Orbital Infrastructure Group, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

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 September 30, 2018

 

OR

 

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

 

For the transition period from _______ to ______

 

Commission File Number 0-29923

 

CUI Global, Inc.

(Exact name of registrant as specified in its charter)

 

Colorado		84-1463284
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

20050 SW 112th Avenue

Tualatin, Oregon 97062

(Address of principal executive offices and zip code)

 

(503) 612-2300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  ☒  NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically 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, 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 28,550,792 shares of the registrant's common stock, par value $0.001 per share, issued and outstanding as of November 7, 2018.

 

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INDEX

 

 

			Page
	Part I
Item 1.	Financial Statements		2
	Condensed Consolidated Balance Sheets		2
	Condensed Consolidated Statements of Operations (Unaudited)		3
	Condensed Consolidated Statements of Comprehensive Income and Loss (Unaudited)		4
	Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows (Unaudited)		6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
	Overview		33
	Results of Operations		34
	Liquidity and Capital Resources		42
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		46
Item 4.	Controls and Procedures		47
	Part II
Item 1.	Legal Proceedings		48
Item 1A.	Risk Factors		48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds. Common Stock Issued		48
Item 5.	Other Information		49
Item 6.	Exhibits		49
	Exhibit Index		49
	Signatures		50

 

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		September 30,				December 31,
(in thousands, except share and per share amounts)		2018				2017
		(Unaudited)
Assets:
Current Assets:
Cash and cash equivalents		$	2,690			$	12,646
Trade accounts receivable, net of allowance of $124 and $135, respectively			12,174				10,833
Inventories, net of allowance of $1,204 and $946, respectively			16,052				13,892
Contract assets			1,575				2,299
Note receivable, current portion			337				13
Prepaid expenses and other			1,769				1,593
Total current assets			34,597				41,276
Property and equipment, less accumulated depreciation of $4,905 and $4,155, respectively			10,906				11,242
Goodwill			16,243				17,641
Other intangible assets, less accumulated amortization of $13,014 and $11,900, respectively			14,397				15,568
Note receivable, less current portion			—				317
Restricted cash			523				—
Convertible note receivable			500				—
Deposits and other assets			1,791				1,865
Total assets		$	78,957			$	87,909
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable		$	5,712			$	5,110
Short-term overdraft facility			1,278				—
Line of credit			657				—
Mortgage note payable, current portion			97				94
Accrued expenses			4,528				4,186
Contract liabilities			3,657				8,829
Refund liabilities			2,518				695
Total current liabilities			18,447				18,914
Long term mortgage note payable, less current portion			3,182				3,256
Long term note payable, related party			5,304				5,304
Derivative liability			192				356
Deferred tax liabilities			1,922				2,414
Other long-term liabilities			195				179
Total liabilities			29,242				30,423
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at September 30, 2018 or December 31, 2017			—				—
Common stock, par value $0.001; 325,000,000 shares authorized; 28,529,606 shares issued and outstanding at September 30, 2018 and 28,406,856 shares issued and outstanding at December 31, 2017			28				28
Additional paid-in capital			169,856				169,527
Accumulated deficit			(116,229	)			(108,559	)
Accumulated other comprehensive loss			(3,940	)			(3,510	)
Total stockholders' equity			49,715				57,486
Total liabilities and stockholders' equity		$	78,957			$	87,909

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(in thousands, except share and per share amounts)		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Total revenues		$	24,744			$	21,796			$	69,837			$	62,141
Cost of revenues			16,482				14,356				47,363				40,793
Gross profit			8,262				7,440				22,474				21,348
Operating expenses:
Selling, general and administrative			8,499				8,212				26,944				25,480
Depreciation and amortization			535				521				1,618				1,636
Research and development			685				696				2,088				1,920
Provision (credit) for bad debt			24				30				(10	)			(21	)
Impairment of goodwill and intangible assets			—				—				1,263				3
Other operating expenses			3				—				3				9
Total operating expenses			9,746				9,459				31,906				29,027
Loss from operations			(1,484	)			(2,019	)			(9,432	)			(7,679	)
Other income (expense)			(61	)			77				(39	)			169
Interest expense			(132	)			(137	)			(370	)			(374	)
Loss before taxes			(1,677	)			(2,079	)			(9,841	)			(7,884	)
Income tax benefit			(143	)			(177	)			(280	)			(560	)
Net loss		$	(1,534	)		$	(1,902	)		$	(9,561	)		$	(7,324	)
Basic and diluted weighted average common shares outstanding			28,527,234				20,991,534				28,507,286				20,969,735
Basic and diluted loss per common share		$	(0.05	)		$	(0.09	)		$	(0.34	)		$	(0.35	)

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(in thousands)		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Net loss		$	(1,534	)		$	(1,902	)		$	(9,561	)		$	(7,324	)
Other comprehensive income (loss)
Foreign currency translation adjustment			(48	)			771				(430	)			1,971
Comprehensive loss		$	(1,582	)		$	(1,131	)		$	(9,991	)		$	(5,353	)

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(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 (1)			—				—				—				1,891				—				1,891
Balance at January 1, 2018, adjusted			28,406,856				28				169,527				(106,668	)			(3,510	)			59,377
Common stock issued for compensation, services, and royalty payments			122,750				—				329				—				—				329
Net loss for the period ended September 30, 2018			—				—				—				(9,561	)			—				(9,561	)
Other comprehensive loss			—				—				—				—				(430	)			(430	)
Balance, September 30, 2018			28,529,606			$	28			$	169,856			$	(116,229	)		$	(3,940	)		$	49,715

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(in thousands)		For the Nine Months Ended September 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(9,561	)		$	(7,324	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			816				744
Amortization of intangibles			1,429				1,388
Stock issued and stock to be issued for compensation, royalties and services			188				313
Unrealized gain on derivative liability			(164	)			(55	)
Provision for (credit to) bad debt expense and returns allowances			(10	)			(21	)
Deferred income taxes			(352	)			(666	)
Inventory reserve			274				317
Non-cash unrealized foreign currency (gains) losses			135				(307	)
Impairment of goodwill and intangible assets			1,263				3
Loss on disposal of assets			3				9
(Increase) decrease in operating assets:
Trade accounts receivable			(1,439	)			(1,667	)
Inventories			(3,727	)			(902	)
Contract assets			160				1,402
Prepaid expenses and other current assets			(285	)			(562	)
Deposits and other assets			13				(515	)
Increase (decrease) in operating liabilities:
Accounts payable			520				(321	)
Accrued expenses			684				(499	)
Refund liabilities			953				(30	)
Contract liabilities			(853	)			2,932
NET CASH USED IN OPERATING ACTIVITIES			(9,953	)			(5,761	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(644	)			(635	)
Proceeds from sale of property and equipment			—				2
Investments in other intangible assets			(348	)			(448	)
Proceeds from notes receivable			—				19
Investment in convertible note receivable			(500	)			—
NET CASH USED IN INVESTING ACTIVITIES			(1,492	)			(1,062	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from overdraft facility			13,895				2,146
Payments on overdraft facility			(12,570	)			(1,174	)
Proceeds from line of credit			6,696				19,585
Payments on line of credit			(6,039	)			(17,653	)
Payments on capital lease obligations			(2	)			(27	)
Payments on mortgage note payable			(71	)			(66	)
Payments on contingent consideration			(45	)			(61	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,864				2,750
Effect of exchange rate changes on cash			148				214
Net decrease in cash, cash equivalents and restricted cash			(9,433	)			(3,859	)
Cash, cash equivalents and restricted cash at beginning of period			12,646				4,617
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD		$	3,213			$	758

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(in thousands)		For the Nine Months Ended September 30,
		2018				2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid		$	205			$	130
Interest paid, net of capitalized interest		$	373			$	375
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued and to be issued for royalties payable pursuant to product agreements, related party		$	9			$	8
Common stock issued and to be issued for consulting services and compensation in common stock		$	320			$	389
Partial settlement of note receivable via offset against royalty payable netted with (increase) to note receivable from accrued interest		$	(6	)		$	(6	)
Accrued property and equipment purchases at September 30		$	52			$	21
Accrued investment in other intangible assets at September 30		$	129			$	83

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1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND COMPANY CONDITIONS

 

Nature of Operations

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

 

The Power and Electromechanical segment consists of the wholly owned subsidiaries: CUI, Inc. (CUI), based in Tualatin, Oregon; CUI Japan, based in Tokyo, Japan; CUI-Canada, based in Toronto, Canada; and the entity holding the corporate building, CUI Properties. All three operating subsidiaries are providers of power and electromechanical components 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, ICE (Intelligent Control of Energy) products enabled by the VPS patented software system and offering a technology architecture that addresses power and related accessories; and components - including connectors, speakers, buzzers, and industrial control solutions including encoders and sensors. These offerings provide a technology architecture that addresses power and related accessories to industries as broadly ranging as telecommunications, consumer electronics, medical and defense.

 

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

 

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

 

Basis of Presentation

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

 

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

 

 

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

 

Captions in December 31, 2017 consolidated balance sheet within Form 10-K		Reclassified to	Captions in December 31, 2017 condensed consolidated balance sheet herein
Costs in excess of billings			Contract assets
Billings in excess of costs			Contract liabilities
Unearned revenue			Contract liabilities
Unearned revenue			Refund liabilities

 

Changes in these accounts as reclassified are reflected on the condensed consolidated statement of cash flows for the nine months ended September 30, 2018 and 2017.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, impairment of prepaid royalties, revenue recognition on cost-to-cost-method type contracts, inventory valuation, 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.

 

Reclassification

Certain reclassifications have been made to the 2017 condensed consolidated balance sheet, and statement of operations and statement of cash flows in order to conform to the 2018 presentation.

 

Company Conditions

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

 

The Company had losses of $9.6 million and cash used in operating activities of $(10.0) million during the nine months ended September 30, 2018. As of September 30, 2018, our accumulated deficit is $116.2 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 includes obtaining a new long-term financing in the form of a renewed line of credit, and the issuances of a signed letter of intent signed on October 4, 2018 for the sale/leaseback of our Tualatin headquarters. The line of credit renewal and sale/leaseback transaction are both expected to close during the fourth quarter of 2018 and will result in significant cash inflow. In addition to these plans, as of September 30, 2018, the Company has unused availability of $3.3 million on its current line of credit and unused availability of $0.7 million under its Overdraft Facility. Including our cash balance, we further have $16.2 million of positive working capital primarily related to trade accounts receivable and our inventory less current liabilities that we will manage in the next twelve months to create positive cash flow. 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.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - UPDATE

 

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

 

Revenue Recognition

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

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3. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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

 

 

The impact of adoption on our condensed consolidated balance sheet and condensed consolidated statement of operations as of and for the period ended September 30, 2018 was as follows:

 

 

 

 

 

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

 

 

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, ICE (Intelligent Control of Energy) products enabled by the VPS patented software system and offering a technology architecture that addresses power and related accessories; and components - including connectors, speakers, buzzers, and industrial control solutions including encoders and sensors. These offerings provide a technology architecture that addresses power and related accessories to industries as broadly ranging as telecommunications, consumer electronics, medical and defense. The production and delivery of these products are considered single performance obligations. Revenue is recognized when we satisfy a performance obligation and this occurs upon shipment and ownership transfer of our products to our customers at a point in time.

 

Energy segment

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Accounts Receivable, Contract Assets and Contract Liabilities

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

 

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

 

Contract liabilities from our construction contracts occur when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue.

 

 

Activity in the current contract liabilities for the nine months ended September 30, 2018 was as follows:

 

 

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

 

Performance Obligations

Remaining Performance Obligations

Remaining performance obligations, represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of September 30, 2018, the Company's remaining performance obligations are generally expected to be filled within the next 12 months.

 

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

 

 

Performance Obligations Satisfied Over Time

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

 

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

 

Performance Obligations Satisfied at a Point in Time.

Revenue from goods and services transferred to customers at a single point in time accounted for 86% of revenues for the nine-month period ended September 30, 2018. The majority of our revenue recognized at a point in time is in our Power and Electromechanical segment. Revenue on these contracts is recognized when the product is shipped and the customer takes ownership of the product. Determination of ownership and control transfer is determined by shipping terms delineated on the customer purchase orders.

 

Variable Consideration

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

 

 

The following table presents our revenues disaggregated by revenue source for the three months ended September 30, 2018:

 

 

The following table presents our revenues disaggregated by revenue source for the nine months ended September 30, 2018:

 

 

 

The following table presents our revenues disaggregated by timing of revenue recognition for the three months ended September 30, 2018:

 

 

The following table presents our revenues disaggregated by timing of revenue recognition for the nine months ended September 30, 2018:

 

 

 

The following table presents our revenues disaggregated by region for the three months ended September 30, 2018:

 

 

The following table presents our revenues disaggregated by region for the nine months ended September 30, 2018:

 

 

 

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 September 30, 2018 and December 31, 2017, accrued liabilities included $1.8 million and $1.3 million of accrued inventory payable, respectively. At September 30, 2018 and December 31, 2017, inventory by category is valued net of reserves and consists of:

 

 

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5. PREPAID EXPENSES, DEPOSITS AND OTHER

 

 

During the second quarter of 2017, prepaid royalties in the amount of $1.6 million were transferred to long-term and included in Deposits and other assets from prepaid expenses due to a change in the estimated period of when those prepayments will be amortized based upon management’s assessment of future GasPT sales. At September 30, 2018 and December 31, 2017, there were $1.7 million and $1.8 million of prepaid royalties included in Deposits and other assets, respectively.

 

6. 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 our 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 our major customers and continued strengthening of our 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.

 

 

The remaining goodwill related to the Orbital-UK reporting unit as of September 30, 2018 and December 31, 2017 was $3.2 million and $4.5 million, respectively, which is included in the Energy segment. As of September 30, 2018, there was also goodwill remaining for CUI Inc., CUI-Canada and CUI-Japan reporting units, which are included in the Power and Electromechanical segment.

 

The carrying value of goodwill and the activity for the nine months ended September 30, 2018 are as follows:

 

 

 

7. 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 September 30, 2018 and December 31, 2017), which was the carrying value of the investment, earning interest at 5% per annum, due June 30, 2019. The Company recorded $4 thousand and $5 thousand of interest income from the note in the three months ended September 30, 2018 and 2017, respectively. The Company recorded $13 thousand and $13 thousand of interest income from the note in the nine months ended September 30, 2018 and 2017, respectively. The interest receivable is settled on a quarterly basis via a non-cash offset against the finders-fee royalties earned by TPI on GasPT sales. Any remaining finders-fee royalties balance is offset against the note receivable quarterly. The Company also received a $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, 2018 and concluded that no allowance was necessary. For more details on this investment see Note 2 - Summary of Significant Accounting policies to CUI Global's financial statements filed in Item 8 of the Company's latest Form 10-K filed with the SEC on March 14, 2018.

 

During July 2018, CUI Global made an investment of $0.5 million in a convertible note receivable with Virtual Power Systems (“VPS”) to support the two companies’ continued collaboration and development of industry transforming Software Defined Power technologies. The note accrues interest at 2% per annum and the interest is compounded annually. Unless converted into shares earlier, principal and accrued interest will convert automatically on the maturity date (October 27, 2019) into shares of VPS common stock at the then current fair market value. If VPS receives gross proceeds greater than $3 million prior to the maturity date in a sale or series of sales of equity securities, the principal and unpaid accrued interest of the note will automatically convert into shares at 80% of the price paid per share for equity securities by investors at that time. The fair market value of the investment at September 30, 2018 is estimated to be the same as its current carrying value with no gains recorded since acquisition.

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8. DERIVATIVE INSTRUMENTS

 

The Company uses various derivative instruments including forward currency contracts, and interest rate swaps to manage certain exposures. These instruments are entered into under the Company’s corporate risk management policy to minimize exposure and are not for speculative trading purposes. The Company recognizes all derivatives as either assets or liabilities in the condensed consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of derivatives are recognized in earnings. For additional information on fair value of derivatives, see Note 12, “Investments and Fair Value Measurements,” of these condensed consolidated financial statements. The Company has limited involvement with derivative instruments and does not trade them. The Company has entered into one interest rate swap, which has a maturity date of ten years from the date of inception, and is used to minimize the interest rate risk on the variable rate mortgage. During the three and nine months ended September 30, 2018, the Company had $38 thousand and $164 thousand, respectively of unrealized gain related to the derivative liabilities. 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.

 

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

 

The Company records its stock-based compensation expense under its stock option plans and the Company also issues stock for services and royalties. A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and filed with the SEC on March 14, 2018. The Company did not grant any stock options in the three and nine months ended September 30, 2018. For the three and nine months ended September 30, 2018, the Company recorded stock-based expense of $42 thousand and $188 thousand, respectively and for the three and nine months ended September 30, 2017, the Company recorded stock-based expense of $109 thousand and $313 thousand, respectively.

 

10. SEGMENT REPORTING

 

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

 

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, 2018, the Company’s total revenues consisted of 79% from the Power and Electromechanical segment and 21% from the Energy segment. 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 nine months ended September 30, 2018, the Company's total revenues consisted of 82% from the Power and Electromechanical segment and 18% 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.

 

The following information represents segment activity for the three months ended September 30, 2018 and selected balance sheet items as of September 30, 2018:

 

 

The following information represents segment activity for the nine months ended September 30, 2018 and selected balance sheet items as of September 30, 2018:

 

 

⁽¹⁾ For the Power and Electromechanical segment, for the three and nine months ended September 30, 2018, depreciation and amortization includes $207 thousand and $627 thousand, respectively, 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, 2017 and selected balance sheet items as of September 30, 2017:

 

 

The following information represents segment activity for the nine months ended September 30, 2017 and selected balance sheet items as of September 30, 2017:

 

 

⁽¹⁾ For the Power and Electromechanical segment, depreciation and amortization totals for the three and nine months ended September 30, 2017, include $184 thousand and $496 thousand, respectively, 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:

 

 

 

 

 

11. RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 3 - Revenue from Contracts with Customers.

 

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 arrangements 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.

 

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 is currently assessing the impact of this ASU on its consolidated financial statements and will adopt the standard in 2019.

 

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.

 

 

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

 

12. INVESTMENTS AND FAIR VALUE MEASUREMENTS

 

The Company’s fair value hierarchy for its cash equivalents, marketable securities and derivative instruments, including contingent consideration, as of September 30, 2018 and December 31, 2017, respectively, was as follows:

 

 

 

Changes in Fair Value Measurements

Using Significant Unobservable Inputs (Level 3)

 

 

There were no transfers between Level 3 and Level 2 in 2018 as determined at the end of the reporting period. The contingent consideration liability is associated with the acquisition of Tectrol in March 2015 and represents the present value of the expected future contingent payment based on revenue projections of select Tectrol legacy products. The inputs used to measure contingent consideration are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal revenue forecasts. Since the valuation is not supported by market criteria, the valuation is completely dependent on unobservable inputs. During quarterly updates of the valuation, the calculation of the value is based on actual and reasonably estimated future revenues. The final amount of contingent consideration of $45 thousand was paid out during the nine months ended September 30, 2018.

 

 

In the three months ended September 30, 2018, the Company invested $500 thousand in a convertible note receivable. In the future, this note will be evaluated as a level three investment in a debt security. The fair value of the investment at September 30, 2018 is estimated to be the same as its current carrying value with no gains recorded since acquisition. This valuation was determined by the fact that other investors invested during the quarter at substantially the same terms and at the same price as our investment.

 

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 and nine months ended September 30, 2018 and September 30, 2017, the assumed exercise of stock options using the treasury stock method would have had an antidilutive effect and therefore 1.0 million shares related to stock options were excluded from the computation of diluted net loss per share for both the three and nine months ended September 30, 2018 and 2017. Accordingly, diluted net loss per share is the same as basic net loss per share for the three and nine months ended September 30, 2018 and 2017.

 

 

 

14. CAPITALIZED INTEREST

 

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

 

 

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15. INCOME TAXES

 

The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company continues to record a full valuation allowance against the Company’s U.S. net deferred tax assets as it is not more likely than not that the Company will realize a benefit from these assets in a future period. During the nine months ended September 30, 2018, the Company recorded a valuation allowance of $0.6 million against the Company's foreign UK net deferred tax assets as it is not more likely than not that the Company will realize a benefit from those 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 benefit of $143 thousand and $280 thousand was recorded to the income tax provision for the three and nine months ended September 30, 2018, respectively, resulting in an effective tax rate of 8.5% and 2.8%, respectively. The income tax benefit for the three and nine months ended September 30, 2018 includes realizable benefits on losses in certain foreign jurisdictions offset by taxes on profitable foreign operations, domestic state minimum taxes and a valuation allowance on the net deferred tax assets of the foreign UK operations. During the three months ended September 30, 2018 the Company received notice that the Canada Revenue Agency had accepted the Company’s applications for a Scientific Research and Experimental Development (SRED) tax credit for research and development performed in Canada for a prior year. Accordingly, for the three and nine months ended September 30, 2018, the Company recorded a tax benefit of $206 thousand related to the SRED credit. Starting with the third quarter 2018 tax provision, current year estimated SRED credits of approximately $37 thousand are included as part of the Company's normal quarterly tax provision calculation and are included in the total shown above. All of our USA and the foreign UK net deferred tax assets were reduced by a valuation allowance.

 

The Company’s total income tax benefit and effective tax rate for the three and nine months ended September 30, 2017 was $177 thousand and $560 thousand, respectively resulting in an effective tax rate of 8.5% and 7.1%, respectively. The income tax benefit for the three months and nine months ended September 30, 2017 related to realizable benefits on losses in certain foreign jurisdictions offset by taxes on profitable foreign operations and domestic state minimum taxes. During the three months ended September 30, 2017 the Company recorded a tax benefit of $51 thousand related to the SRED credit. All of our USA deferred tax assets were reduced by a valuation allowance.

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16. 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:

 

 

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.

 

During the period ended September 30, 2018, the Company’s wholly owned subsidiary, CUI, Inc., maintained a two-year revolving Line of Credit (LOC) with Wells Fargo Bank with the following terms:

 

 

⁽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, 2018.

 

The line of credit is secured by the following collateral via a security agreement with CUI Inc. and CUI-Canada at September 30, 2018:

 

(in thousands)

 

 

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. The LOC contains certain financial covenants. The Company was in compliance with the financial covenants as of September 30, 2018. At September 30, 2018, there was a $0.7 million balance outstanding on the LOC and $3.3 million of credit was available. The Company expects to renew the line of credit in the fourth quarter.

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17. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

 

 

18. NOTES PAYABLE

 

Notes payable is summarized as follows:

 

 

(1)

On October 1, 2013, the purchase of the Company’s Tualatin, Oregon corporate offices was completed for $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, 2018, the Company made principal payments of $71 thousand against the mortgage promissory note payable. At September 30, 2018, the balance owed on the mortgage promissory note payable was $3.3 million, of which $97 thousand and $3.2 million were in current and long-term liabilities, respectively. See Note 16, Working Capital Line of Credit and Overdraft Facility, for more information on the Company's debt covenants.

 

(2)

The note payable to International Electronic Devices, Inc. (formerly CUI, Inc.) is associated with the acquisition of CUI, Inc. The promissory note is due May 15, 2020 and includes a 5% interest rate per annum, with interest payable monthly and the principal due as a balloon payment at maturity. The note contains a contingent conversion feature, such that in the event of default on the note the holder of the note can, at the holder’s option, convert the note principal into common stock at $0.001 per share. As of September 30, 2018, the Company is in compliance with all terms of this promissory note and the conversion feature is not effective.

 

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19. CONCENTRATIONS

 

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

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

 

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:

 

 

 

CUI had one supplier concentration of approximately 10% during the three months ended September 30, 2018. There were no supplier concentrations of 10% or greater in the nine months ended September 30, 2018. CUI had one concentration of approximately 11% and 12% for the three and nine months ended September 30, 2017.

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20. OTHER EQUITY TRANSACTIONS

 

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

 

 

⁽¹⁾ Includes bonus of $163 thousand that was accrued and expensed in 2017.

⁽²⁾ Total excludes $5 thousand of stock compensation related to royalties that were recorded as expense but not issued and outstanding as of September 30, 2018 and includes $7 thousand of stock compensation related to 2017 royalties.

⁽³⁾ Excludes $24 thousand of stock compensation for stock issued in 2017 that was amortized from prepaid expense in 2018.

 

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