Orbital Infrastructure Group, Inc. - Quarter Report: 2019 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, 2019

 

OR

 

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

 

For the transition period from _______ to ______

 

Commission File Number 0-29923

 

CUI Global, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

	20050 SW 112th Avenue
	Tualatin, Oregon 97062

 

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(Address of principal executive offices and zip code)

 

 

(503) 612-2300

(Registrant’s telephone number, including area code)

 

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

YES  ☒ NO  ☐

 

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

YES  ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐	Accelerated filer ☒
Non-accelerated filer  ☐	Smaller reporting company ☒
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐  NO  ☒

 

There were 28,736,436 shares of the registrant's common stock, par value $0.001 per share, issued and outstanding as of November 12, 2019.

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value.	CUI	Nasdaq Capital Market

 

 

 

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		September 30,				December 31,
(in thousands, except share and per share amounts)		2019				2018
		(Unaudited)				(See Note 1)
Assets:
Current Assets:
Cash and cash equivalents		$	1,728			$	3,979
Trade accounts receivable, net of allowance of $25 and $17, respectively			4,589				5,034
Inventories			1,580				1,622
Contract assets			2,567				1,744
Note receivable, current portion			—				318
Prepaid expenses and other current assets			1,462				1,512
Assets held for sale - current			30,486				21,272
Total current assets			42,412				35,481
Property and equipment, less accumulated depreciation of 1,284 and $1,182, respectively			4,211				4,536
Investment in VPS - equity method			5,198				—
Right of use assets - Operating leases			5,615				—
Other intangible assets, less accumulated amortization of $9,462 and $8,889, respectively			4,271				5,314
Restricted cash			—				523
Note receivable - related party			3,183				—
Convertible note receivable			—				655
Deposits and other assets			69				508
Assets held for sale - noncurrent			—				23,150
Total assets		$	64,959			$	70,167
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable		$	3,096			$	1,520
Short-term overdraft facility			—				1,344
Notes payable - current			269				—
Operating lease obligations - current portion			754				—
Accrued expenses			2,599				1,893
Contract liabilities			2,222				1,956
Deferred gain on leaseback, current portion			—				289
Liabilities held for sale - current			10,059				11,584
Total current liabilities			18,999				18,586
Operating lease obligations, less current portion			4,977				—
Deferred tax liabilities			1,584				1,914
Deferred gain on leaseback, less current portion			—				2,599
Liabilities held for sale - noncurrent			—				5,327
Other long-term liabilities			166				203
Total liabilities			25,726				28,629
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $0.001; 10,000,000 shares authorized;  no shares issued at September 30, 2019 or December 31, 2018			—				—
Common stock, par value $0.001; 325,000,000 shares  authorized; 28,680,260 shares issued and outstanding at
September 30, 2019 and 28,552,886 shares issued and  outstanding at December 31, 2018			29				29
Additional paid-in capital			170,049				169,898
Accumulated deficit			(126,685	)			(123,993	)
Accumulated other comprehensive loss			(4,160	)			(4,396	)
Total stockholders' equity			39,233				41,538
Total liabilities and stockholders' equity		$	64,959			$	70,167

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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,
		2019				2018				2019				2018
Total revenues		$	6,073			$	5,155			$	17,793			$	12,908
Cost of revenues			4,652				3,834				13,464				9,860
Gross profit			1,421				1,321				4,329				3,048
Operating expenses:
Selling, general and administrative			4,793				4,222				14,092				13,773
Depreciation and amortization			359				382				1,136				1,145
Research and development			20				47				123				116
Provision (credit) for bad debt			(18	)			4				110				5
Impairment of goodwill			—				—				—				1,263
Other operating income			(11	)			—				(13	)			—
Total operating expenses			5,143				4,655				15,448				16,302
Continuing Loss from operations			(3,722	)			(3,334	)			(11,119	)			(13,254	)
Loss from equity method investment in VPS			(354	)			—				(710	)			—
Fair value gain on equity method investment purchase			—				—				629				—
Other expense			(463	)			(43	)			(575	)			(79	)
Interest expense			(4	)			(60	)			(35	)			(164	)
Loss from continuing operations before taxes			(4,543	)			(3,437	)			(11,810	)			(13,497	)
Income tax benefit			(1,310	)			(396	)			(1,598	)			(1,042	)
Loss from continuing operations, net of taxes			(3,233	)			(3,041	)			(10,212	)			(12,455	)
Discontinued operations (Note 3)
Income from operations of discontinued power and electromechanical components business (including gain on disposal of $3,631 in the quarter ended September 30, 2019)			3,944				1,760				5,598				3,656
Income tax expense			1,023				253				966				762
Income from discontinued operations, net of income taxes			2,921				1,507				4,632				2,894
Net loss		$	(312	)		$	(1,534	)		$	(5,580	)		$	(9,561	)
Basic and diluted weighted average common shares outstanding			28,691,206				28,527,234				28,636,918				28,507,286
Loss from continuing operations per common share - basic and diluted		$	(0.11	)		$	(0.11	)		$	(0.35	)		$	(0.44	)
Earnings from discontinued operations - basic and diluted		$	0.10			$	0.06			$	0.16			$	0.10
Loss per common share - basic and diluted		$	(0.01	)		$	(0.05	)		$	(0.19	)		$	(0.34	)

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(in thousands)		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2019				2018				2019				2018
Net loss		$	(312	)		$	(1,534	)		$	(5,580	)		$	(9,561	)
Other comprehensive income (loss)
Foreign currency translation adjustment			67				(48	)			236				(430	)
Comprehensive loss		$	(245	)		$	(1,582	)		$	(5,344	)		$	(9,991	)

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(In thousands, except share amounts)		Common Stock																Accumulated Other				Total
		Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Comprehensive Income (Loss)				Stockholders' Equity
Balance, December 31, 2018			28,552,886			$	29			$	169,898			$	(123,993	)		$	(4,396	)		$	41,538
Cumulative effect of accounting change (1)			—				—				—				2,888				—				2,888
Balance at January 1, 2019, adjusted			28,552,886				29				169,898				(121,105	)			(4,396	)			44,426
Common stock issued for compensation, services, and royalty payments			29,067				—				40				—				—				40
Net loss for the period ended March 31, 2019			—				—				—				(3,003	)			—				(3,003	)
Other comprehensive income			—				—				—				—				92				92
Balance, March 31, 2019			28,581,953				29				169,938				(124,108	)			(4,304	)			41,555
Common stock issued for compensation, services, and royalty payments			50,349				—				68				—				—				68
Net loss for the period ended June 30, 2019			—				—				—				(2,265	)			—				(2,265	)
Other comprehensive income			—				—				—				—				77				77
Balance, June 30, 2019			28,632,302				29				170,006				(126,373	)			(4,227	)		$	39,435
Common stock issued for compensation, services, and royalty payments			47,958				—				43				—				—				43
Net loss for the period ended September 30, 2019			—				—				—				(312	)			—				(312	)
Other comprehensive income			—				—			$	—				—				67				67
Balance, September 30, 2019			28,680,260			$	29			$	170,049			$	(126,685	)		$	(4,160	)		$	39,233

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(in thousands, except share amounts)		Common Stock																Accumulated Other				Total
		Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Comprehensive Income (Loss)				Stockholders' Equity
Balance, December 31, 2017			28,406,856			$	28			$	169,527			$	(108,559	)		$	(3,510	)		$	57,486
Cumulative effect of accounting change (2)			—				—				—				1,891				—				1,891
Balance at January 1, 2018, adjusted			28,406.856				28				169,527				(106,668	)			(3,510	)			59,377
Common stock issued for compensation, services, and royalty payments			79,042				—				220				—				—				220
Net loss for the period ended March 31, 2018			—				—				—				(3,262	)			—				(3,262	)
Other comprehensive income			—				—				—								440				440
Balance, March 31, 2018			28,485.898				28				169,747				(109,930	)			(3,070	)			56,775
Common stock issued for compensation, services, and royalty payments			19,156				—				61				—				—				61
Net loss for the period ended June 30, 2018			—				—				—				(4,765	)			—				(4,765	)
Other comprehensive loss			—				—				—				—				(822	)			(822	)
Balance, June 30, 2018			28,505,054				28				169,808				(114,695	)			(3,892	)			51,249
Common stock issued for compensation, services, and royalty payments			24,552				—				48				—				—				48
Net loss for the period ended September 30, 2018			—				—				—				(1,534	)							(1,534	)
Other comprehensive loss			—				—				—				—				(48	)			(48	)
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,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(5,580	)		$	(9,561	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			645				816
Amortization of intangibles			1,326				1,429
Stock issued and stock to be issued for compensation, royalties and services			155				188
Unrealized gain on derivative liability			—				(164	)
Non-cash loss on equity method investment in VPS			710				—
Non-cash fair value gain on equity method investment purchase			(629	)			—
Gain on sale of electromechanical components business			(3,631	)			—
Provision for (credit to) bad debt expense			90				(10	)
Deferred income taxes			(644	)			(352	)
Inventory reserve			135				274
Non-cash unrealized foreign currency losses			614				135
Impairment of goodwill			—				1,263
(Gain) loss on disposal of assets			(13	)			3
(Increase) decrease in operating assets:
Trade accounts receivable			1,196				(1,439	)
Inventories			(31	)			(3,727	)
Contract assets			(891	)			160
Prepaid expenses and other current assets			362				(285	)
Right of use assets - Operating leases			743				—
Deposits and other assets			(248	)			13
Increase (decrease) in operating liabilities:
Accounts payable			2,406				520
Operating lease liabilities			(687	)			—
Accrued expenses			(122	)			684
Refund liabilities			(367	)			953
Contract liabilities			246				(853	)
NET CASH USED IN OPERATING ACTIVITIES			(4,215	)			(9,953	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(278	)			(644	)
Proceeds from sale of property and equipment			14				—
Cash paid for other intangible assets			(269	)			(348	)
Cash paid for convertible notes receivable			—				(500	)
Cash paid for equity-method Investment			(1,615	)			—
Proceeds from Notes receivable			313				—
Proceeds from sale of restricted investment			400				—
Proceeds from electromechanical components business sale			4,696				—
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			3,261				(1,492	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from overdraft facility			6,842				13,895
Payments on overdraft facility			(8,208	)			(12,570	)
Proceeds from line of credit			20,889				6,696
Payments on line of credit			(21,188	)			(6,039	)
Payments on financing lease obligations			(3	)			(2	)
Payments on mortgage note payable			—				(71	)
Payments on notes payable			(88	)			—
Payments on contingent consideration			—				(45	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(1,756	)			1,864
Effect of exchange rate changes on cash			(64	)			148
Net decrease in cash, cash equivalents and restricted cash			(2,774	)			(9,433	)
Cash, cash equivalents and restricted cash at beginning of period			4,502				12,646
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD		$	1,728			$	3,213

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(in thousands)		For the Nine Months Ended September 30,
		2019				2018
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid		$	143			$	205
Interest paid, net of capitalized interest		$	300			$	373
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash item for January 1, 2019 adoption of ASC 842 - establishment of right-of-use assets and offsetting lease obligations		$	7,703			$	—
Non-cash investment in equity method investment - see note 6		$	4,292			$	—
Common stock issued and to be issued for royalties payable pursuant to product agreements		$	22			$	9
Common stock issued and to be issued for consulting services and compensation in common stock		$	129			$	320
Partial settlement of note receivable via offset against royalty payable netted with (increase) to note receivable from accrued interest		$	5			$	(6	)
Accrued property and equipment purchases at September 30		$	8			$	52
Accrued investment in other intangible assets at September 30		$	38			$	129

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

 

Nature of Operations

CUI Global Inc. (CUI Global or "the Company") is a platform company composed of one segment, the Energy segment, along with an "Other" category.

 

Prior to this report, the Company included a second segment named, the Power and Electromechanical segment. This segment is included in Discontinued Operations starting with the third quarter 2019 reporting. See Note 3 - Discontinued Operations And Sale of a Business for more information on the Company's discontinued operations.

 

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

 

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

 

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes condensed consolidated financial statements. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

 

It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. All intercompany accounts and transactions have been eliminated in consolidation. The results for the interim period are not necessarily indicative of the results to be expected for the remaining quarter or year ending December 31, 2019.

 

 

Reconciliation of Cash, Cash Equivalents, and Restricted Cash on Condensed Consolidated Statements of Cash Flows

 

 

Use of Estimates

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

 

Company Conditions

The Company had net loss of $5.6 million and cash used in operating activities of $4.2 million during the nine months ended September 30, 2019. As of September 30, 2019, the Company's accumulated deficit is $126.7 million.

 

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

 

Management believes the Company's present cash flows will create a challenge for the Company 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 which includes the announced $32.0 million sale of Power operations to Bel Fuse Inc signed on November 8, 2019 and to close within 30 days of signing the agreement. In addition, as of September 30, 2019, the Company has cash and cash equivalents of $1.7 million. Including the Company's cash balance, the Company further has $23.4 million of working capital including $20.4 million of assets held for sale net of liabilities held for sale. Working capital primarily relates to assets held for sale, trade accounts receivable and the Company's inventory less current liabilities that the Company will manage in the next twelve months. In addition, the Company is taking actions to align its cost structure to its forecasted revenue. Considering the above factors, the proceeds from the sale of Power operations to Bel Fuse Inc., and additional measures available to generate cash, management believes the Company will have sufficient cash flows to meet its obligations for the twelve-month period from the date the financial statements are available to be issued.

 

 

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - UPDATE

 

Our significant accounting policies are detailed in "Note 2 Summary of Significant Accounting Policies" within Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019. Significant changes to the Company's accounting policies as a result of adopting Topic 842 are discussed below:

 

Adoption of new accounting standards

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

 

As of September 30, 2019, $5.6 million was included in non-current assets, $0.8 million in current liabilities and $5.0 million in non-current liabilities, on the condensed consolidated balance sheets as a result of the new lease standard. The change in right of use assets and lease obligations is reflected in the change in operating assets and liabilities in the Cash Flows from Operating Activities section of the Condensed Consolidated Statements of Cash Flows. Principal portion of financing lease payments are included in the Financing section of the Condensed Consolidated Statements of Cash Flows. There was no impact on the Company's Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Comprehensive Income and Loss. Additionally, as part of the January 1, 2019 adjustment to transition to the new standard, the Company recorded a $2.9 million adjustment to accumulated deficit to recognize the deferred gain that was originally recorded as part of the December 2018 sale/leaseback of the Tualatin headquarters.

 

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

 

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The guidance will be effective for the fiscal year beginning after December 15, 2018, including interim periods within that year. The Company implemented the standard as of January 1, 2019. There was no effect of this change in the Company's condensed consolidated financial statements for the period ended September 30, 2019.

 

3.	DISCONTINUED OPERATIONS AND SALE OF A BUSINESS

 

As part of the Company’s stated strategy to transform CUI Global into a diversified energy infrastructure services platform serving North American energy customers, the Company’s board of directors made the decision to divest of its Power and Electromechanical businesses. On September 30, 2019, CUI Global, Inc. entered into an asset sale agreement by and among, CUI, Inc.("Seller"), a wholly owned subsidiary of the Company ("Parent"), and Back Porch International, Inc. ("Buyer") to sell the Company’s Electromechanical business to a management led group. The remaining Power supply businesses are expected to be divested within twelve months.

 

Pursuant to the terms of the asset sale agreement, the Seller and Parent agreed to sell and assign to the management-led group, Back Porch International, Inc., the rights and obligations of Seller and Parent to the assets constituting the non-power supply electromechanical components product group of Seller and Parent effective the close of business September 30, 2019 for $15 million (the "Purchase Consideration"). The Purchase Consideration consists of approximately $4.7 million in cash at closing, assumption of debt of the CUI Parent in the approximate amount of $5.3 million, and a 5-year earn out based upon a multiple of EBITDA of the Business above $3.5 million, guaranteed to be a total of $5 million (fair value of $3.2 million at September 30, 2019). In addition to the assets purchased, the Buyer shall assume and agree to pay, perform and discharge certain liabilities agreed to by the Buyer and Seller ("Assumed Liabilities") including scheduled accounts payable and vendor purchase orders at the closing of the disposition, with the Sellers generally remaining obligated for remaining pre-closing liabilities other than the assumed liabilities (the “Excluded Liabilities”). The Sellers retained their power supply components product lines and their Internet domain names and trademarks. The Company recorded a $3.6 million pre-tax gain on the sale, which is also included in discontinued operations.

 

The associated results of operations are separately reported as Discontinued Operations for all periods presented on the Consolidated Statements of Operations. Balance sheet items for the discontinued businesses, including goodwill from the former Power and Electromechanical segment have been reclassified to assets held for sale within current assets and liabilities held for sale within current liabilities in the Consolidated Balance Sheet as of September 30, 2019 and December 31, 2018. Cash flows from these discontinued businesses are included in the consolidated cash flow statements. See below for additional information on operating and investing cash flows of the discontinued operations. Results from continuing operations for the Company and segment highlights exclude the former Power and Electromechanical segment, which is included in these discontinued operations.

 

 

The former 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 that previously held the corporate building, CUI Properties. All three operating subsidiaries are providers of power and electromechanical components for Original Equipment Manufacturers (OEMs).

 

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

 

Selected data for these discontinued businesses consisted of the following (in thousands):

 

 

 

 

* The assets and liabilities of the disposal group classified as held for sale are classified as current on the September 30, 2019 balance sheet because it is probable that the sale will occur and proceeds will be collected within one year.

 

 

Net cash provided by operating activities of discontinued operations for the nine months ended September 30, 2019 and 2018 was $4.8 million and $3.7 million, respectively.

 

Net cash used in investing activities of discontinued operations for the nine months ended September 30, 2019 and 2018 was $0.4 million and $0.8 million, respectively.

 

4.	REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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 performance obligations satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Accounts Receivable, Contract Assets and Contract Liabilities

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

 

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

 

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

 

 

Activity in the contract liabilities for the nine months ended September 30, 2019 and 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 the Company's distributor customers. The liability for estimated returns of newly introduced product is reversed to revenue as the inventory is sold. Future scrap returns are based on a percentage of total revenues. In addition to the refund liabilities recorded for future returns, the Company also records an adjustment to inventory and corresponding adjustment to cost of revenue for the Company's right to recover products from customers upon settling the refund liability.

 

Performance Obligations

Remaining Performance Obligations

Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of September 30, 2019, the Company's remaining performance obligations are generally expected to be filled within the next 12 months.

 

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

 

 

Performance Obligations Satisfied Over Time

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

 

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

 

Performance Obligations Satisfied at a Point in Time

Revenue from goods and services transferred to customers at a single point in time accounted for 20% and 26% of revenues for the nine-month period ended September 30, 2019 and 2018, respectively. The majority of the Company's revenue recognized at a point in time is in the Company's Power and Electromechanical segment. Revenue on these contracts is recognized when the product is shipped and the customer transfers control or customer takes control of the product. Determination of ownership and control transfer is determined by shipping terms delineated on the customer purchase orders.

 

Variable Consideration

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

  

 

The following tables present the Company's revenues disaggregated by timing of revenue recognition for the Energy segment:

 

 

The following tables present the Company's revenues disaggregated by region:           

 

 

5.	INVENTORIES

 

Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method or through the moving average cost method. At September 30, 2019 and December 31, 2018, accrued liabilities included $0.7 million and $0.1 million of accrued inventory payable, respectively. At September 30, 2019 and December 31, 2018, inventory by category is valued net of reserves and consists of:

 

 

 

 

6.	INVESTMENTS

 

During the three months ended March 31, 2016, CUI Global's 8.5% ownership investment in Test Products International, Inc. ("TPI"), recognized under the cost method, was exchanged for a note receivable from TPI of $0.4 million, which was the carrying value of the investment, earning interest at 5% per annum, through maturity. The Company recorded $0 and $4 thousand of interest income in the three months ended September 30, 2019 and 2018, respectively. The Company recorded $8 thousand and $13 thousand of interest income from the note in the nine months ended September 30, 2019 and 2018, respectively. The interest receivable was 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 was offset against the note receivable quarterly. The Company received full payment on the note during the three months ended June 30, 2019.

 

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

 

On March 30, 2019, the Company converted its $0.7 million in notes receivable into preferred stock of VPS. In addition, the Company contributed $0.3 million of cash and $2.5 million of other assets, as well as $1.8 million of future expenditures recorded as liabilities by the Company, of which $1.3 million were paid in the nine months ended September 30, 2019. In return, the Company acquired a 21.4% ownership share of VPS. During the three months ended June 30, 2019, the Company recorded a $0.6 million gain based on the fair value of the investment in VPS. As of September 30, 2019, the Company's ownership percentage has been reduced to 20.60% following VPS's issuance of additional equity. Based on current accounting guidance, the Company will record its share of VPS's income or loss under the equity method of accounting. Under the equity method of accounting, results will not be consolidated, but the Company will record a proportionate percentage of the profit or loss of VPS as an addition to or a subtraction from the VPS investment asset. The VPS investment basis at September 30, 2019 was $5.2 million as reflected on the condensed consolidated balance sheets.

 

 

A summary of the unaudited financial statements of the affiliate as of September 30, 2019 is as follows:

 

 

7.	DERIVATIVE INSTRUMENTS

 

The Company uses various derivative instruments including forward currency contracts, and interest rate swaps to manage certain exposures. These instruments are entered into under the Company’s corporate risk management policy to minimize exposure and are not for speculative trading purposes. The Company recognizes all derivatives as either assets or liabilities in the condensed consolidated balance sheets and measures those instruments at fair value. Changes in the fair value of derivatives are recognized in earnings. The Company has limited involvement with derivative instruments and does not trade them. In the first nine months of 2018, the Company had an interest rate swap, which had a maturity date of ten years from the date of inception, and was used to minimize the interest rate risk on the variable rate mortgage. During the three and nine months ended September 30, 2018, the Company had $38 thousand and $0.2 million, respectively, of unrealized gain related to the interest rate swap. The Company closed out this derivative in December 2018 as part of the Company's sale/leaseback transaction and the Company has not owned any derivative instruments during the nine months ended September 30, 2019.

 

8.

LEASES

 

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

 

 

In December 2018, the Company entered into a sale-lease back transaction to sell and leaseback the CUI, Inc. Tualatin facility. The Company sold the Tualatin headquarters and warehouse for $8.1 million at a deferred gain of $2.9 million and has leased back the facility for approximately $53 thousand per month until December 2028. The lease includes two options to renew the term for periods of five years each at the then prevailing market rate per rentable square foot for the premises. As a result of the implementation and transition to the accounting guidance in ASC 842, the deferred gain was recognized on January 1, 2019 as a credit to retained earnings.

 

Orbital-UK has a number of operating leases on vehicles, equipment, and accommodations for visiting personnel. During the nine months ended September 30, 2019, the monthly combined rent on these leases was approximately $29 thousand.

 

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

 

Consolidated rental expense was $1.0 million for the nine months ended September 30, 2019 and is included in selling, general and administrative expense, on the condensed consolidated statement of operations.

 

Future minimum operating lease obligations at September 30, 2019 are as follows for the years ended December 31:

 

 

 

Total lease cost and other lease information is as follows:

 

 

* Includes $6.2 million recorded at the date of implementation of ASC 842 on January 1, 2019.

 

Variable lease costs primarily include common area maintenance costs, real estate taxes and insurance costs passed through to the Company from lessors.

 

The following lease disclosures as of December 31, 2018 for continuing operations were required under previous accounting guidance under ASC 840 and under the transition guidance of ASC 842:

 

CUI executed a sale-leaseback transaction of its Tualatin, OR headquarters facility in December of 2018. There was $16 thousand of rent expense associated with this lease in 2018, and monthly rent expense in 2019 will be approximately $51 thousand per month.

 

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

 

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

 

Rental expense from continuing operations was $0.8 million in 2018 and is included in selling, general and administrative expense on the statement of operations for the year ended December 31, 2018.

 

 

Future minimum operating lease obligations from continuing operations as of December 31, 2018 were as follows:

 

 

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

 

The Company records its stock-based compensation expense on options issued in the past under its stock option plans and the Company also issues stock for services and royalties. The Company's stock option plans expired in 2018. A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and filed with the SEC on March 18, 2019. For the three and nine months ended September 30, 2019 the Company recorded stock-based expense of $44 thousand and $155 thousand, respectively, and for the three and nine month ended September 30, 2018 the Company recorded stock-based expense of $42 thousand and $188 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 identified six operating segments based on the activities of the Company in accordance with ASC 280-10. In September 2019, the Company's board of directors made the decision to divest of three of the Company's operating segments, which in aggregate constituted the Company's Power and Electromechanical segment. In addition, on September 30, 2019 the Company divested a portion of the former Power and Electromechanical segment. The remaining assets and liabilities of the Power and Electromechanical segment are included in assets and liabilities held for sale. Operating activity of the former Power and Electromechanical segment is included in Income from Discontinued Operations. The remaining three operating segments have been aggregated into one reportable segment, and an Other category. The Company's one reportable segment is the Energy segment.

 

 

The following information represents segment activity for the three months ended September 30, 2019:

 

 

The following information represents segment activity for the nine months ended September 30, 2019:

 

 

⁽¹⁾ The Other category included depreciation and amortization of discontinued operations.

⁽²⁾ Includes purchases of property, plant and equipment and the investment in other intangible assets. The Other category includes expenditures for discontinued operations.

 

The following information represents selected balance sheet items by segment as of September 30, 2019:

 

 

⁽¹⁾ The Other category includes assets held for sale related to the Company's discontinued operations, which include $8.2 million of goodwill and $6.9 million of other intangible assets.

 

The following information represents segment activity for the three months ended September 30, 2018:

 

 

 

The following information represents segment activity for the nine months ended September 30, 2018:

 

 

⁽¹⁾ The Other category included depreciation and amortization of discontinued operations.

⁽²⁾ Includes purchases of property, plant and equipment and the investment in other intangible assets. The Other category includes expenditures for discontinued operations.

 

The following information represents selected balance sheet items by segment as of September 30, 2018:

 

 

⁽¹⁾ The Other category includes assets held for sale related to the Company's discontinued operations, which includes $13.1 million of goodwill and $8.7 million of other intangible assets.

 

The following represents revenue by country:

 

 

 

 

 

11.	RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

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 does not expect the impact of this ASU on its consolidated financial statements to be material and will adopt the standard in 2020.

 

12.	FAIR VALUE MEASUREMENTS

 

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of September 30, 2019 and December 31, 2018, respectively, was as follows:

 

 

 

 

 

(1) Investment is a 12-month certificate of deposit classified as available for sale and included in Deposits and other assets on the balance sheet at December 31, 2018.

 

There were no transfers between Level 3 and Level 2 in 2019 as determined at the end of the reporting period. The inputs used to measure the convertible note are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal analysis. Since the valuation is not supported by market criteria, the valuation is completely dependent on unobservable inputs. The convertible note receivable was converted to VPS stock in the first quarter of 2019 (see Note 6). The future value of the investment will be measured using the equity method of accounting. The Note Receivable, Related Party was a note receivable obtained as part of the divestiture of the Company's electromechanical components business and has a future value of $5 million. The present value of the note receivable has been valued based on a discount rate estimated by taking the average borrowing rates of the Company and the buyer of the electromechanical components business. The inputs into the fair value calculation of the Note Receivable, Related Party are considered unobservable inputs.

 

 

 

13.	LOSS PER COMMON SHARE

 

In accordance with FASB Accounting Standards Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” Basic loss from continuing operations per share, Basic income from discontinued operations per share and basic net income (loss) per share that is available to shareholders is computed by dividing the income or loss by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the respective 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 loss from continuing operations in the three and nine months ended September 30, 2019 and September 30, 2018, the assumed exercise of stock options using the treasury stock method would have had an antidilutive effect and therefore 0.9 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, 2019 and 1.0 million shares were excluded for both the three and nine months ended September 30, 2018. Accordingly, diluted earnings (loss) per share for continuing operations, discontinued operations and net income is the same as basic earnings (loss) per share for continuing operations, discontinued operations and net income for the three and nine months ended September 30, 2019 and 2018.

 

 

14.	INCOME TAXES

 

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

 

Total net income tax benefit of $0.3 million and total net income tax benefit of $0.6 million recognized for the three and nine months ended September 30, 2019 is being allocated under ASC 740-20-45-7 to more than one financial statement component other than continuing operations.

 

A net income tax benefit of $1.3 million and $1.6 million was recorded to the income tax provision from continuing operations for the three and nine months ended September 30, 2019, resulting in an effective tax rate of 28.8% and 13.5%, respectively. A net income tax expense of $1.0 million and $1.0 million was recorded to the income tax provision from discontinued operations for the three and nine months ended September 30, 2019. The income tax benefit from continuing operations for the three and nine months ended September 30, 2019 was due to application of ASC 740-20-45-7, domestic state minimum taxes, reductions in net deferred tax liabilities and the recording of a full valuation on existing deferred tax assets in the United States and United Kingdom. All of the Company’s USA and the foreign U.K. net deferred tax assets were reduced by a valuation allowance.

 

The Company's total income tax benefit and effective tax rate from continuing operations for the three and nine months ended September 30, 2018 was $0.4 million and $1.0 million resulting in an effective tax rate of 11.5% and 7.7%, respectively. A net income tax expense of $0.3 million and $0.8 million was recorded to the income tax provision from discontinued operations for the three and nine months ended September 30, 2018. The income tax benefit from continuing operations for the three and nine months ended September 30, 2018 primarily consisted of application of ASC 740-20-45-7, domestic state minimum taxes, and a valuation allowance on the net deferred tax assets of the foreign U.K. operations. All of our USA and the foreign U.K. net deferred tax assets were reduced by a valuation allowance.

 

 

 

15.	ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss are as follows:

 

 

16.	NOTES PAYABLE

 

Notes payable is summarized as follows:

 

 

(1)

The note payable to International Electronic Devices, Inc. (formerly CUI, Inc.) is associated with the acquisition of CUI, Inc. The promissory note was due May 15, 2020 and included a 5% interest rate per annum, with interest payable monthly and the principal due as a balloon payment at maturity. The note included a contingent conversion feature, such that in the event of default on the note the holder of the note could, at the holder’s option, convert the note principal into common stock at $0.001 per share. Upon the sale of the Company's electromechanical components business on September 30, 2019, the buyer also assumed the $5.3 million related party note payable as partial payment.

 

(2)

A note payable for $358 thousand to First Insurance Funding was executed on July 10, 2019 by CUI Global for the purpose of financing a portion of the Company's insurance coverage. The note will be paid over eight months at an annual percentage rate of 4.83% with monthly payments of approximately $46 thousand and will be paid off by March 1, 2020.

 

 

 

17.	CONCENTRATIONS

 

The Company's major product lines are natural gas infrastructure and high-tech solutions in the Energy 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:

 

 

 

There were no supplier concentrations greater than 10% during the three and nine months ended September 30, 2019 and 2018.