Note 3 - Investments and Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Text Block]

INVESTMENTS AND FAIR VALUE MEASUREMENTS

The Company’s fair value hierarchy for its cash equivalents, marketable securities and derivative instruments as of

December

31,

2018

and

December

31,

2017,

respectively, was as follows:

(In thousands)
December 31, 2018	Level 1		Level 2		Level 3		Total
Money market securities	$	16	$	—	$	—	$	16
Certificate of deposit - restricted cash		523		—		—		523
Certificate of deposit - restricted investment (1)		400		—		—		400
Convertible notes receivable		—		—		655		655
Total assets	$	939	$	—	$	655	$	1,594

December 31, 2017	Level 1		Level 2		Level 3		Total
Money market securities	$	16	$	—	$	—	$	16
Total assets	$	16	$	—	$	—	$	16
Derivative instrument payable	$	—	$	356	$	—	$	356
Contingent consideration		—		—		45		45
Total liabilities	$	—	$	356	$	45	$	401

(

) Investment is a

-month certificate of deposit classified as available for sale and included in Deposits and other assets on the balance sheet.

Fair Value Measurements

Using Significant Unobservable Inputs (Level

- recurring basis)

(In thousands)	Contingent			Convertible Notes
	Consideration			Receivable
Balance at December 31, 2017	$	45		$	—
Payments		(45	)		—
Investments		—			655
Fair value adjustments		—			—
Balance at December 31, 2018	$	—		$	655

There were

transfers between Level

and Level

2018

as determined at the end of the reporting period. The convertible notes receivable balance is with Virtual Power Systems ("VPS"). The convertible notes receivable are considered a restricted security. The fair value measurement of a restricted security includes consideration of whether the restriction would be factored in by market participants in pricing the asset. The fair value of a restricted security could be based on the quoted price for an otherwise identical unrestricted security of the same issuer that trades in a public market, adjusted to reflect the effect of the restriction. The adjustment would reflect the amount market participants would demand because of the risk relating to the inability to access a public market for the security for the specified period. The Company concluded based on the history of VPS having raised substantial funds under its bridge loan/purchase agreement prior to and subsequent to CUI’s investments, that the value of the notes have neither increased significantly or decreased significantly. While VPS continues to grow and continues to develop and sell its products, it is reasonable to conclude that the value of VPS is increasing. However, since VPS continues to sell restricted convertible notes, it is also a consideration that the value per note has been diluted somewhat as well. We have concluded that any dilution has been offset by the increased value of VPS. This is evidenced by the fact that VPS continues to be able to market and sell its restricted securities at the same terms as CUI had participated previously in. Since there are

not

unrestricted securities with similar terms to the restricted ones that CUI has invested in, we have concluded, that the fair value of CUI’s convertible notes receivable with VPS remain the face value of the initial investments of

$500,000

and

$155,000

plus the accrued interest earned through

December 31, 2018.

The contingent consideration liability was associated with the acquisition of Tectrol in

March 2015

and represented the present value of the expected future contingent payments based on revenue projections of select Tectrol legacy products. The inputs used to measure the convertible notes receivable and the contingent consideration are classified as Level

within the valuation hierarchy. These valuations are

not

supported by market criteria.

The Company's valuation of the contingent consideration reflected the Company’s internal revenue forecasts. Since the valuation was

not

supported by market criteria, the valuation was completely dependent on unobservable inputs. During quarterly updates of the valuation, the calculation of the value was based on actual and reasonably estimated future revenues. The contingent consideration was fully satisfied in

2018.

The fair values of the reporting units subject to the Company’s quantitative impairment analysis were determined utilizing a blend of a market and an income approach to determine the estimated fair values of the reporting units, as discussed in Note

The fair value measurements and models were classified as non-recurring Level

measurements.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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