ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

ACCOUNTING POLICIES

2. ACCOUNTING POLICIES

Restatement

The Company is restating its condensed consolidated financial statements for the three and nine months ended September 30, 2013 to correct errors related to the acquisition accounting for the April 1, 2013 acquisition of our wholly owned subsidiary, Orbital Gas Systems, Ltd. (Orbital), the Company has determined that a deferred tax liability related to identifiable intangibles and an associated increase in goodwill were not recognized on Orbital's date of acquisition. The reversal of the deferred tax liability is recognized as an offset to the related current tax expense recognized on amortization of the identifiable intangibles. The Company’s decision to restate the aforementioned condensed consolidated financial statements was made as a result of the determination that a deferred tax  liability should have been recorded at the date of the business combination when Orbital was acquired. The September 30, 2013 condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of comprehensive gain and loss, condensed consolidated statements of cash flows and notes to condensed consolidated financial statements have been restated to correct this error.

The Company’s condensed consolidated financial statements have been restated as follows:

Condensed Consolidated Balance Sheets

	As of September 30, 2013 (unaudited)
	As Previously Reported		Adjustments		As Restated
Goodwill, net	$	18,413,545	$	3,843,345	$	22,256,890
Total assets		92,054,774		3,843,345		95,898,119
Accrued tax payable		570,699		(45,613)		525,086
Deferred tax liability		-		3,194,628		3,194,628
Total liabilities		20,488,262		3,149,015		23,637,277
Accumulated deficit		(76,124,821)		665,426		(75,459,395)
Accumulated other comprehnsive income (loss)		1,186,546		28,904		1,215,450

Condensed Consolidated Statements of Operations

	For the three months ended September 30, 2013 (unaudited)
	As Previously Reported		Adjustments		As Restated
Provision (benefit) for taxes	$	116,332	$	(522,971)	$	(406,639)
Net income		214,315		522,971		737,286

	For the nine months ended September 30, 2013 (unaudited)
	As Previously Reported		Adjustments		As Restated
Provision (benefit) for taxes	$	318,063	$	(665,426)	$	(347,363)
Net income allocable to common stockholders		47,001		665,426		712,427

Condensed Consolidated Statements of Comprehensive Gain and Loss

	For the three months ended September 30, 2013 (unaudited)
	As Previously Reported		Adjustments		As Restated
Net income	$	214,315	$	522,971	$	737,286
Foreign currency translation adjustment		1,283,993		30,277		1,314,270
Comprehensive Income		1,498,308		553,248		2,051,556

	For the nine months ended September 30, 2013 (unaudited)
	As Previously Reported		Adjustments		As Restated
Net income	$	47,001	$	665,426	$	712,427
Foreign currency translation adjustment		1,210,882		28,904		1,239,786
Comprehensive Income		1,257,883		694,330		1,952,213

The effect on cash flow was to adjust net income for deferred income taxes with no effect on previously reported cash used in or provided by operating, investing or financing activities.

 

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 in 2013 and 2012 include estimates used to review the Company’s long-lived assets for impairment, allowances for uncollectible accounts receivable, inventory valuation, estimates of costs to complete and earnings on uncompleted contracts, valuation of non-cash capital stock issuances, valuation for unearned revenue, and the valuation allowance on deferred tax assets and realization of deferred tax liabilities.

Principles of Consolidation

These interim unaudited condensed consolidated financial statements include the accounts of CUI Global, Inc., its wholly owned subsidiaries CUI, Inc., CUI Japan, as well as Orbital Gas Systems Limited (included since April 1, 2013), hereafter referred to as the “Company”. Significant intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S., and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

· Level 1 – Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the reporting date.

· Level 2 – Pricing inputs are quoted for similar assets, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes assets or liabilities valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

· Level 3 – Pricing inputs are unobservable for the assets or liabilities; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

Cash

Cash includes deposits at financial institutions with maturities of three months or less. The Company at times has cash in banks in excess of FDIC insurance limits or in interest bearing accounts, which may or may not be covered by FDIC insurance, and places its temporary cash investments with high credit quality financial institutions. CUI Global considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds, certificates of deposit and commercial paper. At September 30, 2013, the Company had $3,139,400 of cash balances at domestic financial institutions which were covered under the FDIC and other insured deposits programs and $137,156 at foreign financial institutions covered under the United Kingdom Financial Services Compensation (FSC).

Investments

The Company considers all investments with original maturities over 90 days that mature in less than one year from the balance sheet date to be short-term investments. Both short- and long-term investments primarily include money market funds, certificates of deposit, corporate notes, and commercial paper. At September 30, 2013, CUI Global had $10,882,682 of short-term investments classified as held-to-maturity, which are reported at amortized cost, which approximates market. At September 30, 2013, the Company had $9,750,000 of investments in certificates of deposit which were covered under FDIC insured limits.

Accounts Receivable

CUI Global subsidiaries CUI, Inc. and CUI Japan grant credit to customers, with standard terms of Net 30 days and our subsidiary Orbital Gas Systems Limited grants credit to its customers, with standard terms of Net EOM 50 days (due within 50 days of the end of the month invoiced). Other credit terms are available based upon a review of the customer’s financial strength. The Company routinely assesses the financial strength of its customers and, therefore, believes that its accounts receivable credit risk exposure is limited. In addition, the Company maintains a foreign credit receivables insurance policy for CUI, Inc. customers that covers many of its foreign receivable balances in an effort to further reduce credit risk exposure. Included in the accounts receivable balance as of September 30, 2013 is $0 of balances billed but not paid by a customer under retainage provisions.

Inventory

Inventory consists of finished and un-finished products. At September 30, 2013, the Company had finished goods of $5,615,234, raw materials of $788,067, work in process of $339,754 and an allowance of $624,110.

Land, Buildings, Furniture, Vehicles, Equipment and Software

Land is recorded at cost and includes expenditures made to ready it for use. Land is considered to have an infinite useful life.

Buildings are recorded at cost and are depreciated over their estimated useful lives.

Furniture, vehicles, equipment and software are recorded at cost and include major expenditures, which increase productivity or substantially increase useful lives.

Maintenance, repairs and minor replacements are charged to expenses when incurred. When furniture, vehicles and equipment are sold or otherwise disposed of, the asset and related accumulated depreciation are removed from this account, and any gain or loss is included in the statement of operations.

The cost of furniture, equipment and software is depreciated over the estimated useful lives of the related assets.

Depreciation is computed using the straight-line method for financial reporting purposes. The estimated useful lives and accumulated depreciation for land, buildings, furniture, equipment and software are as follows:

	Estimated Useful Life
Land	Infinite
Buildings	39 years
Furniture and equipment	3 to 10 years
Vehicles	3 to 5 years
Software	3 to 5 years

GOODWILL (restated) AND OTHER INTANGIBLE ASSETS

Goodwill (restated)

The Company records goodwill associated with its acquisitions of businesses when the consideration paid exceeds the fair value of the net tangible and identifiable intangible assets acquired. Goodwill balances are evaluated for potential impairment on an annual basis. The current guidance allows an entity to assess qualitatively whether it is necessary to perform step one of a prescribed two-step annual goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the two-step goodwill impairment test is not required. The Company performed a qualitative assessment of goodwill at May 31, 2013, and determined that the two-step process was not necessary. The Company's goodwill balance at September 30, 2013 was $22,256,890, of which $12,907,157 related to CUI, Inc., $138,530 related to CUI Japan, and $9,211,203 related to Orbital Gas Systems Limited as a result of the April acquisition. The Company's goodwill balance at December 31, 2012 was $13,046,358, all of which related to CUI, Inc. and CUI Japan.

Other Intangible Assets

The following table provides the components of identifiable intangible assets:

						Identifiable						Identifiable
	*	September 30, 2013				Intangible		December 31, 2012				Intangible
	Estimated	Gross				Assets, less		Gross				Assets, less
	Useful	Carrying		Accumulated		Accumulated		Carrying		Accumulated		Accumulated
	Life	Amount		Amortization		Amortization		Amount		Amortization		Amortization
Finite-lived intangible assets
Order backlog - Orbital	2	$	3,595,101	$	(898,777)	$	2,696,324	$	-	$	-	$	-
Tradename - Orbital	10		1,933,093		(96,653)		1,836,440		-		-		-
Tradename - V-Infinity	5		1,095,400		(273,850)		821,550		1,095,400		(109,540)		985,860
Customer list - Orbital	10		7,516,149		(375,809)		7,140,340		-		-		-
Technology rights	20**		707,063		(105,683)		601,380		303,664		(77,779)		225,885
Technology-Based Asset-      Know How - Orbital	12		3,044,863		(126,869)		2,917,994		-		-		-
Technology -Based Asset -      Software - Orbital	10		659,962		(32,997)		626,965		-		-		-
Debt offering costs			-		-		-		220,000		(177,222)		42,778
Other intangible assets			156,970		(67,502)		89,468		154,470		(49,106)		105,364
			18,708,601		(1,978,140)		16,730,461		1,773,534		(413,647)		1,359,887
Indefinite-lived intangible assets
Tradename - CUI			4,892,856		-		4,892,856		4,892,856		-		4,892,856
Customer list - CUI			1,857,000		-		1,857,000		1,857,000		-		1,857,000
Patents Pending			551,559		-		551,559		551,559		-		551,559
			7,301,415		-		7,301,415		7,301,415		-		7,301,415
Identifiable intangible assets		$	26,010,016	$	(1,978,140)	$	24,031,876	$	9,074,949	$	(413,647)	$	8,661,302

* All intangibles are reviewed annually for impairment, or sooner if circumstances change.

** Technology rights are amortized over a twenty year life or the term of the rights agreement. These technology rights are related to agreements at Orbital and CUI Inc. of $403,400 and $303,663, respectively.

The amortization expense for the nine months ended September 30, 2013 and 2012 amounted to $1,676,731 and $83,651, respectively. Amortization expense for the three months ended September 30, 2013 and 2012 amounted to $810,328 and $65,286, respectively.

Investment in Affiliate

Through the acquisition of CUI, Inc. the Company obtained 352,589 common shares representing an 8.62% and 11.54% interest at September 30, 2013 and 2012, respectively, in Test Products International, Inc., hereafter referred to as TPI. TPI is a provider of handheld test and measurement equipment. The Company enjoys a close association with this affiliate through common Board of Director membership and participation that allows for a significant amount of influence over affiliate business decisions. Accordingly, for financial statement purposes, the Company accounts for its investment in this affiliated entity under the equity method.

A summary of the unaudited financial statements of the affiliate as of September 30, 2013 is as follows:

Current assets	$	6,626,832
Non-current assets		316,972
Total Assets	$	6,943,804
Current liabilities	$	2,926,039
Non-current liabilities		738,773
Stockholders' equity		3,278,992
Total Liabilities and Stockholders' Equity	$	6,943,804
Revenues	$	10,420,861
Operating income		810,594
Net profit		60,979
Other comprehensive profit (loss):
Foreign currency translation adjustment		33,668
Comprehensive net profit		94,647
Company share of Net Profit 11.54% thru June 30, 2013, 8.62% thereafter		4,212
Equity investment in affiliate	$	262,456

Asset Impairment

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In performing the review for recoverability, the future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized as the excess of the carrying amount over the fair value. Otherwise, an impairment loss is not recognized. Management estimates the fair value and the estimated future cash flows expected. Any changes in these estimates could impact whether there was impairment and the amount of the impairment.

Patent Costs

The Company estimates the patents it has filed have a future beneficial value; therefore it capitalizes the costs associated with filing for its patents. At the time the patent is approved, the patent costs associated with the patent are amortized over the useful life of the patent. If the patent is not approved, at that time the costs will be expensed. A change in the estimate of the patent having a future beneficial value will impact the other assets and expense accounts.

Revenue Recognition

The recognition of revenue requires judgment, including whether a sale includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. Customers receive certain elements of CUI Global products over a period of time. These elements include licensing rights to manufacture and sell our proprietary patent protected products. The ability to identify VSOE for those elements and the fair value of the respective elements could materially impact the amount of earned and unearned revenue. CUI Global does not have any history as to the costs expected to be incurred in granting licensing rights relating to its products. Therefore, revenues may be recorded that are not in proportion to the costs expected to be incurred in performing these services.

Revenues in connection with product related sales are recognized at the time the product is shipped to the customer.

VSOE sales also exist for CUI Japan related to the development of product for specific customers. The ability to identify VSOE for those elements and the fair value of the respective elements could materially impact the amount of earned and unearned revenue. VSOE sales are invoiced according to the related sales agreements.

Orbital Gas Systems Limited revenues and related costs on production type contracts, are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined. Contract costs plus recognized profits are accumulated as deferred assets, and billings and/or cash received are recorded to a deferred revenue liability account. The net of these two accounts for any individual project is presented as "Costs in excess of billings," an asset account, or "Billings in excess of costs," a liability account.

Production type contracts that do not qualify for use of the percentage of completion method are accounted for using the “completed contract method” of accounting in accordance with ASC 605-35-25-57. Under this method, contract costs are accumulated as deferred assets, and billings and/or cash received is recorded to a deferred revenue liability account, during the periods of construction, but no revenues, costs, or profits are recognized in operations until the period within which completion of the contract occurs. A contract is considered complete when all costs except insignificant items have been incurred; the equipment is operating according to specifications and has been accepted by the customer.

Shipping and Handling Costs

Amounts billed to customers in sales transactions related to shipping and handling represent revenues earned for the goods provided and are included in sales. Costs of shipping and handling are included in cost of revenues.

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for an equity award based on the grant-date fair value of the award. All grants under our stock-based compensation programs are accounted for at fair value and that cost is recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).

Compensation expense for options granted to non-employees is determined in accordance with the standard as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for awards granted to non-employees is re-measured each period.

Determining the appropriate fair value of the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based payment and stock price volatility. The Company uses the Black-Scholes option-pricing model to value its stock option awards which incorporate the Company’s stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life.

Foreign Currency Translation

The financial statements of the Company's foreign offices have been translated into U.S. dollars in accordance with FASB ASC 830, “Foreign Currency Matters” (FASB ASC 830). All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using an appropriately weighted average exchange rate for the period. The translation gains and losses resulting from the changes in exchange rates during 2013 and 2012 have been reported in accumulated other comprehensive income, except for gains and losses resulting from the translation of intercompany receivables and payables, which are included in earnings for the period.

Segment Reporting

For the three and nine months ended September 30, 2012, the Company operated in one operating segment based on the activities of the company in accordance with the ASC 280-10. Operating segments are defined 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 10-Q filing for the three and nine months ended September 30, 2012 presented five operating segments based on the products offered, which included: External Power, Internal Power, Industrial Controls, Discontinued Operations and Other. Management determined that presenting these as a consolidated segment is the best presentation as the business activities of CUI Global at September 30, 2012 were not organized on the basis of differences related to products, services or geography. The Company’s chief operating decision maker looked at the operations as a whole when making operating decisions and allocating resources for the period ended September 30, 2012.

Following the acquisition of Orbital Gas Systems Limited in April 2013, management has identified three operating segments based on the activities of the company in accordance with the ASC 280-10. The three segments are Power and Electro-Mechanical, Gas and Other. The Power and Electro-Mechanical segment is focused on the operations of CUI, Inc. and CUI Japan for the sale of internal and external power supplies and related components, industrial controls and test and measurement devices. The Gas segment is focused on the operations of Orbital Gas Systems Limited which includes gas related test and measurement systems, including the GasPT2. The Other segment represents the remaining activities that do not meet the threshold for segment reporting and are combined.

The following information represents segment activity for the nine months ended September 30, 2013:

	Power and Electro- Mechanical		Gas		Other		Totals
			(restated)				(restated)
Revenues from external customers	$	33,425,562	$	11,998,646	$	-	$	45,424,208
Income (loss) from operations	$	3,019,601	$	173,327	$	(2,630,043)	$	562,885
Other significant non-cash items:
Segment assets	$	35,271,498	$	42,265,766	$	18,360,855	$	95,898,119
Intangible assets	$	8,406,156	$	15,613,439	$	12,281	$	24,031,876
Goodwill, net	$	13,045,687	$	9,211,203	$	-	$	22,256,890
Expenditures for segment assets	$	549,865	$	692,927	$	-	$	1,242,792

The following information represents segment activity for the three months ended September 30, 2013:

	Power and Electro- Mechanical		Gas		Other		Totals
			(restated)				(restated)
Revenues from external customers	$	11,172,196	$	6,041,561	$	-	$	17,213,757
Income (loss) from operations	$	1,238,935	$	(81,844)	$	(763,479)	$	393,612
Other significant non-cash items:
Segment assets	$	35,271,498	$	42,265,766	$	18,360,855	$	95,898,119
Intangible assets	$	8,406,156	$	15,613,439	$	12,281	$	24,031,876
Goodwill, net	$	13,045,687	$	9,211,203	$	-	$	22,256,890
Expenditures for segment assets	$	139,400	$	658,806	$	-	$	798,206

Reclassification

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC, did not, or are not believed by management, to have a material impact on the Company’s present or future financial statements.