Notes to the Condensed
Consolidated Financial Statements
(Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
CUI Global Inc. (CUI Global) is a platform
company composed of two segments, the Power and Electromechanical segment and the Energy segment, along with an "Other"
category.
The Power and Electromechanical segment
consists of the wholly owned subsidiaries: CUI, Inc. (CUI), based in Tualatin, Oregon; CUI Japan, based in Tokyo, Japan; CUI-Canada,
based in Toronto, Canada; and the entity holding the corporate building, CUI Properties. All three 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 and ICE. These offerings
provide a technology architecture that addresses power and related accessories to industries as broadly ranging as 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." This business segment was formed when in April 2013, CUI Global acquired 100% of the
capital stock of Orbital-UK, a United Kingdom-based provider of 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. In January 2015, CUI Global
formed and opened Orbital Gas Systems, North America, Inc., a wholly owned subsidiary of CUI Global, to represent the Energy segment
in the North American market. GasPT® and VE Technology® products are sold through Orbital.
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, 2016.
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, 2017.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments
and estimations of long-lived assets, impairment of prepaid royalties, revenue recognition on percentage of completion type contracts,
allowances for uncollectible accounts, inventory valuation, warranty reserves, 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.
Revision
Immaterial revision was made to the condensed
consolidated statement of cash flows: for the nine months ended September 30, 2016, $122 thousand was reclassified from effect
of exchange rate changes on cash to non-cash unrealized foreign currency gains/losses included as a reconciling item to cash provided
by operating activities. This change was related primarily to foreign currency gains and losses on intercompany advances to Orbital-UK.
2. 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 September 30, 2017 and December 31, 2016, accrued liabilities included $1.3
million and $1.1 million of accrued inventory payable, respectively. At September 30, 2017 and December 31, 2016, inventory
by category is valued net of reserves and consists of:
(in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
11,126
|
|
|
$
|
9,684
|
|
Raw materials
|
|
|
3,267
|
|
|
|
3,357
|
|
Work-in-process
|
|
|
955
|
|
|
|
935
|
|
Inventory reserves
|
|
|
(1,127
|
)
|
|
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
14,221
|
|
|
$
|
13,202
|
|
3. PREPAID EXPENSES, DEPOSITS AND OTHER
(in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid expenses and other
|
|
$
|
1,733
|
|
|
$
|
2,174
|
|
Deposits and other assets
|
|
$
|
1,876
|
|
|
$
|
100
|
|
During the second quarter of 2017, prepaid
royalties in the amount of $1.6 million were transferred to long-term and included in Deposits and other assets from prepaid expenses
due to a change in the estimated period of when those prepayments will be amortized based upon management’s assessment of
future GasPT sales. There was $1.8 million of prepaid royalty included in Deposits and other assets at September 30, 2017.
4. GOODWILL AND INDEFINITE-LIVED
INTANGIBLES
The Company tests for impairment of other
indefinite-lived intangible assets in the second quarter of each year and when events or circumstances indicate that the carrying
amount of the intangible assets exceed their fair value and may not be recoverable. The Company performed a qualitative assessment
of impairment for other indefinite-lived intangible assets at May 31, 2017 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, 2017.
The Company also tests for impairment
of Goodwill in the second quarter of each year and when events or circumstances indicate that the carrying amount of Goodwill
exceeds its fair value and may not be recoverable. As detailed in ASC 350-20-35-3A, in performing its testing for impairment of
goodwill as of May 31, 2017, management 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, 2017 are as follows:
(in thousands)
|
|
Power and
Electro -
Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Balance, December 31, 2016
|
|
$
|
13,083
|
|
|
$
|
7,042
|
|
|
$
|
—
|
|
|
$
|
20,125
|
|
Currency translation adjustments
|
|
|
9
|
|
|
|
603
|
|
|
|
—
|
|
|
|
612
|
|
Balance, September 30, 2017
|
|
$
|
13,092
|
|
|
$
|
7,645
|
|
|
$
|
—
|
|
|
$
|
20,737
|
|
5. INVESTMENT
AND NOTE RECEIVABLE
During the three months ended
March 31, 2016, CUI Global's 8.5% ownership investment in Test Products International, Inc. ("TPI"), recognized under
the cost method, was exchanged for a note receivable from TPI of $0.4 million, which was the carrying value of the investment,
earning interest at 5% per annum, due June 30, 2019. The Company recorded $5 thousand and $5 thousand of interest income from
the note in the three months ended September 30, 2017 and 2016, respectively. The Company recorded $13 thousand and $15 thousand
of interest income from the note in the nine months ended September 30, 2017 and 2016, respectively. The interest receivable is
settled on a quarterly basis via a non-cash offset against the finders-fee royalties earned by TPI on GasPT sales. Any remaining
finders-fee royalties balance is offset against the note receivable quarterly. The Company also received a $19 thousand cash payment
against the note in the nine months ended September 30, 2017. CUI Global reviewed the note receivable for non-collectability as
of September 30, 2017 and concluded that no allowance was necessary. For more details on this investment see Note 2 - Summary
of Significant Accounting policies to CUI Global's financial statements filed in Item 8 of the Company's latest Form 10-K filed
with the SEC on March 14, 2017.
6. 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 10, “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,
2017, the Company had $20 thousand and $55 thousand, respectively of unrealized gain related to the derivative liabilities.
Embedded Derivative Liabilities
The Company
evaluates embedded conversion features pursuant to FASB Accounting Standards Codification No. 815 (“FASB ASC 815”),
“Derivatives and Hedging,” which requires a periodic valuation of the fair value of derivative instruments and a corresponding
recognition of liabilities associated with such derivatives.
7. 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, 2016. The Company did not grant any stock options in the three and nine months ended September 30, 2017.
For the three and nine months ended September 30, 2017, the Company recorded stock-based expense of $0.1 million and $0.3
million, respectively, and 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.
8. 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 Power and Electromechanical segment also includes CUI
Properties, LLC that owns the Company's Tualatin, Oregon facility. The Energy segment is focused on the operations of Orbital
Gas Systems Ltd. and Orbital Gas Systems, North America, Inc. which includes gas related test and measurement systems, including
the GasPT. The Other category represents the remaining activities that are not included as part of the other reportable segments
and represents primarily corporate activity.
During the
three months ended September 30, 2017, the Company’s total revenues consisted of 77% from the Power and Electromechanical
segment and 23% from the Energy segment. During the three months ended September 30, 2016, 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, 2017, the Company’s total revenues consisted of 78% from the Power and Electromechanical
segment and 22% from the Energy segment. During the nine months ended September 30, 2016, 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, 2017 and selected balance sheet items as
of September 30, 2017:
(in thousands)
|
|
Power and
Electro-
Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
16,700
|
|
|
$
|
5,096
|
|
|
$
|
—
|
|
|
$
|
21,796
|
|
Depreciation and amortization
(1)
|
|
|
363
|
|
|
|
342
|
|
|
|
—
|
|
|
|
705
|
|
Interest expense
|
|
|
75
|
|
|
|
1
|
|
|
|
61
|
|
|
|
137
|
|
Profit (loss) from operations
|
|
|
890
|
|
|
|
(1,660
|
)
|
|
|
(1,249
|
)
|
|
|
(2,019
|
)
|
Segment assets
|
|
|
49,377
|
|
|
|
29,495
|
|
|
|
705
|
|
|
|
79,577
|
|
Other intangible assets, net
|
|
|
8,979
|
|
|
|
6,873
|
|
|
|
—
|
|
|
|
15,852
|
|
Goodwill
|
|
|
13,092
|
|
|
|
7,645
|
|
|
|
—
|
|
|
|
20,737
|
|
Expenditures for long-lived
assets
(2)
|
|
|
157
|
|
|
|
114
|
|
|
|
—
|
|
|
|
271
|
|
The following
information represents segment activity for the nine months ended September 30, 2017 and selected balance sheet items as
of September 30, 2017:
(in thousands)
|
|
Power and
Electro-
Mechanical
|
|
|
Energy
|
|
|
Other
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
48,542
|
|
|
$
|
13,599
|
|
|
$
|
—
|
|
|
$
|
62,141
|
|
Depreciation and amortization
(1)
|
|
|
1,139
|
|
|
|
993
|
|
|
|
—
|
|
|
|
2,132
|
|
Interest expense
|
|
|
187
|
|
|
|
3
|
|
|
|
184
|
|
|
|
374
|
|
Profit (loss) from operations
|
|
|
1,984
|
|
|
|
(5,924
|
)
|
|
|
(3,739
|
)
|
|
|
(7,679
|
)
|
Segment assets
|
|
|
49,377
|
|
|
|
29,495
|
|
|
|
705
|
|
|
|
79,577
|
|
Other intangible assets, net
|
|
|
8,979
|
|
|
|
6,873
|
|
|
|
—
|
|
|
|
15,852
|
|
Goodwill
|
|
|
13,092
|
|
|
|
7,645
|
|
|
|
—
|
|
|
|
20,737
|
|
Expenditures for long-lived
assets
(2)
|
|
|
786
|
|
|
|
297
|
|
|
|
—
|
|
|
|
1,083
|
|
(1)
For the Power and Electromechanical segment, for the three and nine months ended September 30, 2017, depreciation and
amortization include $184 thousand and $496 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.
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
|
|
Profit (loss) from operations
|
|
|
813
|
|
|
|
(201
|
)
|
|
|
(1,197
|
)
|
|
|
(585
|
)
|
Segment assets
|
|
|
51,438
|
|
|
|
32,316
|
|
|
|
268
|
|
|
|
84,022
|
|
Other intangibles 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
|
|
Profit (loss) from operations
|
|
|
1,038
|
|
|
|
(480
|
)
|
|
|
(4,503
|
)
|
|
|
(3,945
|
)
|
Segment assets
|
|
|
51,438
|
|
|
|
32,316
|
|
|
|
268
|
|
|
|
84,022
|
|
Other intangibles assets, net
|
|
|
9,461
|
|
|
|
7,541
|
|
|
|
—
|
|
|
|
17,002
|
|
Goodwill
|
|
|
13,102
|
|
|
|
7,403
|
|
|
|
—
|
|
|
|
20,505
|
|
Expenditures for segment
assets
(2)
|
|
|
580
|
|
|
|
545
|
|
|
|
—
|
|
|
|
1,125
|
|
(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.
(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 September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
USA
|
|
$
|
13,631
|
|
|
|
62
|
%
|
|
$
|
13,152
|
|
|
|
56
|
%
|
United Kingdom
|
|
|
3,634
|
|
|
|
17
|
%
|
|
|
4,540
|
|
|
|
20
|
%
|
All Others
|
|
|
4,531
|
|
|
|
21
|
%
|
|
|
5,565
|
|
|
|
24
|
%
|
Total
|
|
$
|
21,796
|
|
|
|
100
|
%
|
|
$
|
23,257
|
|
|
|
100
|
%
|
(dollars in thousands)
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
USA
|
|
$
|
38,209
|
|
|
|
61
|
%
|
|
$
|
35,006
|
|
|
|
52
|
%
|
United Kingdom
|
|
|
10,434
|
|
|
|
17
|
%
|
|
|
13,988
|
|
|
|
21
|
%
|
All Others
|
|
|
13,498
|
|
|
|
22
|
%
|
|
|
18,064
|
|
|
|
27
|
%
|
Total
|
|
$
|
62,141
|
|
|
|
100
|
%
|
|
$
|
67,058
|
|
|
|
100
|
%
|
9. RECENT
ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued Accounting
Standards Update ("ASU") No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment
. ASU 2017-04 simplifies the goodwill impairment test by eliminating Step 2 from the test among
other technical changes intended to streamline the impairment test. The amendment requires an entity to perform its annual, or
interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments should
be applied on a prospective basis.
The Company is required to adopt ASU 2017-04 for
its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and may early adopt as early
as its first annual or interim impairment testing date following January 1, 2017. The Company elected to early adopt the amendments
of this standard effective with its May 31, 2017 goodwill impairment test. The early adoption of this standard did not impact
the Company’s financial condition, results of operations, and cash flows.
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 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. After initial evaluation, the Company expects to implement using the modified retrospective
method. The Company continues to prepare for implementation in the first quarter of 2018. The Company expects to utilize certain
practical expedients in its implementation of the revenue standard.
10. 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,
2017 and December 31, 2016, respectively, was as follows:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Money market securities
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Total assets
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Derivative instrument payable
|
|
$
|
—
|
|
|
$
|
413
|
|
|
$
|
—
|
|
|
$
|
413
|
|
Contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
45
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
413
|
|
|
$
|
45
|
|
|
$
|
458
|
|
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Money market securities
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Total assets
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Derivative instrument payable
|
|
$
|
—
|
|
|
$
|
467
|
|
|
$
|
—
|
|
|
$
|
467
|
|
Contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
103
|
|
|
|
103
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
467
|
|
|
$
|
103
|
|
|
$
|
570
|
|
Fair Value Measurements
|
|
|
|
Using Significant Unobservable Inputs (Level 3)
|
|
|
|
(in thousands)
|
|
Contingent
consideration
|
|
Balance at December 31, 2016
|
|
$
|
103
|
|
Payments
|
|
|
(61
|
)
|
Fair value adjustments
|
|
|
3
|
|
Balance at September 30, 2017
|
|
$
|
45
|
|
There were no transfers between Level
3 and Level 2 in 2017 as determined at the end of the reporting period. The contingent consideration liability is associated with
the acquisition of Tectrol in March 2015 and represents the present value of the expected future contingent payment based on revenue
projections of select Tectrol legacy products. The inputs used to measure contingent consideration are classified as Level 3 within
the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal revenue forecasts.
Since the valuation is not supported by market criteria, the valuation is completely dependent on unobservable inputs. During
quarterly updates of the valuation, the calculation of the value is based on actual and reasonably estimated future revenues.
Based on the Company’s revenue projections and third quarter 2017 analysis, the current value of the contingent consideration
increased $3 thousand, net of actual payments made during the nine months ended September 30, 2017.
Contingent consideration in the amount
of $61 thousand was paid out during the nine months ended September 30, 2017.
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, 2017 and September 30,
2016, 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, 2017 and 2016. Accordingly, diluted net loss per share is the same as basic net loss
per share for the three and nine months ended September 30, 2017 and 2016.
(in thousands, except share and per share amounts)
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(1,902
|
)
|
|
$
|
(507
|
)
|
|
$
|
(7,324
|
)
|
|
$
|
(4,656
|
)
|
Basic and diluted weighted average number of shares outstanding
|
|
|
20,991,534
|
|
|
|
20,906,781
|
|
|
|
20,969,735
|
|
|
|
20,891,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest cost incurred
|
|
$
|
143
|
|
|
$
|
123
|
|
|
$
|
389
|
|
|
$
|
370
|
|
Interest cost capitalized - property and equipment
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(15
|
)
|
|
|
(6
|
)
|
Interest expense, net
|
|
$
|
137
|
|
|
$
|
119
|
|
|
$
|
374
|
|
|
$
|
364
|
|
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 $(177) thousand and
$(560) thousand was recorded to the income tax provision for the three and nine months ended September 30, 2017 resulting
in an effective tax rate of 8.5% and 7.1%, respectively. The income tax benefit primarily relates to realizable benefits on losses
in certain foreign jurisdictions offset by taxes on profitable foreign operations and domestic state minimum taxes. All of our
USA deferred tax assets were reduced by a full valuation allowance. During the three months ended September 30, 2017, the Company
received notice that the Canada Revenue Agency had accepted the Company’s application for a Scientific Research and Experimental
Development (SRED) tax credit for research and development performed in Canada in a prior year. Accordingly, the Company recorded
a tax benefit of $51 thousand related to the SRED credit in the current period.
The Company’s total income tax expense
(benefit) and effective tax rate was $(191) thousand and 27.4%, and $82 thousand and (1.8)% respectively, for the same periods
in 2016. The income tax expense (benefit) for the quarter and year-to-date related primarily to taxes on the Company's profitable
foreign operations and domestic state minimum taxes.
The Company adopted ASU 2016-09,
Compensation
- Stock Compensation (Topic 718)
effective January 1, 2017 on a modified retrospective basis, whereby a cumulative-effect
adjustment to equity as of the beginning of the period is required. Upon evaluation, no adjustment was required as of January
1, 2017.
14. WORKING CAPITAL LINE OF CREDIT
AND OVERDRAFT FACILITY
During the
period ended September 30, 2017, 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, 2017
Balance
|
|
|
Expiration Date
|
|
|
Interest rate
|
$
|
6,000
|
(2)
|
|
$
|
1,932
|
(1)
|
|
June 1, 2019
(2)
|
|
|
Fixed rate at 2.25% above the LIBOR in effect on the first day of the
applicable fixed-rate term, or
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate at 2.25% above the daily one-month LIBOR rate.
|
(1)
As a result of the Company’s
cash management system, checks issued but not presented to the bank for payment may create negative book cash balances. When those
checks are presented for payment if there isn't sufficient cash in the bank account, the checks would be honored by the bank with
a corresponding increase to CUI's draw on its line of credit. There were no negative book cash balances included in the balance
on the line of credit as of September 30, 2017.
(2)
During the second quarter
of 2017, the Company modified its LOC agreement, which included extending the expiration date, adding CUI-Canada assets as collateral,
and modifying restrictive debt covenants and increasing the interest rate on the facility. During the third quarter of 2017, the
Company further modified its LOC agreement, temporarily increasing the credit limit until December 31, 2017 to $6 million from
$4 million.
The line of credit is secured by the following
collateral via a security agreement with CUI Inc. and CUI-Canada at September 30, 2017:
(in thousands)
|
|
|
|
|
|
|
|
CUI Inc. and CUI-Canada General intangibles, net
|
|
$
|
8,979
|
|
CUI Inc. and CUI-Canada Accounts receivable, net
|
|
$
|
6,773
|
|
CUI Inc. and CUI-Canada Inventory, net
|
|
$
|
12,393
|
|
CUI Inc. and CUI-Canada Equipment, net
|
|
$
|
1,784
|
|
The borrowing base for the line of credit is based on a percent
of CUI Inc. and CUI-Canada's inventory plus a percent of CUI Inc.'s accounts receivable.
CUI Global, Inc., the parent
company, is a payment guarantor of the LOC. Other terms included in this revolving line of credit for CUI limit capital
expenditures by CUI Inc. and CUI-Canada to $1.75 million in any fiscal year. The LOC is supported by a single long-term note
that does not require repayment until maturity although the Company at its option can repay and re-borrow amounts up to the
LOC limit. Since the maturity date is June 1, 2019, which is more than one year in the future, the LOC is classified as
long-term. The LOC contains certain financial covenants. In the second quarter of 2017, the Company renegotiated the terms of the LOC and its
related covenants. In the third quarter of 2017, the Company received a temporary increase in its credit limit to $6 million.
The credit limit will automatically decrease to $4 million as of January 1, 2018. The Company is currently in compliance with its covenants. At September 30, 2017, there was a $1.9 million balance outstanding on the LOC
and $4.1 million of credit was available.
On October 5, 2016, Orbital Gas Systems
Ltd. signed a five-year agreement with the London branch of Wells Fargo Bank N.A. for a multi-currency variable rate overdraft
facility with a facility limit of 1.5 million pounds sterling ($2.0 million at September 30, 2017) that expires on October
5, 2021. The London branch of Wells Fargo Bank N.A. can demand repayment of amounts on overdraft at any time. The interest rate
on the facility is a base rate plus a 2.25% margin. The facility had an interest rate of 2.5% at September 30, 2017. 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. At September 30, 2017, there was a $1.0 million balance outstanding on the overdraft
facility and $1.0 million of credit was available.
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,
|
|
|
|
2017
|
|
|
2016
|
|
Foreign currency translation adjustment
|
|
$
|
(3,619
|
)
|
|
$
|
(5,590
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(3,619
|
)
|
|
$
|
(5,590
|
)
|
16. CAPITAL LEASES
The following
is an analysis of the leased property under capital leases by major classes as of September 30, 2017 and December 31,
2016:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Classes of Property
|
|
|
|
|
|
|
|
|
Motor vehicles
|
|
$
|
—
|
|
|
$
|
98
|
|
Equipment
|
|
|
19
|
|
|
|
19
|
|
Less: Accumulated depreciation
|
|
|
(6
|
)
|
|
|
(65
|
)
|
|
|
$
|
13
|
|
|
$
|
52
|
|
The following summarizes the current and
long-term portion of capital leases payable as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Current leases payable
|
|
$
|
3
|
|
|
$
|
28
|
|
Long-term leases payable
|
|
|
10
|
|
|
|
12
|
|
|
|
$
|
13
|
|
|
$
|
40
|
|
17. NOTES PAYABLE
Notes payable is summarized as follows
as of September 30, 2017 and December 31, 2016:
(in thousands)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Mortgage
note payable
(1)
|
|
$
|
3,373
|
|
|
$
|
3,439
|
|
Acquisition
Note Payable - related party
(2)
|
|
|
5,304
|
|
|
|
5,304
|
|
Ending Balance
|
|
$
|
8,677
|
|
|
$
|
8,743
|
|
|
(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, 2017, the Company made principal payments
of $66 thousand against the mortgage promissory note payable. At September 30, 2017,
the balance owed on the mortgage promissory note payable was $3.4 million, of which $93
thousand and $3.3 million were in current and long-term liabilities, respectively. See
Note 14, Working Capital Line of Credit and Overdraft Facility, for more information
on the Company's debt covenants.
|
|
(2)
|
The note payable to International
Electronic Devices, Inc. (formerly CUI, Inc.) is associated with the acquisition of CUI,
Inc. The promissory note is due May 15, 2020 and includes a 5% interest rate per annum,
with interest payable monthly and the principal due as a balloon payment at maturity.
The note contains a contingent conversion feature, such that in the event of default
on the note the holder of the note can, at the holder’s option, convert the note
principal into common stock at $0.001 per share. As of September 30, 2017, the Company
is in compliance with all terms of this promissory note and the conversion feature is
not effective.
|
18. CONCENTRATIONS
For the three months ended September 30,
2017, 27% of revenues were derived from one customer: Digi-Key Electronics in the Power and Electromechanical segment. For the
three 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, 2017, 26% of revenues were derived from one customer: Digi-Key
Electronics. For the nine months ended September 30, 2016, 19% of revenues were derived from one customer: Digi-Key Electronics.
The Company’s major product lines
during the first nine months of 2017 and 2016 were power and electromechanical products and natural gas infrastructure and high-tech
solutions.
At September 30, 2017, of the gross
trade accounts receivable of $11.5 million, 16% was due from one customer: National Grid in the Energy segment. At December 31,
2016, of the gross trade accounts receivable totaling $9.5 million, 30% was due from three customers: Scotia Gas Networks plc,
Socrate spa, and National Grid, each at 10% in the Energy segment.
CUI had one supplier concentration of
approximately 11% and 12% for the three and nine months ended September 30, 2017, respectively, related to inventory product
received. During the three and nine months ended September 30, 2016, CUI had one supplier concentration of 8%, related to
inventory product received.
The Company had revenue concentration
in the United Kingdom for the three months ended September 30, 2017, and 2016 of 17% and 20%, respectively.
The Company had revenue concentration
in the United Kingdom for the nine months ended September 30, 2017 and 2016 of 17% and 21%, respectively.
At September 30, 2017 and December
31, 2016, the Company had trade accounts receivable concentrations in the United Kingdom of 33% and 27%, respectively. At September 30,
2017, the Company had a trade accounts receivable concentration in Canada of 11%.
19. OTHER EQUITY TRANSACTIONS
The following shares issued during 2017 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 August 2017
|
|
Vested restricted common stock
|
|
Expense
|
|
Four board members
|
|
Director compensation
|
|
|
33,956
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January, February and June 2017
|
|
Common stock
|
|
Expense
|
|
Three Employees
|
|
Approved bonus
|
|
|
28,634
|
|
|
|
182
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017
|
|
Common stock
|
|
Expense
|
|
Related party
|
|
Q4 Royalty Fee
|
|
|
1,233
|
|
|
|
8
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January and February 2017
|
|
Common stock
|
|
Expense
|
|
Two Employees
|
|
Cashless stock option exercises
|
|
|
245
|
|
|
|
—
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2017
|
|
Common stock
|
|
Prepaid exp/
expense
|
|
Third-party consultant
|
|
Strategic investor marketing services
|
|
|
15,000
|
|
|
|
57
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,068
|
|
|
$
|
397
|
(4)
|
(1)
Bonuses
and royalty of $176 thousand were accrued and expensed in 2016.
(2)
The Company received $—
for the issuance in the cashless option exercises.
(3)
Amount includes $38 thousand
that was included in prepaid expense at September 30, 2017.
(4)
Does not include stock expense of $130 thousand included in accrued liabilities at September 30, 2017 for unissued stock.
20. SUBSEQUENT EVENT
On October 23, 2017, the Company closed
on an underwritten public offering of 7,392,856 shares at a public offering price of $2.80 per share, including 964,285 shares
sold at the public offering price pursuant to the underwriter's exercise in full of its option to purchase additional shares to
cover over-allotments. The net proceeds to CUI Global (after deducting underwriting discount and other estimated expenses payable
by the Company) were approximately $19.2 million. The Company intends to use the net proceeds from the offering primarily
for general corporate purposes, which may include operating expenses, working capital to improve and promote its commercially
available products, advance product candidates, future acquisitions or share repurchases, expand international presence and commercialization,
general capital expenditures and satisfaction of debt obligations. In October 2017, the Company used some of the proceeds
of the public offering to pay off its line of credit, which had a balance of $1.9 million at September 30, 2017.