TMCnet News
CUI GLOBAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Important Note about Forward-Looking Statements The following discussion and analysis should be read in conjunction with our un-audited financial statements as of June 30, 2014 and notes thereto included in this document and our audited 10-K/A filings for the period ended December 31, 2013 and the notes thereto. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed elsewhere in this Form 10-Q. The statements that are not historical constitute "forward-looking statements". Said forward-looking statements involve risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, express or implied by such forward-looking statements. These forward-looking statements are identified by their use of such terms and phrases as "expects", "intends", "goals", "estimates", "projects", "plans", "anticipates", "should", "future", "believes", and "scheduled". The variables which may cause differences include, but are not limited to, the following: general economic and business conditions; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employment benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with various government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate; therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any person that the objectives and expectations of the Company will be achieved. Overview CUI Global, Inc. is a Colorado corporation organized on April 21, 1998. The Company's principal place of business is located at 20050 SW 112th Avenue, Tualatin, Oregon 97062, phone (503) 612-2300. CUI Global is a platform company dedicated to maximizing shareholder value through the acquisition, development and commercialization of new, innovative technologies. Through its subsidiaries, CUI Global has built a diversified portfolio of industry leading technologies that touch many markets. 24 During the six months ended June 30, 2014, CUI Global had a loss from operations of $634,725. During the six months ended June 30, 2014, CUI Global had a consolidated net loss of $554,380. The consolidated net loss for the six months ended was primarily the result of increased selling, general and administrative expenses related to the increase in revenues and selling and marketing efforts associated with new technologies and increased depreciation and amortization expenses primarily associated with the amortization of intangible assets related to the Orbital acquisition, in excess of the increased gross profit. CUI, Inc. and CUI Japan - Subsidiaries CUI, Inc. is based in Tualatin, Oregon and CUI Japan is based in Tokyo, Japan. Both CUI, Inc. and CUI Japan are providers of electronic components including power supplies, transformers, converters, connectors and industrial controls for Original Equipment Manufacturers (OEMs). Through CUI, Inc., the Company holds 352,589 common shares (representing an 11.54% interest thru June 30, 2013, 8.62% interest thru December 31, 2013, 8.94% interest thru March 31, 2014 and 8.50% interest thereafter) in Test Products International, Inc., a provider of handheld test and measurement equipment. Since its inception in 1989, CUI has been delivering quality products, extensive application solutions and superior personal service. CUI's solid customer commitment and honest corporate message are a hallmark in the industry. Through CUI's capabilities and extensive contacts throughout Asia, CUI Global is able to continue to identify, acquire and commercialize new proprietary technologies. CUI Global will use CUI's market partners and global distribution capabilities to bring other products to market, including the Novum Digital Power Modules, Solus Power Topology, and other proprietary devices, described below. CUI's testing and R&D capabilities allow CUI Global to commercialize and prototype its products more efficiently and economically. CUI and CUI Japan define their product offering into two categories: components including connectors, speakers, buzzers, test and measurement devices, and control solutions including encoders and sensors; and power solutions which include Novum and Solus. These offerings provide a technology architecture that addresses power and related accessories to industries as broadly ranging as consumer electronics, medical and defense. Effective April 1, 2013, CUI Global closed on a share purchase agreement to acquire 100% of the equity interest in Orbital Gas Systems Limited, a company organized under the laws of England and Wales ("Orbital"), from Orbital's sole shareholder. The Orbital acquisition has provided CUI Global with immediate credibility and platform in the natural gas industry. Orbital is the largest natural gas systems integrator in the U.K. By acquiring Orbital, we acquired a company that has operated successfully in the natural gas industry for over 25 years. In addition, Orbital is a leading provider of natural gas infrastructure and high-tech solutions to National Grid, the national gas transmission company in the U.K. and one of the most respected specialist gas engineering companies in the world. Orbital has developed its 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. 25 Power Supply Units Our current power line consists of external and embedded ac-dc power supplies, dc-dc converters and basic digital point of load modules. This dynamic, broadly applicable product line accounts for a significant portion of our current revenue and recent revenue growth. Digital Power Patent License Agreement with Power-One The company entered into a non-exclusive Field of Use Agreement with Power-One (a Bel Fuse company), to license Power-One's Digital Power Technology patents. The license provides access to Power-One's portfolio of Digital Power Technology patents for incorporation into the company's new line of digital point of load power modules. The company, through its power division, also manufactures a wide range of embedded and external power electronics devices for OEM manufacturers. Novum ® Advanced Power We have developed the first fully featured digital point of load dc-dc converter in the power market under our Novum Advanced Power line of products. This product is a next generation product targeted at the intermediate bus power architecture that is prolifically used in the telecom and networking communications market. In September of 2010 we released full production versions of two point of load modules. We were finalists for the prestigious Golden Mousetrap Award and EDN Innovation Award for these parts in 2010. With the shift towards smarter, smaller, and more energy efficient power requirements, our engineers are seeking innovative solutions that allow them to keep pace with lower core voltages, faster transient response needs and increasing thermal issues that they face in their designs. Our recently introduced Novum NDM2 modules, with a full suite of digital features, specifically address these growing system complexities through intelligent power management. The NDM2 series is the first to be designed by the company as part of the Ericsson cooperation announced in July 2011. The agreement formalizes a plan between the two companies to offer a multisource digital POL platform based on the Ericsson BMR46X series, with future plans to co-develop modules outside the existing range of 10~50A. We have also developed a middle ground product to ease the customer base into the benefits of digital in power. We developed a "smart module" that allows for the benefits of digital in the design cycle but when installed functions like a highly optimized analog unit. Solus ® Topology License with California Power Research The company entered into an exclusive Field of Use Agreement with California Power Research to license their BPS-5 topology, now marketed as the Solus Topology. This topology provides industry leading efficiencies and densities in power design. The topology is broadly applicable to both DC-DC and AC-DC products. This will allow for the company to have a long roadmap of industry leading products to service its broad customer base. In addition, its first target is the Intermediate Bus Architecture (IBA) where the Digital POL modules are used. Solus ® Power Topology Through the Solus Topology, we have a proprietary patented power topology for designing unique power circuits. This topology allows for higher efficiencies, densities, response time, and price competitiveness that is otherwise unavailable. Our initial product designed using this topology is in the quarter brick dc-dc converter market. Solus is an entirely new topology, rich in features that accelerate the performance trend trajectories for the bigfour power conversion needs in the telecom and server markets: greater efficiency; higher power density; reduced EMI (electro-magnetic interference); and faster transient response four times as fast. We have introduced the NQB2060 Novum® one quarter brick bus converter as a prime example of the benchmark 720 watts output power performance using the Solus Topology. Since the Solus Topology maintains its effectiveness independent of the control method used, it can operate with analog voltage mode control, analog current mode control, and various digital control profiles. We believe that unique feature opens the door for the company to implement this topology in a wide variety of power supply product platforms. We also believe that this topology will allow for at least a decade of new product designs and introductions. 26 As the large scale networking and telecommunications companies convert to digital power, our early entry into the market, our unique Solus Topology, and our relationship with Ericsson should enhance our ability to penetrate this (according to the Darnell Group) multi-billion dollar market. Components AMT® Encoder The company has an exclusive agreement to develop, sell and distribute the AMT encoder worldwide. The AMT series modular encoder is designed with proprietary, capacitive, code-generating technology as opposed to optical or magnetic encoding. This unique device allows breakthroughs in selectable resolution, shaft-adaptation and convenient mounting solutions to bring ease of installation, reduction in SKU's and economies of scale in purchasing. The AMT amounts to almost 2000 different encoders in one package. The company is selling and distributing the AMT through various customers. Moreover, the product is being marketed by multiple DC motor manufacturers. The AMT has been awarded several design wins from Motion Control OEM's producing a wide range of products from cash machines to robotics. ISO 9001:2008 Certification CUI, Inc. is certified to the ISO 9001:2008 Quality Management Systems standards and guidelines. CUI is registered as conforming to the requirements of standard: ISO 9001:2008, The Quality Management System is applicable to Design, Development and Distribution of electro- mechanical components for OEM manufacturing. ISO 9001 is accepted worldwide as the inclusive international standard that defines quality. The certification of compliance with ISO 9001:2008 recognizes that our policies, practices and procedures ensure consistent quality in the design services, technology and products we provide our customers. Orbital Gas Systems, Ltd. - Subsidiary Effective April 1, 2013, CUI Global closed on a share purchase agreement to acquire 100% of the equity interest in Orbital Gas Systems Limited, a company organized under the laws of England and Wales ("Orbital"), from Orbital's sole shareholder. The Orbital acquisition provided CUI Global with immediate credibility and platform in the natural gas industry. Orbital is the largest natural gas systems integrator in the U.K. By acquiring Orbital, we acquired a company that has operated successfully in the natural gas industry for over 25 years. In addition, Orbital is a leading provider of natural gas infrastructure and high-tech solutions to National Grid, the national gas transmission company in the U.K. and one of the most respected transmission companies in the world. Orbital has developed its 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. 27 On July 19, 2013, our wholly-owned subsidiary, Orbital Gas Systems, Ltd., acquired exclusive worldwide rights to manufacture, sell, design, and otherwise market the VE-Probe and VE-Technology from its United Kingdom-based inventor, EnDet Ltd. The agreement gives Orbital exclusive and sole control of all technology related to its revolutionary GasPT2 and GasPTi natural gas metering systems. By combining the GasPT2 technology with the equally unique VEProbe, which is able to provide a gas sample from a high pressure transmission line in less than two seconds, Orbital has created the GasPTi metering system. The GasPTi system is able to accurately provide almost real-time data to the natural gas operator in a total cycle-time of less than five seconds. GasPT2 Through an exclusive licensing contract with GL Industrial Services UK, Ltd. (GL), formerly British-based Advantica, Ltd., CUI Global owns exclusive rights to manufacture, sell and distribute a Gas Quality Inferential Measurement Device (GasPT2) designed by GL on a worldwide basis, now marketed as the GasPT2. The natural gas inferential metering device, the GasPT2, is a low cost solution to measuring natural gas quality. It can be connected to a natural gas system to provide a fast, accurate, close to real time measurement of the physical properties, such as thermal conductivity, speed of sound and carbon dioxide content. From these measurements it infers an effective gas mixture comprising four components: methane, propane, nitrogen, and measured carbon dioxide and then uses ISO6976 to calculate the gas quality characteristics of calorific value (CV), Wobbe index (WI), relative density (RD), and compression factor (Z). An ISO, International Organization for Standardization, is a documented agreement containing technical specifications or other precise criteria to be used consistently as rules, guidelines or definitions of characteristics to ensure that materials, products, processes and services are fit for their purpose. This new and innovative technology has been certified for use in fiscal monitoring by Ofgem in the United Kingdom, the Polish Oil & Gas Company Department of Testing and Calibration in Warsaw, NOVA Chemical/TransCanada in Canada, the Pipeline Research Counsel International (PRCI) in the US and SNAM RETE in Italy. At present, there is no equivalent product competition. There are instruments like gas chromatographs ("GC"), but they are slow, complicated to use and as much as five times the price of the GasPT2. By way of example, in the case of SNAM RETE, the Italian gas transmission company, there are 13 natural gas injection points for the SNAM RETE system. Those injection points will continue to use GC's for monitoring. On the other hand, there are 1,500 customer access points, servicing 7,500 customers. Those would include city gates, large industrial users, power generation plants and others. All of those customer access ports would be applicable for the GasPT2 Technology. In addition, there are currently 50,000 gas-fired turbines in operation worldwide. Each of those turbines is subject to variances in natural gas quality. Depending on the quality of the gas, by using our GasPTi Technology, those very expensive machines can be tuned to run more efficiently and therefore longer with much cleaner emissions. Currently, because of the delay in information from the GC's, such tuning cannot be effectively accomplished. It is this greater efficiency that has lead National Grid in the UK to change its entire turbine control strategy, recently cancelling an order for several GC's and, in October 2013, replacing those GC's with an order for eight (8) GasPTi devices specifically designed for natural gas-fired turbine control. 28 In conjunction with the Orbital acquisition, we have moved the entire GasPT2 technology portfolio, along with the VE-Probe, into Orbital's product division, Orbital Global Solutions. Orbital-GS has successfully introduced the combined GasPT2 unit and VE-Probe to National Grid, the largest natural gas provider in the UK. In January 2012 the company entered into a five (5) year, exclusive distribution agreement for our GasPT2 technology with an Italian company, SOCRATE s.p.a. for sales, marketing, distribution and service of our GasPT2 gas metering device for Italy and North Africa, including Libya and Tunisia. SOCRATE is the "vendor-of-choice" for SNAM RETE GAS ("SRG") and was referred to the company by SRG. SOCRATE continues to be involved in negotiations with SRG relative to both the 2010 Technical Upgrade of Metering Facilities and 2011/2012 New Capacity and Implementation Plan. In conjunction with those two initiatives, SOCRATE has recently ordered a demonstration unit and several field test units for installation on the SRG transmission system. Following the acquisition of Orbital and the transfer of gas operations to Orbital-GS, the company has entered into a series of Distribution Agreements with internationally recognized entities in the natural gas industry, including, but not limited, Ives Equipment Corporation in the US and Benchmark Engineering in Canada. These agreements are designed to supplement and enhance our previously announced and continuing agreements with BWG/Blue Flame and SOCRATE. Intellectual Property The Company relies on various intellectual property laws and contractual restrictions to protect its proprietary rights in products, logos and services. These include confidentiality, invention assignment and nondisclosure agreements with employees, contractors, suppliers and strategic partners. The confidentiality and nondisclosure agreements with employees, contractors and suppliers are in perpetuity or for a sufficient length of time so as to not threaten exposure of proprietary information. CUI Global continues to file and protect its intellectual property rights, trademarks and products through filings with the US Patent and Trademark Office and, as applicable, internationally. The company also ensures, through specific provisions and agreements, that all licensed technology is fully patent-protected in the US and internationally by the Licensor, where applicable. The Company estimates the patent applications it has filed will have a future beneficial value to the Company; thus, it capitalizes the costs associated with filing for its patents. At the time the patent is issued, the patent costs associated with the patent are amortized over the useful life of the patent. If the patent is not issued, at that time the costs will be expensed. A change in the estimate of the patent having a future beneficial value to the Company will impact the other assets and expense accounts of the Company. 29 Results of Operations Revenue During the six months ended June 30, 2014 and 2013, revenue was $36,114,102 and $28,210,451, respectively. The revenue for the six months ended June 30, 2014 is comprised of $23,776,369 from CUI products, $11,708,901 from Orbital gas products, $607,711 from CUI Japan products and $21,121 from freight. The revenue for the six months ended June 30, 2013 is comprised of $21,568,231 from CUI products, $5,957,085 from the gas segment operations, including Orbital, $665,529 from CUI Japan products and $19,606 for freight. During the three months ended June 30, 2014 and 2013, revenue was $19,214,193 and $18,151,091, respectively. The revenue for the three months ended June 30, 2014 is comprised of $13,245,985 from CUI products, $5,639,299 from Orbital gas products, $317,576 from CUI Japan products and $11,333 from freight. The revenue for the three months ended June 30, 2013 is comprised of $12,166,785 from CUI products, $5,561,085 from gas segment operations, including Orbital, $410,729 from CUI Japan products and $12,492 for freight. The increase in revenues during the six months ended June 30, 2014 is mainly attributable to the acquisition of Orbital Gas Systems Limited in April 2013 and the related first three months revenues from Orbital during 2014 accounts for $5,673,602 of the gas segment revenues increase during the six months ended June 30, 2014. In addition, increases through CUI and CUI Japan products of $2,150,320 are the result of continued product introductions during 2013 and through the second quarter of 2014, sales and marketing efforts, continued growth in the sales through the distribution channel customers, and the increased back log of orders on hand at December 31, 2013. The increase in revenues during the three months ended June 30, 2014 is primarily attributable to increases through CUI and CUI Japan products of $984,888 which are the result of continued product introductions during 2013 and through the second quarter of 2014, sales and marketing efforts, continued growth in the sales through the distribution channel customers, and the increased back log of orders on hand at December 31, 2013. Additionally, the gas segment operations contributed $5,639,299 during the second quarter of 2014, an increase of $78,214 as compared to the prior year. The customer orders related to the Power and Electro-Mechanical segment (CUI, Inc. and CUI Japan) are associated with the existing product offering, continued new product introductions, continued sales and marketing programs, new customer engagements, the addition of Future Electronics as a distributor of CUI products in early 2013, and the strengthening within the electronic components industry. The subsidiary, CUI, Inc., held a backlog of customer orders of approximately $14.0 million as of June 30, 2014. At June 30, 2014, Orbital Gas Systems Limited held a backlog of customer orders of approximately $23.7 million. Cost of revenues For the six months ended June 30, 2014 and 2013, the cost of revenues was $21,412,512 and $17,263,366, respectively. For the three months ended June 30, 2014 and 2013, the cost of revenues was $11,506,825 and $11,148,154, respectively. The cost of revenues as a percentage of revenue for the six months ended June 30, 2014 decreased to 59% from 61% during the prior year comparative period. For the three months ended June 30, 2014, the cost of revenues as a percentage of revenue decreased to 60% from 61% in the prior year period. This percentage will vary based upon the product mix sold during the period, the mix of natural gas systems sold during the period, and is also dependent upon the competitive markets in which the Company competes as well as foreign exchange rates. 30 The cost of revenues as a percentage of revenue for the Power and Electro-Mechanical segment for the three and six months ended June 30, 2014 was 61% and 60%, respectively. The cost of revenues as a percentage of revenue for the Gas segment for the three and six months ended June 30, 2014 was 58%. Selling, General and Administrative Expenses Selling, General and Administrative (SG&A) expenses include such items as wages, commissions, consulting, general office expenses, business promotion expenses and costs of being a public company, including legal and accounting fees, insurance and investor relations. For the six months ended June 30, 2014 compared to the same period in 2013, SG&A expenses increased $3,458,429. The increase during the six months ended June 30, 2014 is primarily associated with the addition of the SG&A activities of Orbital Gas Systems Limited which was acquired in April 2013 and accounted for approximately $2.0 million of additional expenses during the first quarter of 2014 as compared to the prior year as well as increases associated with the ongoing activities to reach new customers, promote new product lines including Novum, Solus, GasPT, IRIS and VE-Probe, new product introductions, as well as the overall growth in expenses in relation to the revenue growth. As a percentage of total revenue, SG&A increased during the six month period ended June 30, 2014 to 35% from 33% during the prior year comparable period. The increase of $1,205,350 during the three months ended June 30, 2014 is primarily associated with the ongoing activities to reach new customers, promote new product lines, new product introductions, as well as the overall growth in expenses in relation to the revenue growth during the quarter. As a percentage of total revenue, SG&A increased during the three month period ended June 30, 2014 to 34% from 29% during the prior year comparable period. The SG&A associated with Orbital includes, among other things, the continued sales efforts and related costs for the GasPT2 products and other gas systems sold through Orbital. Additional factors impacting the three and six month increases are the ongoing activities to support the revenue growth through the Power and Electro-Mechanical segment, which generated increased revenues during the six month period of approximately $2.2 million and $1.0 during the three month period ended June 30, 2014. Depreciation and Amortization The depreciation and amortization expenses are associated with the depreciated buildings, furniture, equipment, vehicles, software and other intangible assets over the estimated useful lives of the related assets. During the six months ended June 30, 2014 and 2013, the total depreciation and amortization expenses were $2,256,051 and $1,194,402, respectively. The total depreciation and amortization expenses for the six months ended June 30, 2014 and 2013 include $126,883 and $130,395, respectively, which are included in cost of revenues. The large increase in the depreciation and amortization expense between periods is primarily the result of the first quarter 2014 amortization expense of $785,099 associated with the identifiable intangible assets that were acquired with Orbital Gas Systems Limited during the second quarter of 2013, as well as the depreciation of ongoing operating assets and the headquarters building acquired during the fourth quarter of 2013. 31 During the three months ended June 30, 2014 and 2013, the total depreciation and amortization expenses were $1,137,608 and $983,266, respectively. The total depreciation and amortization for the three months ended June 30, 2014 and 2013 include $61,453 and $62,788, respectively, which are included in cost of revenues. The increase during the three months comparable period is primarily associated with the depreciation of ongoing operating assets, including additions such as the headquarters building acquired during the fourth quarter of 2013. Research and Development The research and development costs are related to the development of technology and products. Research and development costs were $598,617 and $443,465 for the six months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014 and 2013, the Company recorded an expense of $328,765 and $198,775, respectively. Research and development costs are associated with the continued research and development of new and existing technologies including the Novum digital power modules, Solus advanced power topology, GasPT2, and other products. Other Income Other income for the six months ended June 30, 2014 consisted primarily of $71,355 of gain on foreign exchange, $68,345 of interest income, and $12,000 rental income. Other income for the six months ended June 30, 2013 consisted primarily of $64,515 of gain on foreign exchange, $39,888 of interest income, and $12,000 of rental income. Other income for the three months ended June 30, 2014 consisted primarily of $28,852 of gain on foreign exchange, $35,035 of interest income, and $6,000 rental income. Other income for the three months ended June 30, 2013 consisted of $18,865 of gain on foreign exchange, $31,192 of interest income, and $6,000 of rental income. Investment Income The Company recognized earnings of $42,110 on equity investment in affiliate for the six months ended June 30, 2014 as compared to a loss of $4,126 during the same period in 2013. For the three months ended June 30, 2014 the Company recognized earnings of $26,740 on equity investment in affiliate as compared to a loss of $6,229 during the same period in 2013. Amortization of debt offering costs The Company recorded an amortization of debt offering costs expense of $0 and $36,666 for the six months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014, the Company recorded an expense of $0 and $18,333, respectively, for the amortization of debt offering costs. The capitalized debt offering costs for which the 2013 expense related was fully amortized during 2013. Interest Expense The Company incurred interest expense of $253,274 and $201,453 for the six months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014 and 2013, the Company incurred interest expense of $127,783 and $86,979, respectively. 32 The 2014 expense is associated with interest on bank and secured promissory notes payable. The 2013 expense is associated with interest on the bank operating line of credit, bank loans, and secured and unsecured promissory notes. The increase in both the three and six month periods is primarily due to the mortgage note payable and related interest swap agreement associated with the purchase of the CUI headquarters facility in the fourth quarter of 2013 as well as the reduction associated with the $2,000,000 principal payment on the note payable to International Electronic Devices during 2013 and the repayment of the borrowing on the line of credit during 2013. Provision (benefit) for taxes The Company is subject to taxation in the U.S., various state and foreign jurisdictions. We continue to record a full valuation allowance against our U.S. net deferred tax assets as it is not more likely than not that we 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 to be more likely than not. A net benefit of $331,250 was recorded to the income tax provision for the three month period ended June 30, 2014 resulting in an effective tax rate of 83.29% for the period. The increase in the income tax benefit for the quarter relates primarily to a change in the estimated net loss forecasted for our foreign operations. This amount is partially offset by domestic state minimum taxes as all of our other USA tax benefits are reduced by a full valuation allowance. Our total income tax expense and effective tax rate were $49,287 and 10.13%, respectively, for the same period in 2013. A net benefit of $359,538 was recorded to the income tax provision for the six month period ending June 30, 2014 resulting in an effective tax rate of 39.34% for the period. The income tax benefit relates primarily to our foreign operations where the benefit can be realized, but is partially offset by domestic state minimum taxes as all of our other USA tax benefits are reduced by a full valuation allowance. Our total income tax expense and effective tax rate were $59,276 and 172.23%, respectively, for the same period in 2013. Liquidity and Capital Resources General As of June 30, 2014, CUI Global held Cash and cash equivalents of $15,182,145 and investments of $11,955,454. Operations, acquisitions, investments, patents, equipment, land and buildings have been funded through cash on hand, and cash from operations. Cash Provided by Operations Operating requirements generated positive cash flow from operations of $48,683 during the six months June 30, 2014, versus positive cash flow from operations of $0.6 million for the same period 2013. The change in cash from operations is primarily the result of the increases in assets from operating activities offset by the net income earned before non-cash expenses. Significant factors that impacted the cash used in operations include increased receivables of approximately $2.0 million associated primarily with the timing of deliveries and related sales terms. Additionally, the cash flow from operations was impacted by an approximately $0.4 million increase in prepaid expenses associated largely with prepaid insurance premiums and consulting services fees. At the same time, costs in excess of billings decreased approximately $0.6 million associated with the progress on the related projects. Accounts payable increased approximately $0.5 million primarily due to the timing of goods receipts and the related terms. Accrued expenses increased $0.1 million primarily due to the decrease in accrued inventory payable which is a function of the timing of delivery schedules to meet customer order requirements. Accrued compensation increased $0.1 million due to the timing of payroll related liability payment requirements, and employee compensation accruals including commissions and performance bonuses accrued. Accrued taxes increased $0.1 million primarily in relation to value-added tax payables. Unearned revenue increased $0.4 million and billings in excess of costs decreased $1.2 million during the period, these are associated with several customer prepayments and deferred revenues including certain power and electro-mechanical product sales through distribution. 33 During the first six months of 2014 and 2013, the Company used stock and options as a form of payment to certain vendors, consultants and employees. For the six months ended June 30, 2014 and 2013, respectively, the Company recorded a total of $526,692 and $295,541 for compensation and services expense including amortization of deferred compensation related to equity given, or to be given, to employees and consultants for services provided. The increase in 2014 as compared to 2013 is attributable to increases in stock compensation expense for stock issued to consultants for strategic consulting services regarding the testing and demonstration of the GasPT2 technology and an increase in options related expenses for options granted to employees and directors that expense over their associated vesting life. As the Company focuses on technology development and product line additions during 2014, it will continue to fund research and development together with related sales and marketing efforts for its various product offerings with cash on hand and cash flows from continuing operations. Capital Expenditures and Investments During the second quarters of 2014 and 2013, CUI Global invested $483,262 and $442,086, respectively, in fixed assets. These investments typically include additions to equipment and software for engineering and research and development, tooling for manufacturing, furniture, regular computer equipment and software upgrades for office personnel and other fixed assets as needed for operations. The Company anticipates further investment in fixed assets during 2014 in support of its on-going business and continued development of product lines and technologies. The Company invested a net $1,118,794 in short term investments classified as held to maturity during the six months period ended June 30, 2014. These investments included money market securities, certificates of deposit, commercial paper and corporate notes. There were no funds invested in short term investments classified as held to maturity during the period ended June 30, 2013. Investments made by the Company are subject to an investment policy which limits our risk of loss exposure by setting appropriate strategic consulting services regarding the testing and demonstration of the GasPT2 technology credit quality requirements for investments held, limiting maturities to be 1 year or less, and also setting appropriate concentration levels to prevent concentrations. This includes a requirement that no more than 3% of the portfolio, or $500,000, whichever is greater, may be invested in one particular issue. Financing Activities During the quarter ended June 30, 2014, the Company made payments of $70,719 toward capital lease obligations and $38,082 toward the mortgage note payable. During the same period in 2013, the Company received net proceeds after related expenses of $45,135,280 from the registered offering sale of 9,660,000 shares of common stock at $5.00 per share, and made payments of $459,448 against the line of credit, and $3,736 was paid against capital lease obligations. 34 CUI Global may raise additional capital needed to fund the further development and marketing of its products as well as payment of its debt obligations. Financing activities - related party activity During the six months ended June 30, 2014 and 2013, $132,592 and $190,271, respectively, of interest payments were made in relation to the promissory notes issued to related party, IED, Inc. Also during the first six months ended June 30, 2013, payments of $2,000,000 were made against the related party note payable. Recap of Liquidity and Capital Resources During the three months ended June 30, 2014, the Company continued to maintain its financial strength. This included the improved net loss from the prior year when excluding the significant amortization expense of approximately $1.6 million associated with intangible assets acquired as part of the April 2013 Orbital acquisition. The Wells Fargo mortgage promissory note has a balance at June 30, 2014 of $3,642,974 due, of which $78,764 is the current portion. As of the date of this filing, the Company is compliant with all covenants on the promissory note with Wells Fargo Bank. Additionally, at June 30, 2014, the Company had a $0 balance on its $4,000,000 two year revolving Line of Credit (LOC) with Wells Fargo Bank. As of the date of this filing, the Company is compliant with all covenants on the line of credit with Wells Fargo Bank. At June 30, 2014, the Company had cash and cash equivalents balances of $15,182,145 and short term investments held to maturity of $11,955,454. At June 30, 2014, the Company had $2,889,954 of cash and cash equivalents balances at domestic financial institutions which were covered under the FDIC insured deposits programs and $144,738 at foreign financial institutions covered under the United Kingdom Financial Services Compensation (FSC). At June 30, 2014 the Company held $243,854 in Japanese bank accounts and $6,000,498 in European bank accounts. At June 30 2014, CUI Global had $11,955,454 of short-term investments classified as held-to-maturity, which are reported at amortized cost, which approximates market. At June 30, 2014, the Company had $8,860,000 of investments in certificates of deposit which were covered under FDIC insured limits and covered under $500,000 of SIPC insured programs for investments. At June 30, 2014, the Company has capital lease obligations of $157,923, of which $64,279 are current obligations. The Company believes its operations and existing financing structure, including cash and cash equivalents and short-term investments will provide sufficient cash to meet its short-term working capital requirements for the next twelve months. 35 Critical Accounting Policies Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements. While all these significant accounting policies impact its financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our results of operations, financial position or liquidity for the periods presented in this report. Recent Accounting Pronouncements In March 2013, the FASB issued Accounting Standards Update 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 provides updated guidance to clarify a parent company's accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance is effective for periods beginning after December 15, 2013, and is to be applied prospectively to derecognition events occurring after the effective date. This ASU had no impact on the Company's condensed consolidated financial statements or financial statement disclosures. In July 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Credit Carryforward Exists." ASU No 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carry forward exists. The amendments in this update are effective for fiscal years and interim reporting periods beginning after December 15, 2013. The adoption of this provision had no impact on the Company's financial condition or results of operations. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017. 36 Off-Balance Sheet Arrangements As of June 30, 2014, the Company had no off-balance sheet arrangements. |