 2016, the Company also prepares a quantitative analysis in addition to the qualitative one. 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. Through these reviews, management concluded that there were no
events or circumstances that triggered an impairment (and there was no expectation that a reporting unit or a significant portion
of a reporting unit would be sold or otherwise disposed of in the following year).
The carrying
value of goodwill and the activity for the nine months ended September 30, 2016 are as follows:
(in thousands)
|
|
Power and Electro - Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Balance, December 31, 2015
|
|
$
|
13,077
|
|
|
$
|
8,450
|
|
|
$
|
—
|
|
|
$
|
21,527
|
|
Currency translation adjustments
|
|
|
25
|
|
|
|
(1,047
|
)
|
|
|
—
|
|
|
|
(1,022
|
)
|
Balance, September 30, 2016
|
|
$
|
13,102
|
|
|
$
|
7,403
|
|
|
$
|
—
|
|
|
$
|
20,505
|
|
The Company also tests for impairment of
other indefinite-lived intangible assets in the second quarter of each year and when events or circumstances indicate that the
carrying amount of the intangible assets exceed their fair value and may not be recoverable. The Company performed a qualitative
assessment of impairment for other indefinite-lived assets at May 31, 2016 following the guidance in ASC 350-30-35-18A and
18B and determined there to be no impairment. Other Indefinite-lived intangibles were $7.3 million at September 30, 2016.
4. INVESTMENT
AND NOTE RECEIVABLE
Prior to September
30, 2015, CUI Global had an 8.5% ownership investment in Test Products International, Inc. (“TPI”) that was recognized
via the equity method of accounting. For more details on this investment see Note 2 - Summary of Significant Accounting policies
to CUI Global's financial statements filed in Item 8 of the Company's latest Form 10-K filed with the SEC on March 14, 2016.
Subsequent to
September 30, 2015, CUI Global and its common related parties were unable to obtain a timely financial report, which was inconsistent
with prior periods, evidencing a reduction in the influence of CUI Global over TPI. Based on this change in influence, and CUI
Global’s level of technical control through its 8.5% equity interest, management determined that effective with the quarter
ended December 31, 2015 that CUI Global no longer had significant influence over TPI. Accordingly, the Company's investment in
TPI was accounted for under the cost method in the fourth quarter of 2015. During the three months ended March 31, 2016, the investment
in TPI was exchanged for a note receivable from TPI of $0.4 million, which was the carrying value of the investment, earning interest
at 5% per annum, due June 30, 2019. The Company recorded $5 thousand of interest income from the note in the three months ended
September 30, 2016 and $15 thousand for the nine months ended September 30, 2016. 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 September 30,
2016 and concluded that no allowance was necessary.
Presented below
are the equity method earnings through nine months ended September 30, 2015 for the period that CUI Global had significant influence
over TPI:
(in thousands)
|
|
|
|
Revenues
|
|
$
|
10,718
|
|
Operating income
|
|
$
|
674
|
|
Net profit
|
|
$
|
621
|
|
Other comprehensive profit (loss):
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
Comprehensive net profit
|
|
$
|
621
|
|
Company share of net profit
|
|
$
|
53
|
|
5. DERIVATIVE
INSTRUMENTS
The Company
uses various derivative instruments including forward currency contracts, and interest rate swaps to manage certain exposures.
These instruments are entered into under the Company’s corporate risk management policy to minimize exposure and are not
for speculative trading purposes. The Company recognizes all derivatives as either assets or liabilities in the condensed consolidated
balance sheet and measures those instruments at fair value. Changes in the fair value of derivatives are recognized in earnings.
For additional information on fair value of derivatives, see Note 9, “Investments and Fair Value Measurements,” of
these condensed consolidated financial statements. The Company has limited involvement with derivative instruments and does not
trade them. The Company has entered into one interest rate swap, which has a maturity date of ten years from the date of inception,
and is used to minimize the interest rate risk on the variable rate mortgage. During the three and nine months ended September 30,
2016, the Company had $47 thousand of unrealized gain and $98 thousand of unrealized loss, respectively related to the derivative
liabilities.
Embedded Derivative Liabilities
The Company
evaluates embedded conversion features pursuant to FASB Accounting Standards Codification No. 815 (“FASB ASC 815”),
“Derivatives and Hedging,” which requires a periodic valuation of the fair value of derivative instruments and a corresponding
recognition of liabilities associated with such derivatives.
6. STOCK-BASED PAYMENTS FOR COMPENSATION,
SERVICES AND ROYALTIES
The Company
records its stock-based compensation expense under its stock option plans and the Company also issues stock for services and royalties.
A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes
to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2015. The Company did not grant any stock options in the three and nine months ended September 30, 2016. For the three and nine
months ended September 30, 2016, the Company recorded stock-based expense of $0.1 million and $1.0 million, respectively,
and for the three and nine months ended September 30, 2015, the Company recorded stock-based expense of $0.3 million and $1.0
million, respectively. In addition, prepaid expenses at September 30, 2016 and December 31, 2015 included stock-based
payments related to prepaid services of $0 and $31 thousand, respectively.
7. 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.
Management has
identified six operating segments based on the activities of the Company in accordance with 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, Inc., CUI-Canada and
CUI Japan for the sale of internal and external power supplies and related components and industrial controls. The Energy segment
is focused on the operations of Orbital Gas Systems Limited and Orbital Gas Systems, North America, Inc., which includes gas related
metering, monitoring and control systems, including the GasPT, VE Probe and IRIS. The Other category represents the remaining activities
that are not included as part of the other reportable segments and primarily represents corporate activity.
During the three
months ended September 30, 2016 and September 30, 2015, the Company’s total revenues consisted of 69% from the Power
and Electromechanical segment and 31% from the Energy segment. During the nine months ended September 30, 2016 and September 30,
2015, the Company's total revenues consisted of 67% from the Power and Electromechanical segment and 33% from the Energy segment.
The following
information represents segment activity for the three months ended September 30, 2016 and selected balance sheet items as of September 30,
2016:
(in thousands)
|
|
Power and Electro-Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
16,157
|
|
|
$
|
7,100
|
|
|
$
|
—
|
|
|
$
|
23,257
|
|
Depreciation and amortization
(1)
|
|
|
371
|
|
|
|
339
|
|
|
|
—
|
|
|
|
710
|
|
Interest expense
|
|
|
56
|
|
|
|
3
|
|
|
|
60
|
|
|
|
119
|
|
Income (loss) from operations
|
|
|
813
|
|
|
|
(201
|
)
|
|
|
(1,197
|
)
|
|
|
(585
|
)
|
Segment assets
|
|
|
51,438
|
|
|
|
32,316
|
|
|
|
268
|
|
|
|
84,022
|
|
Other intangible assets, net
|
|
|
9,461
|
|
|
|
7,541
|
|
|
|
—
|
|
|
|
17,002
|
|
Goodwill
|
|
|
13,102
|
|
|
|
7,403
|
|
|
|
—
|
|
|
|
20,505
|
|
Expenditures for segment assets
(2)
|
|
|
99
|
|
|
|
255
|
|
|
|
—
|
|
|
|
354
|
|
The following information represents
segment activity for the nine months ended September 30, 2016 and selected balance sheet items as of September 30, 2016:
(in thousands)
|
|
Power and Electro-Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
44,607
|
|
|
$
|
22,451
|
|
|
$
|
—
|
|
|
$
|
67,058
|
|
Depreciation and amortization
(1)
|
|
|
1,063
|
|
|
|
1,083
|
|
|
|
1
|
|
|
|
2,147
|
|
Interest expense
|
|
|
166
|
|
|
|
5
|
|
|
|
193
|
|
|
|
364
|
|
Income (loss) from operations
|
|
|
1,038
|
|
|
|
(480
|
)
|
|
|
(4,503
|
)
|
|
|
(3,945
|
)
|
Segment assets
|
|
|
51,438
|
|
|
|
32,316
|
|
|
|
268
|
|
|
|
84,022
|
|
Other intangible assets, net
|
|
|
9,461
|
|
|
|
7,541
|
|
|
|
—
|
|
|
|
17,002
|
|
Goodwill
|
|
|
13,102
|
|
|
|
7,403
|
|
|
|
—
|
|
|
|
20,505
|
|
Expenditures for segment assets
(2)
|
|
|
580
|
|
|
|
545
|
|
|
|
—
|
|
|
|
1,125
|
|
The following
information represents segment activity for the three months ended September 30, 2015 and selected balance sheet items as of September 30,
2015:
(in thousands)
|
|
Power and Electro-Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Revenues from external customers
(3)
|
|
$
|
16,596
|
|
|
$
|
8,249
|
|
|
$
|
—
|
|
|
$
|
24,845
|
|
Depreciation and amortization
(1)
|
|
|
330
|
|
|
|
392
|
|
|
|
3
|
|
|
|
725
|
|
Earnings on equity method investment
|
|
|
29
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29
|
|
Interest expense
|
|
|
57
|
|
|
|
1
|
|
|
|
51
|
|
|
|
109
|
|
Income (loss) from operations
(4)
|
|
|
1,572
|
|
|
|
(308
|
)
|
|
|
(1,097
|
)
|
|
|
167
|
|
Segment assets
|
|
|
50,855
|
|
|
|
36,855
|
|
|
|
3,499
|
|
|
|
91,209
|
|
Other intangible assets, net
|
|
|
9,644
|
|
|
|
9,687
|
|
|
|
3
|
|
|
|
19,334
|
|
Goodwill
|
|
|
13,080
|
|
|
|
8,656
|
|
|
|
—
|
|
|
|
21,736
|
|
Expenditures for segment assets
(2)
|
|
|
313
|
|
|
|
1,734
|
|
|
|
—
|
|
|
|
2,047
|
|
The following information represents segment activity for the
nine months ended September 30, 2015 and selected balance sheet items as of September 30, 2015:
(in thousands)
|
|
Power and Electro-Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Revenues from external customers
(3)
|
|
$
|
43,617
|
|
|
$
|
20,737
|
|
|
$
|
—
|
|
|
$
|
64,354
|
|
Depreciation and amortization
(1)
|
|
|
929
|
|
|
|
1,545
|
|
|
|
5
|
|
|
|
2,479
|
|
Earnings on equity method investment
|
|
|
53
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
Interest expense
|
|
|
168
|
|
|
|
5
|
|
|
|
145
|
|
|
|
318
|
|
Income (loss) from operations
(4)
|
|
|
2,266
|
|
|
|
(3,568
|
)
|
|
|
(3,324
|
)
|
|
|
(4,626
|
)
|
Segment assets
|
|
|
50,855
|
|
|
|
36,855
|
|
|
|
3,499
|
|
|
|
91,209
|
|
Other intangible assets, net
|
|
|
9,644
|
|
|
|
9,687
|
|
|
|
3
|
|
|
|
19,334
|
|
Goodwill
|
|
|
13,080
|
|
|
|
8,656
|
|
|
|
—
|
|
|
|
21,736
|
|
Expenditures for segment assets
(2)
|
|
|
741
|
|
|
|
3,838
|
|
|
|
—
|
|
|
|
4,579
|
|
|
(1)
|
For the Power and Electromechanical segment, Depreciation
and amortization totals for the three and nine months ended September 30, 2016, include $125 thousand and $338 thousand, respectively,
which were classified as cost of revenues in the Condensed Consolidated Statements of Operations. Depreciation and amortization
for the three and nine months ended September 30, 2015, include $93 thousand and $252 thousand, respectively, which were 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. Excludes amounts for the Tectrol, Inc. acquisition in 2015.
|
|
(3)
|
See note 1, Nature of Operations - Revisions, for explanation
of change to 2015 revenue amounts.
|
|
(4)
|
For the three and nine months ended September 30, 2015,
$31 thousand and $94 thousand, respectively, of compensation expense included in Selling, General and Administrative expense was
reclassified from the Power and Electromechanical segment to the Energy segment to conform with the 2016 presentation.
|
The following
represents revenue by country:
(dollars in thousands)
|
|
For the Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
USA
|
|
$
|
13,152
|
|
|
|
56
|
%
|
|
$
|
14,012
|
|
|
|
56
|
%
|
United Kingdom
|
|
|
4,540
|
|
|
|
20
|
%
|
|
|
5,235
|
|
|
|
21
|
%
|
All Others
|
|
|
5,565
|
|
|
|
24
|
%
|
|
|
5,598
|
|
|
|
23
|
%
|
Total
|
|
$
|
23,257
|
|
|
|
100
|
%
|
|
$
|
24,845
|
|
|
|
100
|
%
|
(dollars in thousands)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
USA
|
|
$
|
35,006
|
|
|
|
52
|
%
|
|
$
|
34,768
|
|
|
|
54
|
%
|
United Kingdom
|
|
|
13,988
|
|
|
|
21
|
%
|
|
|
15,978
|
|
|
|
25
|
%
|
All Others
|
|
|
18,064
|
|
|
|
27
|
%
|
|
|
13,608
|
|
|
|
21
|
%
|
Total
|
|
$
|
67,058
|
|
|
|
100
|
%
|
|
$
|
64,354
|
|
|
|
100
|
%
|
8. RECENT
ACCOUNTING PRONOUNCEMENTS
In August 2016, the FASB issued Accounting
Standards Update (“ASU”) No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments
(“ASU 2016-15”). ASU 2016-15 clarifies whether eight specifically identified cash flow issues
should be categorized as operating, investing or financing activities in the statement of cash flows. The guidance will be effective
for the fiscal year beginning after December 15, 2017, including interim periods within that year. The Company is currently assessing
the impact of this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU No.
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more useful information about expected
credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred
loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking
information to estimate all expected credit losses. This ASU is effective for fiscal years and interim periods within those years
beginning after December 15, 2019 and early adoption is permitted for fiscal years and interim periods within those years beginning
after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation
- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”).
This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based
payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits
and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy
election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity
classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual
and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter
of 2017. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition
method, depending on the area covered in this update. Early adoption is permitted. We have not yet selected a transition date
nor have we determined the effect of the standard on our ongoing financial reporting.
In February 2016, The FASB issued ASU No.
2016-02,
Leases (Topic 842)
(‘‘ASU 2016-02’’). ASU 2016-02 requires lessees to present right-of-use
assets and lease liabilities (with the exception of short-term leases) on the balance sheet. The new guidance will be effective
for public business entities for fiscal years beginning after December 15, 2018 including interim periods within that fiscal year.
We are currently evaluating the impact of the Company’s pending adoption of ASU 2016-02 on the Company’s consolidated
financial statements and will adopt the standard in 2019.
In July 2015, the FASB issued ASU No. 2015-11,
“
Simplifying the Measurement of Inventory
” (“ASU 2015-11”) that requires entities to measure inventory
at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for fiscal
years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The guidance
must be applied on a prospective basis with early adoption permitted. The guidance is not expected to have a material impact on
our financial statements and we have not elected to early adopt.
In May 2014,
the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “
Revenue from Contracts with Customers
”
(“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle
of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects
the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process
to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process
than are required under existing U.S. GAAP. The standard was originally effective for annual periods beginning after December 15,
2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting
the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a
retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes
additional note disclosures). On July 9, 2015, the FASB affirmed its proposal to defer the effective date of the new revenue standard
for public entities by one year to annual reporting periods beginning after December 15, 2017, and interim periods beginning in
the first interim period within the year of adoption. Early application is permitted, but not before the original effective date
for public entities, annual reporting periods after December 15, 2016, and interim periods beginning in the first interim period
within the year of adoption. We are currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on the
Company’s consolidated financial statements and have not yet determined the method by which the Company will adopt the standard
in 2018.
9. INVESTMENTS
AND FAIR VALUE MEASUREMENTS
The Company’s fair value hierarchy
for its cash equivalents, marketable securities and derivative instruments, including contingent consideration, as of September 30,
2016 and December 31, 2015, respectively, was as follows:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Money market securities
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Total assets
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Derivative instrument payable
|
|
$
|
—
|
|
|
$
|
678
|
|
|
$
|
—
|
|
|
$
|
678
|
|
Contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
150
|
|
|
|
150
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
678
|
|
|
$
|
150
|
|
|
$
|
828
|
|
December 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Money market securities
|
|
$
|
1,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,915
|
|
Total assets
|
|
$
|
1,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,915
|
|
Derivative instrument payable
|
|
$
|
—
|
|
|
$
|
580
|
|
|
$
|
—
|
|
|
$
|
580
|
|
Contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
216
|
|
|
|
216
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
580
|
|
|
$
|
216
|
|
|
$
|
796
|
|
Fair Value Measurements
|
|
|
|
Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
Contingent Consideration
|
|
Balance at December 31, 2015
|
|
$
|
216
|
|
Payments
|
|
|
(59
|
)
|
Quarterly fair value adjustments
|
|
|
(7
|
)
|
Balance at September 30, 2016
|
|
$
|
150
|
|
Level 3 instruments are made up of contingent
consideration that was incurred as part of the Tectrol, Inc. acquisition in March 2015. The contingent consideration liability
represents the present value of the contingent payment based on the related projected revenues. The inputs used to measure contingent
consideration are classified as Level 3 within the valuation hierarchy, which are not observable in the market and reflects the
Company’s own judgments about the assumptions market participants would use in pricing the liability. Changes in the fair
value of the contingent consideration obligation excluding changes due to payments are reflected in the statement of operations
in selling, general and administrative expenses during the period the valuation change occurs. Contingent consideration in the
amount of $59 thousand was paid out during the three months ended March 31, 2016 and the remaining liability for contingent consideration
was revalued as of September 30, 2016 based on an updated forecast of the related revenues.
10. ACQUISITION
CUI-Canada,
Inc.
On March 5,
2015, the Company closed on an Asset Purchase Agreement to acquire certain assets and assume certain liabilities of Tectrol, Inc.,
a Toronto, Canada corporation. The acquisition was effective March 1, 2015 and is included from that date in the Company’s
Power and Electromechanical segment. As a part of this acquisition strategy, CUI Global, Inc. formed a wholly owned Canadian corporate
subsidiary, CUI-Canada, Inc., to receive these acquired assets and liabilities. That entity entered into a five-year lease of the
Toronto facility where Tectrol, Inc. was operating its business. CUI-Canada, Inc. operations include the design, manufacture assembly
and sales of electronic power conversion devices such as AC/DC power supplies, DC/DC power supplies, linear power supplies and
uninterruptable power supplies.
The purchase
price for the acquisition of the assets was $5.2 million subject to good faith adjustments by the parties according to the final
value of the non-obsolete inventory conveyed and other closing adjustments. In addition, the agreement calls for an earn-out/royalty
payment of two percent of the gross sales (for specific, identified customers) over a period of three years from the closing date,
up to a maximum of $0.3 million that may or may not be paid to the seller within 90 days of each calendar year end, depending on
performance by the identified customer(s). The final adjusted purchase price for the acquisition of Tectrol was $4.5 million, which
includes the present value of $0.3 million of royalties to be paid on future sales, which was recorded as $0.2 million of contingent
consideration. During the three months ended March 31, 2016, the Company paid $59 thousand of contingent consideration. At September 30,
2016, $72 thousand of contingent consideration is included on the balance sheet in accrued expenses and the remaining $78 thousand
is included in other long-term liabilities. For additional details on the contingent consideration, see Note 9, “Investments
and Fair Value Measurements,” of these condensed consolidated financial statements. The full purchase price less the contingent
consideration was paid in cash. The Company funded the consideration paid to the shareholder of Tectrol with existing cash and
cash equivalents and funds from short-term investments that had matured.
The acquisition
was accounted for using the acquisition method of accounting and the purchase price was allocated to the assets acquired and liabilities
assumed based upon their estimated fair values at the date of acquisition.
(in thousands)
|
|
|
|
Purchase price
|
|
$
|
4,501
|
|
|
|
|
|
|
Inventory
|
|
$
|
2,302
|
|
Property and equipment
|
|
|
831
|
|
Software
|
|
|
73
|
|
Intangible, customer lists
|
|
|
270
|
|
Intangible, trademark and tradename
|
|
|
130
|
|
Intangible, technology-based asset
|
|
|
1,000
|
|
Goodwill
|
|
|
64
|
|
Liabilities assumed
|
|
|
(169
|
)
|
|
|
$
|
4,501
|
|
The table below
summarizes the unaudited condensed pro forma information of the results of operations of the Company, for the nine months ended
September 30, 2015 as though the acquisition had been completed as of January 1, 2014:
For the nine months ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
CUI Global, Inc.
|
|
|
Tectrol, Inc.
|
|
|
Adjustment
(1)
|
|
|
Pro forma
|
|
Gross revenue
|
|
$
|
64,354
|
|
|
$
|
4,837
|
|
|
$
|
—
|
|
|
$
|
69,191
|
|
Total expenses
|
|
|
68,993
|
|
|
|
5,212
|
|
|
|
31
|
|
|
|
74,236
|
|
Net (loss)
|
|
$
|
(4,639
|
)
|
|
$
|
(375
|
)
|
|
|
|
|
|
$
|
(5,045
|
)
|
|
(1)
|
Adjustment to recognize the estimated depreciation and amortization expense for the presented period
assuming amortization of the intangible assets and depreciation of tangible assets over their estimated useful lives. Estimated
depreciation and amortization for the unaudited pro forma condensed consolidated statements of operations are $31 thousand for
the nine months ended September 30, 2015. The pro forma condensed consolidated statements of operations reflect only pro forma
adjustments expected to have a continuing effect on the consolidated results beyond 12 months from the consummation of the acquisition.
Excluded from the pro forma adjustment is the effect of the write up of inventory recorded as a result of acquisition accounting
of $0.1 million.
|
The above unaudited
condensed pro forma information does not purport to represent what the Companies’ combined results of operations would have
been if such transactions had occurred at the beginning of the period as of January 1, 2014, and are not indicative of future results.
11. LOSS PER COMMON SHARE
In accordance with FASB Accounting Standards
Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” basic net income (loss) per share is computed
by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock
method. Due to the Company’s net loss in the three and nine months ended September 30, 2016 and September 30, 2015,
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 and nine months
ended September 30, 2016 and 2015. Accordingly, diluted net loss per share is the same as basic net loss per share for the
three and nine months ended September 30, 2016 and 2015.
(in thousands, except share and per share amounts)
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(507
|
)
|
|
$
|
(59
|
)
|
|
$
|
(4,656
|
)
|
|
$
|
(4,639
|
)
|
Basic and diluted weighted average number of shares outstanding
|
|
|
20,906,781
|
|
|
|
20,802,217
|
|
|
|
20,891,517
|
|
|
|
20,787,536
|
|
Basic and diluted loss per common share
|
|
$
|
(0.02
|
)
|
|
|
(0.00
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.22
|
)
|
12. CAPITALIZED INTEREST
The cost of constructing facilities, equipment
and project assets includes interest costs incurred during the assets’ construction period. The components of interest expense
and capitalized interest are as follows:
(in thousands)
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest cost incurred
|
|
$
|
123
|
|
|
$
|
125
|
|
|
$
|
370
|
|
|
$
|
373
|
|
Interest cost capitalized - property and equipment
|
|
|
(4
|
)
|
|
|
(16
|
)
|
|
|
(6
|
)
|
|
|
(55
|
)
|
Interest expense, net
|
|
$
|
119
|
|
|
$
|
109
|
|
|
$
|
364
|
|
|
$
|
318
|
|
13. INCOME TAXES
The Company
is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company continues to record a full
valuation allowance against the Company’s U.S. net deferred tax assets as it is not more likely than not that the Company
will realize a benefit from these assets in a future period. In future periods, tax benefits and related deferred tax assets will
be recognized when management concludes realization of such amounts is more likely than not.
A net tax benefit of $191 thousand and
a net tax expense of $82 thousand was recorded to the income tax provision for the three- and nine-month periods ended September 30,
2016, respectively, resulting in an effective tax rate of 27.4% and (1.8)%, respectively, for the periods. The income tax benefit
for the quarter primarily relates to benefits in foreign jurisdictions and the year-to-date relates primarily to taxes on the Company's
profitable foreign operations and domestic state minimum taxes. The Company’s total income tax benefit and effective tax
rate was $188 thousand and $421 thousand and 76.1% and 8.3%, respectively, for the same periods in 2015. The income tax benefit
in the three and nine months ended September 30, 2015 related primarily to deferred taxes at our foreign operations partially offset
by domestic state minimum taxes as all of our USA deferred tax assets were reduced by a full valuation allowance.
14. WORKING CAPITAL LINE OF CREDIT
During the period
ended September 30, 2016, the Company’s wholly owned subsidiary, CUI, Inc., maintained a two-year revolving Line of
Credit (LOC) with Wells Fargo Bank with the following terms:
(in thousands)
|
|
|
|
|
|
Credit Limit
|
|
|
September 30, 2016 Balance
|
|
|
Expiration Date
|
|
Interest rate
|
$
|
4,000
|
|
|
$
|
—
|
|
|
October 1, 2016 *
|
|
Fixed rate at 1.75% above the LIBOR in effect on the first day of the applicable fixed-rate term, or Variable rate at 1.75% above the daily one-month LIBOR rate
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Effective on October 1, 2016, the working capital line
of credit was extended to October 1, 2018.
|
The line of credit is secured by the following
collateral via a security agreement with CUI Inc. at September 30, 2016:
(in thousands)
CUI Inc. General intangibles, net
|
|
$
|
9,407
|
|
CUI Inc. Accounts receivable, net
|
|
$
|
5,836
|
|
CUI Inc. Inventory, net
|
|
$
|
6,681
|
|
CUI Inc. Equipment, net
|
|
$
|
870
|
|
CUI Global, Inc., the parent company, is
a payment guarantor of the LOC. Other terms included in this revolving line of credit for CUI Inc. limit capital expenditures by
CUI Inc. to $1.2 million in any fiscal year. As of the date of this filing, the Company is compliant with all covenants on the
line of credit with Wells Fargo Bank.
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss)
are as follows:
(in thousands)
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Foreign currency translation adjustment
|
|
$
|
(4,337
|
)
|
|
$
|
(1,440
|
)
|
Accumulated other comprehensive income (loss)
|
|
$
|
(4,337
|
)
|
|
$
|
(1,440
|
)
|
16. CAPITAL LEASES
The following
is an analysis of the leased property under capital leases by major classes as of September 30, 2016 and December 31,
2015:
|
|
Asset Balances at
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Classes of Property
|
|
|
|
|
|
|
|
|
Motor vehicles
|
|
$
|
104
|
|
|
$
|
118
|
|
Equipment
|
|
|
19
|
|
|
|
21
|
|
Less: Accumulated depreciation
|
|
|
(63
|
)
|
|
|
(71
|
)
|
|
|
$
|
60
|
|
|
$
|
68
|
|
The following summarizes the current and
long-term portion of capital leases as of September 30, 2016 and December 31, 2015:
(in thousands)
|
|
Liability Balances at
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current leases payable
|
|
$
|
31
|
|
|
$
|
41
|
|
Long-term leases payable
|
|
|
13
|
|
|
|
29
|
|
|
|
$
|
44
|
|
|
$
|
70
|
|
17. NOTES PAYABLE
Notes payable is summarized as follows
as of September 30, 2016 and December 31, 2015:
(in thousands)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Mortgage note payable
(1)
|
|
$
|
3,460
|
|
|
$
|
3,524
|
|
Acquisition Note Payable - related party
(2)
|
|
|
5,304
|
|
|
|
5,304
|
|
Ending Balance
|
|
$
|
8,764
|
|
|
$
|
8,828
|
|
|
(1)
|
On October 1, 2013, the funding of the purchase of the Company’s Tualatin, Oregon corporate
offices from Barakel, LLC was completed. The purchase price for this asset was $5.1 million. The purchase was funded, in part,
by a promissory note payable to Wells Fargo Bank in the amount of $3.7 million plus interest at the rate of 2% above LIBOR, payable
over ten years with a balloon payment due at maturity. It was secured by a deed of trust on the purchased property which was executed
by CUI Properties, LLC and guaranteed by CUI Global, Inc. During the nine months ended September 30, 2016, the Company made principal
payments of $64 thousand against the mortgage promissory note payable. At September 30, 2016, the balance owed on the mortgage
promissory note payable was $3.5 million, of which $88 thousand and $3.4 million were in current and long-term liabilities, respectively.
|
|
(2)
|
The note payable to International Electronic Devices, Inc. (formerly CUI, Inc.) is associated with
the acquisition of CUI, Inc. The promissory note is due May 15, 2020 and includes a 5% interest rate per annum, with interest payable
monthly and the principal due as a balloon payment at maturity. The note contains a contingent conversion feature, such that in
the event of default on the note the holder of the note can, at the holder’s option, convert the note principal into common
stock at $0.001 per share. As of September 30, 2016, the Company is in compliance with all terms of this promissory note and
the conversion feature is not effective.
|
18. CONCENTRATIONS
During the third quarter of 2016, 19% of
revenues were derived from one customer: Digi-Key Electronics at 19% in the Power and Electromechanical segment. Similarly, during
the third quarter of 2015, 19% of revenues were derived from one customer: Digi-Key Electronics in the Power and Electromechanical
segment. For the nine months ended September 30, 2016, 19% of revenues were derived from one customer: Digi-Key Electronics in
the Power and Electromechanical segment. For the nine months ended September 30, 2015, 31% of revenues were derived from two customers:
Digi-Key Electronics in the Power and Electromechanical segment at 20% and National Grid in the Energy segment at 11%.
The Company’s major product lines
during the first nine months of 2016 and 2015 were power and electromechanical products and natural gas infrastructure and high-tech
solutions.
At September 30, 2016, of the gross
trade accounts receivable of $11.9 million, 12% was due from one customer in the Energy segment: Socrate spa. At December 31,
2015, of the gross trade accounts receivable totaling $14.8 million, 11% was due from one customer: National Grid in the Energy
segment.
During the three and nine months ended
September 30, 2016, CUI had one supplier concentration of 8%, related to inventory product received. During the three and nine
months ended September 30, 2015, CUI had one supplier concentration of 9% related to inventory product received.
The Company had a revenue concentration
in the United Kingdom for the three and nine months ended September 30, 2016 of 20% and 21%, respectively. For the three and nine
months ended September 30, 2015, the Company had a revenue concentration in the United Kingdom of 21% and 25%, respectively.
At September 30, 2016, the Company
had trade accounts receivable concentrations in the United Kingdom and Italy of 22% and 12%, respectively. The Company had trade
accounts receivable concentration in the United Kingdom of 28% at December 31, 2015.
19. OTHER EQUITY TRANSACTIONS
The following shares issued during 2016 were recorded in expense
or prepaid asset 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, April and July 2016
|
|
Vested restricted common stock
|
|
Expensed
|
|
Five board members
|
|
Director compensation
|
|
|
38,130
|
|
|
$
|
217
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2016 and July 2016
|
|
Vested restricted common stock
|
|
Expensed
|
|
Four Employees
|
|
Approved bonuses
|
|
|
56,782
|
|
|
|
381
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January, March and September 2016
|
|
Common stock
|
|
Expensed
|
|
Related party, James McKenzie
|
|
Pursuant to royalty agreement
|
|
|
4,918
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February and April 2016
|
|
Common stock
|
|
Expensed
|
|
Three Employees
|
|
Cashless Stock option exercise
|
|
|
718
|
|
|
|
—
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2016 issuances
|
|
|
|
|
|
|
|
|
|
|
100,548
|
|
|
$
|
628
|
(4)
|
|
(1)
|
Includes $12 thousand of stock-based expense related
to 2015 director fees accrued and expensed in the fourth quarter of 2015.
|
|
(2)
|
Bonuses of $366 thousand were accrued and expensed in
the fourth quarter of 2015.
|
|
(3)
|
The Company received $— for the issuance in the
cashless option exercise.
|
|
(4)
|
Does not include stock expense of $475 thousand included
in accrued liabilities at September 30, 2016.
|