REVENUE FROM CONTRACTS WITH CUSTOMERS

January 1, 2018,

we adopted ASC Topic

606

and the related amendments ("ASC

606"

) using the modified retrospective method applied to those contracts which were

not

completed as of

December 31, 2017.

Results for operating periods beginning after

January 1, 2018

are presented under ASC

606,

while comparative information has

not

been restated and continues to be reported in accordance with the accounting standards in effect for those periods. See Note

for a description of our accounting policy resulting from adoption of ASC

606.

We recognized the cumulative effect of initially applying ASC

606

as an adjustment to accumulated deficit in the balance sheet as of

January 1, 2018

as follows:

	Balance at December 31, 2017			Adjustments Due to ASC 606			Balance at January 1, 2018
(in thousands)
Assets
Inventories	$	13,892		$	(1,064	)	$	12,828
Contract assets		2,299			(516	)		1,783
Total current assets		41,276			(1,580	)		39,696
Total assets		87,909			(1,580	)		86,329

Liabilities
Contract liabilities		8,829			(4,168	)		4,661
Refund liabilities		695			870			1,565
Total current liabilities		18,914			(3,298	)		15,616
Deferred tax liabilities		2,414			(173	)		2,241
Total liabilities		30,423			(3,471	)		26,952

Stockholders' Equity
Accumulated deficit		(108,559	)		1,891			(106,668	)
Total stockholders' equity		57,486			1,891			59,377
Total liabilities and stockholders' equity	$	87,909		$	(1,580	)	$	86,329

The impact of adoption on our condensed consolidated balance sheet and condensed consolidated statement of operations as of and for the period ended

March 31, 2018

was as follows:

	For the period ended March 31, 2018
(in thousands)	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher / (Lower)
Statement of Operations
Total revenues	$	21,966		$	21,704		$	262
Cost of revenues		15,389			15,746			(357	)
Gross profit		6,577			5,958			619
Loss from operations		(3,779	)		(4,398	)		619
Loss before taxes		(3,563	)		(4,182	)		619
Income tax benefit		(302	)		(391	)		89
Net loss	$	(3,261	)	$	(3,791	)		530
Basic and diluted loss per common share	$	(0.11	)	$	(0.13	)	$	0.02

	As of March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher / (Lower)
(in thousands)
Assets
Inventories	$	11,906		$	12,548		$	(642	)
Contract assets		1,196			1,570			(374	)
Prepaid expenses and other		1,691			1,780			(89	)
Total current assets		36,423			37,528			(1,105	)
Total assets	$	83,925		$	85,030		$	(1,105	)

Liabilities
Contract liabilities	$	5,168		$	9,621		$	(4,453	)
Refund liabilities		1,951			819			1,132
Total current liabilities		16,154			19,475			(3,321	)
Deferred tax liabilities		1,999			2,178			(179	)
Total liabilities		27,150			30,650			(3,500	)

Stockholders' Equity
Accumulated deficit		(109,929	)		(112,350	)		2,421
Accumulated other comprehensive loss		(3,071	)		(3,045	)		(26	)
Total stockholders' equity		56,775			54,380			2,395
Total liabilities and stockholders' equity	$	83,925		$	85,030		$	(1,105	)

The adoption of ASC

606

had

impact on the Company’s cash flows from operations.

Power and Electromechanical segment

The Power and Electromechanical segment generates its revenue from

two

categories of products:

power solutions

- including external and embedded ac-dc power supplies, dc-dc converters and basic digital point of load modules and offering a technology architecture that addresses power and related accessories; and

components

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

Energy segment

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

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

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

The timing of revenue recognition for Energy products also depends on the payment terms of the contract, as our performance does

not

create an asset with an alternative use to us. For those contracts which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do

not

have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer.

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

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

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

Product-type contracts (for example, sale of GasPt units) for which revenue does

not

qualify to be recognized over time are recognized at a point in time. Revenues from warranty and maintenance activities are recognized ratably over the term of the warranty and maintenance period.

Accounts Receivable, Contract Assets and Contract Liabilities

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

The timing of revenue recognition

may

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

not

include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Condensed Consolidated Balance Sheets.

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

first

three

months of

2018,

$0.9

million of revenue was recorded that was included in contract liabilities at

December 31, 2017.

Refund liabilities and corresponding inventory adjustment

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

Performance Obligations

Remaining Performance Obligations

Remaining performance obligations, represents the transaction price of firm orders for which work has

not

been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of

March 31, 2018,

the Company's remaining performance obligations are generally expected to be filled within the next

months.

Any quarterly adjustments to net revenues, cost of revenues, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments

may

result from positive program performance, and

may

result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations. Likewise, these adjustments

may

result in a decrease in operating income if we determine we will

not

be successful in mitigating these risks. Changes in estimates of net revenues, cost of revenues and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in

one

or more of these estimates could affect the profitability of

one

or more of our performance obligations. For separately priced extended warranty or product maintenance performance obligations, when estimates of total costs to be incurred on the performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

Performance Obligations satisfied over time

To determine the proper revenue recognition method for contracts for our Energy segment, we evaluate whether a single contract should be accounted for as more than

one

performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as

one

performance obligation. Less commonly, however, we

may

promise to provide distinct goods or services within a contract in which case we separate the contract into more than

one

performance obligation. If a contract is separated into more than

one

performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

Performance Obligations satisfied at a point in time.

Revenue from goods and services transferred to customers at a single point in time accounted for

82%

of revenues for the

three

-month period ended

March 31, 2018.

The majority of our revenue recognized at a point in time is in our Power and Electromechanical segment. Revenue on these contracts is recognized when the product is shipped and the customer takes ownership of the product. Determination of ownership and control transfer is determined by shipping terms delineated on the customer purchase orders.

Variable Consideration

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

The following table presents our revenues disaggregated by revenue source for the

three

months ended

March 31, 2018:

(in thousands)	Power and Electromechanical		Energy		Total

Distributor sales	$	9,617	$	—	$	9,617
Direct Sales		7,403		4,946		12,349
Total revenues	$	17,020	$	4,946	$	21,966

The following table presents our revenues disaggregated by timing of revenue recognition for the

three

months ended

March 31, 2018:

(in thousands)	Power and Electromechanical		Energy		Total

Revenues recognized at point in time	$	17,020	$	1,047	$	18,067
Revenues recognized over time		—		3,899		3,899
Total revenues	$	17,020	$	4,946	$	21,966

The following table presents our revenues disaggregated by region for the

three

months ended

March 31, 2018:

(in thousands)	Power and Electromechanical		Energy		Total

North America	$	13,032	$	1,365	$	14,397
Europe		1,094		3,524		4,618
Asia		2,819		29		2,848
Other		75		28		103
Total revenues	$	17,020	$	4,946	$	21,966