CUI GLOBAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) General
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate," or "continue" or use of
negative or other variations or comparable terminology.
CUI Global cautions that these forward-looking statements are further qualified
by important factors that could cause actual results to differ materially, are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements.
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.
During the three months ended March 31, 2012, CUI Global had a loss from
operations of $903,783. During the three months ended March 31, 2012, CUI Global
had a consolidated net loss of $1,071,762, with a net loss attributable to CUI
Global of $1,071,762. The net loss is primarily the result of the decrease in
revenues and related gross profits, an increase in sales, general and
administrative expenses incurred in relation to the equity raises completed
during the first three months of the year and increased sales efforts and
related costs for the Vergence GasPT2 product which required significant travel
and some continuing development and costs associated with safety certification
of the device prior to sale and installation, as well as stock compensation
expenses for issuances to officers and employees as bonuses for achieving
corporate goals and stock issued to consultants related to investor relations
activities during the quarter ended March 31, 2012.
CUI, Inc. - Subsidiary
CUI, Inc., is a Tualatin, Oregon based provider 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 a 11.54% interest) 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
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, Vergence GASPT2 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 defines its product into three categories: components including connectors,
speakers, buzzers and control solutions including encoders and sensors; power
solutions known as V-Infinity; and test and measurement including the Vergence
GasPT2. These offerings provide a technology architecture that addresses power
and related accessories as well as test and measurement capabilities to
industries ranging from consumer electronics to defense and alternative energy.
Our current power line, V-Infinity, 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.
Novum™ Advanced Power
CUI entered into a non-exclusive Field of Use Agreement with Power-One, Inc.
(Nasdaq: PWER) 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 CUI's new line of digital point of load power
modules. CUI, through its power division, manufactures a range of embedded and
external power electronics devices for OEM manufacturers.
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,
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. The agreement formalizes a plan between the two
companies to offer a multi-source 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™ Power Topology
CUI entered into an exclusive Field of Use Agreement with California Power
Research to license their BPS-5 topology, now marketed as the Solus
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
big-four 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. That unique feature opens the door for the
company to implement this topology in a wide variety of power supply product
platforms. We believe that this topology will allow for at least a decade of new
product designs and introductions.
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.
AMT ™ Encoder
Through a licensing agreement, 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.
Vergence ™ 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
Vergence TM GasPT2.
The Vergence 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 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
double 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 7,500 customer access points in the system. Those would
include city gates, large industrial users, power generation plants and
others. All of those customer access ports would be applicable for the Vergence
Technology. In the case of ENAGAS in Spain that ratio is 6 injection points and
over 300 access points.
In addition to these numbers, there are currently 8,000 gas turbines in
operation worldwide. Each of those turbines are subject to variances in natural
gas quality. Depending on the quality of the gas, 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. Operators attempt to deal with the
delay by placing the monitoring station miles away from the turbine or creating
large holding tanks to maintain the gas until an analysis can be completed. The
use of the Vergence Technology, will enable those operators to place the GasPT2
units right next to the turbines and by interfacing them with the machine's
process control software, the tuning can be accomplished on almost a real-time
basis; thus, allowing the turbines to run longer, more efficiently, and cleaner.
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.
CUI Japan and the discontinued operations of Comex Electronics -Subsidiaries
In July 2009, CUI Global acquired, as a wholly owned subsidiary, Comex
Instruments, Ltd., now known as CUI Japan and 49% of Comex Electronics Ltd. Both
companies are Japanese based providers of electronic components. Effective July
1, 2011, CUI Global entered into an agreement to convey its 49% ownership
interest in Comex Electronics to the owners of the remaining 51% who are the
original founders and were the original owners of Comex Instruments, for
$617,975 in the form of a five year note receivable bearing interest at 4% per
annum. The operations of CUI Japan are not affected by this divestment. As such,
the operations of Comex Electronics are reported as discontinued operations for
the current and comparable periods. CUI Global will continue to maintain its
100% ownership of CUI Japan.
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.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2012 are $4,424,474. Operations and
investments in patents and equipment have been funded through cash from
operations, proceeds from equity financings and borrowings from financial
institutions during the three month period.
Cash provided by (used in) operations
Operating requirements generated a positive cash flow from continuing operations
of $364,663 for the three months ended March 31, 2012, versus positive cash flow
from continuing operations of $834,802 for the same period last year. The change
in cash provided by operations is primarily the result of the decrease in
revenues and related gross profits, decrease in trade accounts receivable, a
decrease in inventory, a decrease in prepaid expenses and other current assets,
decreased deposits and other assets, increase in accounts payable, decrease in
accrued expenses, a increase in accrued compensation and an increase in unearned
revenue during the three months ended March 31, 2012.
During the first three months of 2012 and 2011 common stock and stock options
have been used as a form of payment to certain consultants, note holders,
employees and directors. For the first three months of 2012 and 2011, a total of
$367,884 and $89,177, respectively, was recorded for compensation and services
expense including amortization of deferred compensation related to equity given,
or to be given, to employees, directors and consultants for services provided.
During the three months ended March 31, 2012 the Company had no cash flow from
discontinued operations as compared to a negative cash flow in the prior year
comparative period of $77,565.
As the Company focuses on technology development and product line additions
during 2012, it will continue to fund research and development together with
related sales and marketing efforts for its various product offerings with cash
flows from continuing operations.
Capital Expenditures and Investments
During the first three months of 2012 and 2011, there was $148,037 and $99,974
invested in property and equipment, respectively.
During the three months ended March 31, 2012 and 2011 the Company had no cash
flow provided by or used in discontinued investing activities.
During the first three months of 2012, the Company received proceeds of
$12,605,515 from the sales of common stock and exercise of warrants, $1,528,900
of payments were made against the demand notes payable, $4,000,000 of payments
were made against notes and loans payable, $3,000,000 of payments were made
against related party notes and loans payable, and $35,000 of payments were made
against convertible notes payable, related party. During the first three months
of 2011, $530,829 of payments were made against the demand notes payable,
$270,537 of proceeds were received from notes and loans payable, and $359,565 of
payments were made against notes and loans payable, related party. CUI Global
may raise the capital needed to fund the further development and marketing of
its products as well as payment of its debt obligations.
During the three months ended March 31, 2012, there was no cash flow related to
discontinued financing activities. During the three months ended March 31, 2011,
there was $352,894 used in discontinued financing activities.
Recap of liquidity and capital resources
During the first three months of 2012, the Company continued to improve its
financial strength which included raising $12,605,515 from the sales of common
stock and exercise of warrants as well as significant reductions of debt
principal. As of March 31, 2012 the Company had an accumulated deficit of
The Company may seek to raise additional capital for the commercialization and
further development of its product and technology offerings as well as to
further reduce debt. The Company believes its operations and existing financing
structure will provide sufficient cash to meet its short-term working capital
requirements for the next twelve months. As the Company continues to expand and
develop its technology and product lines as well as retire debt, additional
funding sources may be required. The Company will attempt to raise these funds
through borrowing instruments or issuing additional equity.
At March 31, 2012, the Company maintained a $4,000,000 revolving working capital
line of credit with the Business Credit division of Wells Fargo Capital Finance,
part of Wells Fargo Bank, National Association (NYSE: WFC), interest payable
monthly at the Daily Three Month LIBOR plus 3.75% (4.220% at March 31, 2012).
Effective April 3, 2012, the Wells Fargo LOC expiration was extended to July 31,
2015 and the interest rate reduced to the Daily Three Month LIBOR plus 3.25%. As
of the date of this filing, the Company is compliant with all covenants on the
line of credit with Wells Fargo Capital Finance. At March 31, 2012, there was no
balance outstanding on the line of credit.
The Company expects the revenues from CUI, Inc. and CUI Japan to help cover
operating and other expenses for the next twelve months of operations. If
revenues and the funds raised in early 2012 through the sales of equity are not
sufficient to cover all operating and other expenses, additional funding may be
required. There is no assurance the Company will be able to raise such
additional capital. The failure to raise capital or generate product sales in
the expected time frame will have a material adverse effect on the Company.
Results of Operations
During the three months ended March 31, 2012 and 2011, revenue was $8,469,763
and $9,540,551, respectively. The revenue for the three months ended March 31,
2012 is comprised of $8,202,047 from CUI products, $261,759 from CUI Japan
products, and $5,957 for freight. The revenue for the three months ended March
31, 2011 is comprised of $9,488,125 from CUI products, $33,468 from CUI Japan
products, and $18,958 for freight.
The decrease in revenues during the three months ended March 31, 2012 is
primarily the result of a decrease in electronic components orders received
during the fourth quarter of 2011 which occurred in conjunction with an overall
slow down within the electronic components industry during that period. Although
sales revenues during the first quarter were less than the previous year, the
Company experienced an uptick in orders received during the first quarter and
held a backlog of customer orders of approximately $10.7 million as of March 31,
2012 as compared to a backlog of customer orders of approximately $10.1 million
as of March 31, 2011.
Cost of revenues
For the three months ended March 31, 2012 and 2011, the cost of revenue was
$5,185,179 and $5,865,663, respectively.
The cost of revenues as a percentage of revenue for the three months ended March
31, 2012 decreased slightly to 61.22% from 61.48% during the prior year
comparative period. This percentage will vary based upon the product mix sold
during the period and is also dependent upon the competitive markets in which
the Company competes as well as foreign exchange rates.
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 three months ended March 31, 2012 compared to the same period in 2011,
SG&A expenses increased $684,516. The increase is primarily associated with
expenses incurred in relation to the equity raises completed during the first
three months of the year and increased sales efforts and related costs for the
Vergence GasPT2 product which required significant travel and some continuing
development and costs associated with safety certification of the device prior
to sale and installation, as well as stock compensation expenses for issuances
to officers and employees as bonuses for achieving corporate goals and stock
issued to consultants related to investor relations activities during the
quarter ended March 31, 2012. As a percentage of total revenue, SG&A expenses
increased 12.50% as compared to the first three months of 2011. Management
expects the SG&A expenses as a percentage of revenues to improve during the
remainder of 2012 as there were significant expenses in early 2012 associated
with the aforementioned items along with lower revenues during the first
Research and Development
The research and development costs are related to the development of technology
and products. Research and development costs were $178,189 and $184,481, for the
three months ended March 31, 2012 and 2011, respectively. The expense is
associated with continued research and development of new and existing
technologies including the Novum digital power modules, Solus advanced power
topology, Vergence GasPT2, and other products.
During the three month period ended March 31, 2012 the allowance for doubtful
receivables was reduced $10,000 and during the three months ended March 31, 2011
there was no bad debt expense.
Other income for the three months ended March 31, 2012, consisted of $16,599 of
gain on foreign exchange, $6,449 of interest income, $2,000 of rental income,
and $98 from the recovery of bad debts. Other income for the three months ended
March 31, 2011, consisted of $3,128 of interest income ($1,490 from a related
party), $2,484 recovery of bad debts, and $3 of miscellaneous income.
The Company recognized income of $20,577 on equity investment in affiliate for
the three months ended March 31, 2012. For the same period ended 2011, the
Company recognized income of $18,152 on equity investment in an affiliate.
Convertible debt and amortization of debt discount and debt offering costs
The Company recorded an expense of $18,333 and $191,220, for the three months
ended March 31, 2012 and 2011, respectively, for the amortization of debt
discount and debt offering costs. The decrease in expense in 2012 is related to
the reduction in the debt discount related to the 2009 and 2010 reductions of
debt and related debt discounts associated with the convertible note and note
payable used to fund the acquisition of CUI, Inc.
The interest expense of $187,198 and $230,144 for the three months ended March
31, 2012 and 2011 respectively is for interest on the bank operating line of
credit, bank loans, and secured and unsecured promissory notes. The decrease is
primarily due to the reduction of debt in 2011 and during the first three months
of 2012 through principal payments.
Profit (loss) from discontinued operations
During the three months ended March 31, 2012 there was no activity associated
with the discontinued operations of Comex Electronics which were divested
effective July 2011. During the three months ended March 31, 2011, there was a
profit from discontinued operations of $339,451 which included a gain on the
divestment of Comex Electronics during the three month period of $475,689.
Critical Accounting Policies and Estimates
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 if 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. Significant estimates
in 2012 and 2011 include estimates used to review the Company's long-lived
assets for impairment, allowance for doubtful accounts, inventory valuation,
valuations of non-cash capital stock issuances, valuations of derivatives and
the valuation allowance on deferred tax assets. We continue to monitor
significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 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 June, 2011, the FASB issued ASU No. 2011-05, which amends ASC Topic 220,
Comprehensive Income. Under the amendment, an entity has the option to present
the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of net income along
with total net income, each component of other comprehensive income along with a
total for other comprehensive income, and a total amount for comprehensive
income. This ASU eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders'
equity. The amendments in this ASU do not change the items that must be reported
in other comprehensive income or when an item of other comprehensive income must
be reclassified to net income. The amendments in this ASU should be applied
Additionally, the FASB issued a second amendment to ASC Topic 220 in December
2011, ASU No. 2011-12, which allows companies the ability to defer certain
aspects of ASU 2011-05. For public entities, these amendments are effective for
fiscal years, and interim periods within those years, beginning after December
15, 2011. The amendments do not require any transition disclosures.
On September 15, 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and
Other, which simplifies how an entity is required to test goodwill for
impairment. This ASU will allow an entity to first assess qualitative factors to
determine whether it is necessary to perform the two-step quantitative goodwill
impairment test. Under the ASU, an entity would not be required to calculate the
fair value of a reporting unit unless the entity determines, based on a
qualitative assessment, that it is more likely than not that its fair value is
less than its carrying amount. The ASU includes a number of factors to consider
in conducting the qualitative assessment. The ASU is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption is permitted.
Off-Balance Sheet Arrangements
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