SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on cost-to-cost type contracts, allowances for uncollectible accounts, inventory valuation, warranty reserves, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are

not

readily apparent from other sources. Actual results

may

differ from these estimates under different assumptions or conditions.

Company Conditions

The continued delays in shipment of GasPTs on a significant project due to governmental delays and the related slower than expected acceptance of this new disruptive technology has caused a delay in our expected profitability.

The Company had losses of

$17.3

million and cash used in operating activities of

$12.3

million during the year ended

December 31, 2018.

As of

December 31, 2018,

our accumulated deficit is

$124.0

million.

Management believes the Company's present cash flows will

not

enable it to meet its obligations for

twelve

months from the date these financial statements are available to be issued. However, management has developed a plan to address this issue. The plan included obtaining a new long-term financing in the form of a new line of credit, and utilizing the cash received from our recent sale/leaseback of our Tualatin headquarters. As part of this plan the Company has obtained a firm commitment from Bank of American for a

$10.0

million credit facility. The new line of credit is expected to close in

April

2019.

For more information on the Company's new line of credit, see Note

Subsequent Events. In addition, as of

December 31, 2018,

the Company has unused availability of

$2.0

million on its current line of credit and unused availability of

$0.6

million under its Overdraft Facility. However, our new credit facility will replace these facilities. Including our cash balance, we further have

$16.9

million of positive working capital primarily related to trade accounts receivable and our inventory less current liabilities that we will manage in the next

twelve

months to create positive cash flow. Considering the above factors and the new line of credit, management believes it is probable that management’s plans will be achieved and will enable the Company to meet its obligations for the

twelve

-month period from the date the financial statements are available to be issued.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of CUI Global, Inc. and its wholly owned subsidiaries CUI Inc., CUI Japan, CUI-Canada, CUI Properties, LLC, Orbital Gas Systems, Ltd. and Orbital Gas Systems, North America, Inc. 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

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

•

Level

– 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

includes assets or liabilities valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

•

Level

– 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.

The Company determines when a financial instrument transfers between levels based on management’s judgment of the significance of unobservable inputs used to calculate the fair value of the financial instrument.

Management believes the carrying amounts of the short-term financial instruments, including cash and cash equivalents, investment, note receivable, accounts receivable, contract assets, prepaid expense and other assets, accounts payable, accrued liabilities, contract liabilities, refund liabilities, and other liabilities reflected in the accompanying consolidated balance sheet approximate fair value at

December

31,

2018

and

2017

due to the relatively short-term nature of these instruments. Mortgage debt and related notes payable approximate fair value based on current market conditions. The Company measures its derivative liability on a recurring basis using significant observable inputs (Level

). The Company’s derivative liability is valued using a LIBOR swap curve. As of

December 31, 2018,

the mortgage debt and derivative liability were repaid and had

zero

balances.

Cash and Cash Equivalents

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 and places its temporary cash investments with high credit quality financial institutions. The Company considers all highly liquid marketable securities with maturities of

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

December

31,

2018

and

2017,

the Company had

$0.3

million and

$0.9

million, respectively, of cash and cash equivalents balances at domestic financial institutions that were covered under the FDIC insured deposits programs and

$68

thousand and

$0.2

million, respectively, at foreign financial institutions covered under the United Kingdom Financial Services Compensation (FSC) and the Canada Deposit Insurance Corporation (CDIC). At

December

31,

2018

and

2017,

the Company held

$0.3

million and

$0.1

million, respectively, in Japanese foreign bank accounts and

thousand and

$0.1

million, respectively, in European foreign bank accounts and

$67

thousand and

$0.1

million, respectively, in Canadian bank accounts. In addition to the Company's unrestricted cash and cash equivalents, the Company has

$523

thousand of long-term restricted cash on its balance sheet related to a contract guarantee. The restricted cash is classified as long term in nature because the contract guarantee extends to the end of

2021.

Restricted cash is combined with other cash and cash equivalents in reconciling the change in cash on the Company's Consolidated Statements of Cash Flows.

Investments and Notes Receivable

Test Products International, Inc. ("TPI") is a provider of handheld test and measurement equipment. Through the acquisition of CUI Inc., the Company obtained

352,589

common shares (representing an

8.94%

interest from

January 1

March 31, 2014

and

8.5%

thereafter). Through

September 30, 2015,

CUI Global enjoyed a close association with TPI through common related parties, IED, Inc. and James McKenzie as well as through participation that allowed for a significant amount of influence over TPI’s business decisions. Accordingly, through

September 30, 2015,

for financial statement purposes, the Company recognized its investment in TPI under the equity method. Following a determination of reduction in influence and control, the investment was recorded using the cost method.

During the

first

quarter of

2016,

the investment in TPI was exchanged for a note receivable from TPI of

$0.4

million, which was the carrying value of the investment, earning interest at

per annum, due

June 30, 2019.

The Company recorded interest income on the note of

$17

thousand,

$18

thousand and

$19

thousand for the years ended

December 31, 2018,

2017

and

2016,

respectively. The interest receivable has been settled on a quarterly basis via a non-cash offset against the finders-fee royalties earned by TPI on GasPT sales. Finders-fee royalties of

$10

thousand,

$16

thousand and

$37

thousand were earned by TPI in the years ended

December

31,

2018,

2017

and

2016,

respectively, and offset against the note receivable on a quarterly basis. Also, in

2018

and

2017,

the Company received

$19

thousand and

$39

thousand, respectively, in cash payments against the note. The balance on the note receivable at

December 31, 2018

and

2017

was

$318

thousand and

$330

thousand, respectively. CUI Global reviewed the note receivable for non-collectability as of

December

31,

2018

and concluded that

allowance was necessary.

During

2018,

the Company made

two

strategic investments in convertible notes receivable with Virtual Power Systems ("VPS") for a total of

$655

thousand. CUI Inc. is the exclusive

third

-party design and development provider of VPS's ICE (Intelligent Control of Energy) products. See Note

Investments and Fair Value Measurements for more information on these convertible notes.

Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable consist of the receivables associated with revenue derived from product sales including present amounts due to contracts accounted for under cost-to-cost method. An allowance for uncollectible accounts is recorded to allow for any amounts that

may

not

be recoverable, based on an analysis of prior collection experience, customer credit worthiness and current economic trends. Based on management’s review of accounts receivable, an allowance for doubtful accounts of

$0.2

million and

$0.1

million at

December

31,

2018

and

2017,

respectively, is considered adequate. The reserve in both periods considers aged receivables that management believes should be specifically reserved for as well as historic experience with bad debts to determine the total reserve appropriate for each period. Receivables are determined to be past due based on the payment terms of original invoices. The Company grants credit to its customers, with standard terms of Net

days. The Company routinely assesses the financial strength of its customers and, therefore, believes that its accounts receivable credit risk exposure is limited. Additionally, the Company maintains a foreign credit receivables insurance policy that covers many of the CUI Inc. foreign customer receivable balances in an effort to further reduce credit risk exposure.

Activity in the allowance for doubtful accounts for the years ended

December

31,

2018,

2017

and

2016

is as follows:

(In thousands)	For the Years ended December 31,
	2018			2017			2016
Allowance for doubtful accounts, beginning of year	$	135		$	151		$	90
Charge (credit) to costs and expenses		33			(13	)		93
Deductions		(1	)		(3	)		(32	)
Allowance for doubtful accounts, end of year	$	167		$	135		$	151

Inventories

Inventories consist of finished and unfinished products and are stated at the lower of cost or market through either the

first

-in,

first

-out (FIFO) method as a cost flow convention or through the moving average cost method.

December

31,

2018,

and

2017,

inventory is presented on the balance sheet net of reserves. The Company provides reserves for inventories estimated to be excess, obsolete or unmarketable. The Company’s estimation process for assessing the net realizable value is based upon its known backlog, projected future demand, historical usage and expected market conditions. Manufactured inventory includes material, labor and overhead. Inventory by category consists of:

(In thousands)	As of December 31,
	2018			2017
Finished goods	$	10,143		$	10,792
Raw materials		4,200			3,287
Work-in-process		1,194			759
Inventory reserves		(2,495	)		(946	)
Total inventories	$	13,042		$	13,892

Activity in inventory reserves is as follows:

(In thousands)	For the Years ended December 31,
	2018			2017		2016
Inventory reserves, beginning of year	$	946		$	774	$	483
Charge to costs and expenses		1,592			138		312
Other (deductions) additions		(43	)		34		(21	)
Inventory reserves, end of year	$	2,495		$	946	$	774

In the

fourth

quarter of

2018,

the Company recorded an additional inventory reserve of

$1.4

million related to slow-moving inventory in the Energy segment.

Land, Buildings, Improvements, Furniture, Vehicles, Equipment, and Leasehold Improvements

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

Buildings and improvements are recorded at cost.

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

Leasehold improvements are recorded at cost and are depreciated over the lesser of the lease term, estimated useful life, or

ten

years.

The cost of buildings, improvements, furniture, vehicles, and equipment 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 for buildings, improvements, furniture, vehicles, and equipment are as follows:

Maintenance, repairs and minor replacements are charged to expenses when incurred. When buildings, improvements, furniture, equipment and vehicles 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 or as a deferred gain liability on the balance sheets.

Long-Lived Assets

Long-lived assets including finite-lived intangible assets are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts

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 long-lived 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.

In the

fourth

quarter of

2018,

the Company determined that certain long-term prepaid assets classified on the balance sheet as deposits and other assets, which were reliant on future revenue within the Energy segment in order to be amortized to expense, did

not

have adequate forecasted revenue to justify the current valuation. This was primarily driven by the lack of substantial sales over the last

two

years within the Energy segment and uncertainty regarding the level of future sales. For that reason, the Company recorded a

$1.5

million impairment to deposits and other assets and reclassified

$0.1

million to prepaid assets. The amount reclassified to prepaid assets related to prepaid royalties associated with expected

2019

revenue.

2018,

the Company also performed an undiscounted cash flows impairment analysis as prescribed under ASC

360

Property, Plant and Equipment

on its long-lived fixed assets and its finite lived intangible assets at Orbital-UK due to an indication that the overall carrying value of the operating unit was

not

recoverable. Based upon that analysis,

impairment was identified for those assets.

impairments were recognized in

2017

2016.

Identifiable Intangible Assets

Intangible assets are stated at cost net of accumulated amortization and impairment. The fair value for intangible assets acquired through acquisitions is measured at the time of acquisition utilizing the following inputs, as needed:

1.	Inputs used to measure fair value are unadjusted quote prices available in active markets for the identical assets or liabilities if available.

Inputs used to measure fair value, other than quoted prices included in

are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets. This includes assets and liabilities valued using models or other pricing methodologies that do

not

require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full life of the asset.

3.	Inputs used to measure fair value are unobservable inputs supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

4.	Expert appraisal and fair value measurement as completed by third -party experts.

The following are the estimated useful life for the intangible assets:

	Estimated
	Useful
	Life (years)
Finite-lived intangible assets
Order backlog			2
Trade name - Orbital			10
Trade name - V-Infinity			5
Trade name - CUI-Canada			3
Customer list - Orbital			10
Customer list - CUI-Canada			7
Technology rights			20 (1)
Technology-Based Asset - Know How			12
Technology-Based Asset - Software			10
Technology-Based Asset - Power			7
Software		3	to	5 (2)
Patents	See endnote (3)
Other intangible assets	See endnote (4)

Indefinite-lived intangible assets
Trade name - CUI	See endnote (5)
Customer list - CUI	See endnote (5)
Patents pending technology	See endnote (5)

(

)

Technology rights are amortized over a

-year life or the term of the rights agreement.

(

)

Software assets are recorded at cost and include major expenditures, which increase productivity or substantially increase useful lives.

(

)

Patents are amortized over the life of the patent. Any patents

not

approved will be expensed at that time.

(

)

Other intangible assets are amortized over an appropriate useful life, as determined by management in relation to the other intangible asset characteristics.

(

)

Indefinite-lived intangible assets are reviewed annually for impairment and when circumstances suggest.

Indefinite-Lived Intangibles and Goodwill Assets

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC

805,

‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and

may

be adjusted, up to

one

year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

Annual Test.

The Company tests for impairment of indefinite-lived intangibles and Goodwill in the

second

quarter of each year and whenever events or circumstances indicate that the carrying amount of Goodwill exceeds its fair value and

may

not

be recoverable. The Company’s qualitative assessment for indefinite-lived assets at

May 31, 2018,

followed the guidance in ASC

350

18A

and

18B.

Under current accounting guidance, CUI Global is

not

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 guidance includes a number of factors to consider in conducting the qualitative assessment. The Company tests for goodwill impairment in the

second

quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and

may

not

be recoverable.

As detailed in ASC

350

3A,

in performing its testing for Goodwill as of

May 31, 2018,

management completed a qualitative analysis to determine whether it was more likely than

not

that the fair value of a reporting unit is less than its carrying amount, including Goodwill. To complete the qualitative review, management follows the steps in ASC

350

to evaluate the fair values of the Goodwill and considers all known events and circumstances that might trigger an impairment of Goodwill.

During our review of Goodwill as of

May 31, 2018,

the Company determined that there were indicators present to suggest that it was more likely than

not

that the fair value of the Orbital-UK reporting unit was less than its carrying amount.

The significant changes for the Orbital-UK reporting unit subsequent to the most recent impairment test performed as of

December 31, 2017

included a decline in the

2018

actual revenue, operating income and cash flows compared to prior forecasts for the same period and a negative change in the

2018

forecasted revenue, operating income and cash flows for the remainder of the year due in part to the longer than expected temporary halt in shipping of its GasPT product to a major customer in Italy and market uncertainty due to the continuing effects of Brexit.

To test the Orbital-UK reporting unit for impairment as of

May 31, 2018,

the Company used a quantitative test. The Company estimated the fair value of the Orbital-UK reporting unit using a blend of a market approach and an income approach, which was deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the income approach, the Company determined fair value based on estimated future cash flows of the Orbital-UK reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk of the Orbital-UK reporting unit and the rate of return an outside investor would expect to earn. The Company based its cash flow projections for the Orbital-UK reporting unit using a forecast of cash flows and a terminal value developed by capitalizing an assumed stabilized cash flow figure. The forecast and related assumptions were derived from an updated financial forecast prepared during the

second

quarter of

2018.

At that time, a key assumption related to the recoverability of the Orbital-UK reporting unit Goodwill was the resumption of delivery of GasPT product to

one

of our major customers and continued strengthening of our integration revenues. Under the market approach, appropriate valuation multiples were derived from the historical operating data of selected guideline companies. The valuation multiples were evaluated and adjusted based on the strengths and weaknesses of the Company relative to the selected guideline companies and the multiple was then applied to the appropriate operating data of the Company to arrive at an indication of fair market value. As a result of the analysis, the Company concluded that the carrying value of the Orbital-UK reporting unit exceeded its estimated fair value. The quantitative test for the Orbital-UK reporting unit resulted in an impairment for the Orbital-UK reporting unit, and the Company recorded a Goodwill impairment charge of

$1.3

million during the

second

quarter of

2018.

December 2018

Interim Test.

During the

fourth

quarter of

2018,

the Company determined there were indicators present to suggest that it was more likely than

not

that the fair value of the Orbital-UK reporting unit was less than its carrying amount. The significant changes for the Orbital-UK reporting unit subsequent to the annual goodwill impairment test performed as of

May 31, 2018

were driven by a slower recovery in the Energy segment than originally forecasted. Actual GasPT revenue continued to lag behind forecasted revenue as acceptance of the technology continued to be slower than anticipated and delays associated with existing customer contracts that have

not

yet resumed. This slower than expected recovery, led to lower

2018

Energy segment revenue, operating income and cash flows than originally forecasted.

To test the Orbital-UK reporting unit for impairment, the Company used a quantitative test similar to the

one

used at

May 31, 2018

with updated financial forecasts and assumptions based on the information available at

December 31, 2018.

As a result of the analysis, the Company concluded that the carrying value of the Orbital-UK reporting unit exceeded its estimated fair value. The quantitative test for the Orbital-UK reporting unit resulted in an impairment for the Orbital-UK reporting unit, and the Company recorded a goodwill impairment charge of

$3.1

million during the

fourth

quarter of

2018,

which was a write-off of the remaining Energy segment goodwill. In addition, the reporting units in the Power and Electromechanical segment were also tested for impairment due to the overall decrease in market capitalization experienced in

2018.

As of

December 31, 2018,

there was goodwill remaining for CUI Inc., CUI-Canada and CUI-Japan reporting units, which are included in the Power and Electromechanical segment.

December 2017

Interim Test.

During the

fourth

quarter of

2017,

the Company determined that there were indicators present to suggest that it was more likely than

not

May 31, 2017

included a decline in the

2017

actual revenue, operating income and cash flows compared to previously forecasted results and a decline in the

2018

forecasted revenue, operating income and cash flows due in part to the longer than expected temporary halt in shipping of its GasPT product to a major customer in Italy and market uncertainty due to the continuing effects of Brexit.

To test the Orbital-UK reporting unit for impairment, the Company used a quantitative test. The Company estimated the fair value of the Orbital-UK reporting unit using a blend of a market approach and an income approach, which was deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the income approach, the Company determined fair value based on estimated future cash flows of the Orbital-UK reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk of the Orbital-UK reporting unit and the rate of return an outside investor would expect to earn. The Company based its cash flow projections for the Orbital-UK reporting unit using a forecast of cash flows and a terminal value developed by capitalizing an assumed stabilized cash flow figure. The forecast and related assumptions were derived from an updated financial forecast prepared during the

fourth

quarter of

2017.

Under the market approach, appropriate valuation multiples were derived from the historical operating data of selected guideline companies. The valuation multiples were evaluated and adjusted based on the strengths and weaknesses of the Company relative to the selected guideline companies and the multiple was then applied to the appropriate operating data of the Company to arrive at an indication of fair market value. As a result of the analysis, the Company concluded that the carrying value of the Orbital-UK reporting unit exceeded its estimated fair value. The quantitative test for the Orbital-UK reporting unit resulted in an impairment for the Orbital-UK reporting unit, and the Company recorded a goodwill impairment charge of

$3.2

million during the

fourth

quarter of

2017.

2016

Annual Test.

2016,

the analysis, determined there was

impairment necessary to goodwill. Through these reviews, management concluded there were

events or circumstances that triggered an impairment (and there was

expectation that a reporting unit or a significant portion of a reporting unit would be sold or otherwise disposed of in the following year), therefore,

further analysis was necessary to prepare for goodwill impairment beyond the steps in

350

in accordance with current accounting guidance. On a periodic basis, we will also perform a quantitative analysis of goodwill impairment and in

2016,

in addition to the qualitative analysis, we performed a quantitative analysis of goodwill impairment and concluded

impairment of goodwill was required.

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.

Accrued expenses

Accrued expenses are liabilities that reflect expenses on the statement of operations that have

not

been paid or recorded in accounts payable at the end of the period. At

December

31,

2018

and

December

31,

2017,

accrued expenses of

$4.9

million and

$4.2

million, respectively, included

$1.7

million and

$1.9

million, respectively, of accrued compensation and

$1.7

million and

$1.3

million, respectively, of accrued inventory payable.

Derivative instruments

The Company uses various derivative instruments including forward currency contracts, and interest rate swaps to manage certain exposures. These instruments are entered into under the Company’s corporate risk management policy to minimize exposure and are

not

for speculative trading purposes. The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of derivatives are recognized in earnings. The Company has limited involvement with derivative instruments and does

not

trade them. From time to time, the Company

may

enter into foreign currency exchange contracts to minimize the risk associated with foreign currency exchange rate exposure from expected future cash flows. The Company had entered into

one

interest rate swap, which had a maturity date of

ten

years from the date of inception, and was used to minimize the interest rate risk on the variable rate mortgage. During the years ended

December

31,

2018,

2017

and

2016,

the Company had a non-cash gain and unrealized gains of

$129

thousand,

$111

thousand, and

$113

thousand, respectively, related to the derivative liabilities. During the year ended

December 31, 2018,

the Company paid

$227

thousand to close out the interest rate swap in conjunction with the repayment of the related variable rate mortgage.

Derivative Liabilities

The Company evaluates embedded conversion features pursuant to FASB Accounting Standards Codification

No.

815

(‘‘FASB ASC

815’’

), ‘‘Derivatives and Hedging,’’ which requires a periodic valuation of the fair value of derivative instruments and a corresponding recognition of liabilities associated with such derivatives.

Stock-Based Compensation

The Company records its stock-based compensation expense under its stock option plans and also issues stock for services. The Company accounts for stock-based compensation using FASB Accounting Standards Codification

No.

718

(‘‘FASB ASC

718’’

), ‘‘Compensation – Stock Compensation.’’ FASB ASC

718

requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related vesting period.

Stock bonuses issued to employees are recorded at fair value using the market price of the stock on the date of grant and expensed over the vesting period or immediately if fully vested on date of issuance. Employee stock options are recorded at fair value using the Black-Scholes option pricing model. The underlying assumptions used in the Black-Scholes option pricing model by the Company are taken from publicly available sources including: (

) volatility, which is calculated using historic stock price information from online finance websites such as Google Finance and Yahoo Finance; (

) the stock price on the date of grant is obtained from online finance websites such as those previously noted; (

) the appropriate discount rates are obtained from the United States Federal Reserve economic research and data website; and (

) other inputs are determined based on previous experience and related estimates. With regards to expected volatility, the Company utilizes an appropriate period for historical share prices for CUI Global that best reflect the expected volatility for determining the fair value of its stock options.

See Note

Stockholders' Equity for additional disclosure and discussion of the employee stock plan and activity.

Common stock, stock options and common stock warrants issued to other than employees or directors are also recorded on the basis of their fair value, as required by FASB ASC

505,

which is measured as of the date required by FASB ASC

505,

‘‘Equity – Based Payments to Non-Employees.’’ In accordance with FASB ASC

505,

the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying common stock on the ‘‘valuation date,’’ which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the performance completion date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed based off an estimate of the fair value of the stock award as valued under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.

Common stock issued to other than employees or directors subject to performance (performance based awards) require interpretation to include ASC

505

as to when the counterparty’s performance is complete based on delivery, or other relevant performance criteria in accordance with the relevant agreement. When performance is complete, the common stock is issued and the expense recorded on the basis of their value as required by FASB ASC

505

on the date the performance requirement is achieved.

Defined Contribution Plans

The Company has a

401

(k) retirement savings plan that allows employees to contribute to the plan after they have completed

days of service and are

years of age. The Company matches the employee's contribution up to

of total compensation. CUI Inc., Orbital Gas Systems, North America, Inc., and CUI Global made total employer contributions, net of forfeitures, of

$0.5

million,

$0.4

million, and

$0.4

million for

2018,

2017

and

2016,

respectively.

Orbital-UK operates a defined contribution retirement benefit plan for employees who have been employed with the company at least

months and who chose to enroll in the plan. Orbital-UK contributes to its plan the equivalent of

of the employee's salary and the employee has the option to contribute pre-tax earnings. Orbital-UK made total employer contributions of

$0.3

million,

$0.2

million and

$0.3

million during

2018,

2017,

and

2016,

respectively.

Revenue Recognition

January 1, 2018,

we adopted the new accounting standard ASC

606,

“Revenue from Contracts with Customers” and all the related amendments (“new revenue standard"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. This guidance includes the required steps to achieve the core principle that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new revenue standard was applied using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to accumulated deficit as of

January 1, 2018.

As a result of the adoption of this standard, certain changes have been made to the consolidated balance sheets. We expect the ongoing impact of the adoption of the new standard to primarily affect the timing of revenue recognition. The most significant impact was on Power and Electromechanical segment revenue with certain distribution customers that was previously recorded as “sell through." Under the new accounting guidance, we record the revenue upon sale to the distributor with an appropriate amount reserved for estimated returns and allowances as the Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. For the Power and Electromechanical segment, their revenue is based upon the transfer of goods and satisfaction of its performance obligations as of a point in time. During the transition this had the effect of having a certain amount of revenue

not

recorded as revenue but as part of the cumulative effect of the accounting change. For the majority of contracts in the Energy segment, revenue is still measured over time using the cost-to-cost method. The change that most affected the transition adjustment on Energy segment revenue was the requirement to limit revenue recognition on contracts without an enforceable right to payment for performance completed to date. Revenue on contracts without a specific enforceable right to payment on work performed to date was "clawed back" as part of the Company's transition adjustment. The cumulative effect adjustment recorded as of

January 1, 2018

was a net

$1.9

million decrease to accumulated deficit due to a

$2.8

million transition adjustment from the Power and Electromechanical segment partially offset by a $(

0.9

) million transition adjustment from the Energy segment, net of deferred tax.

As a result of the adoption of ASC

606,

the following items have been reclassified from the captions in the

December 31, 2017

consolidated balance sheet included in our Form

-K for the year ended

December 31, 2017

to the captions in the

December 31, 2017

consolidated balance sheet appearing herein:

Captions in December 31, 2017 consolidated balance sheet within Form 10 -K	Reclassified to	Captions in December 31, 2017 consolidated balance sheet herein

Costs in excess of billings		Contract assets
Billings in excess of costs		Contract liabilities
Unearned revenue		Contract liabilities
Unearned revenue		Refund liabilities

Changes in these accounts as reclassified are reflected on the consolidated statement of cash flows for the years ended

December 31, 2017

and

2016.

As mentioned above, on

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. 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:

(in thousands)	Balance at December 31, 2017			Adjustments Due to ASC 606			Balance at January 1, 2018

Balance Sheet
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 consolidated balance sheet and consolidated statement of operations as of and for the year ended

December 31, 2018

was as follows:

(In thousands, except per share amounts)	For the Year Ended December 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher / (Lower)
Statement of Operations
Total revenues	$	96,789		$	91,417		$	5,372
Cost of revenues		67,879			64,495			3,384
Gross profit		28,910			26,922			1,988
Loss from operations		(16,778	)		(18,766	)		1,988
Loss before taxes		(17,531	)		(19,519	)		1,988
Income tax (benefit) expense		(206	)		(462	)		256
Net loss	$	(17,325	)	$	(19,057	)	$	1,732
Basic and diluted loss per common share	$	(0.61	)	$	(0.67	)	$	0.06

(in thousands)	As of December 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher / (Lower)

Balance Sheet
Assets:
Inventories	$	13,042		$	17,578		$	(4,536	)
Contract assets		1,744			2,109			(365	)
Total current assets		35,481			40,382			(4,901	)
Total assets	$	70,167		$	75,068		$	(4,901	)

Liabilities:
Contract liabilities	$	2,226		$	12,203		$	(9,977	)
Refund liabilities		2,417			1,063			1,354
Total current liabilities		18,586			27,209			(8,623	)
Deferred tax liabilities		1,922			1,823			99
Total liabilities		28,629			37,153			(8,524	)

Stockholders' Equity:
Accumulated deficit		(123,993	)		(127,616	)		3,623
Total stockholders' equity		41,538			37,915			3,623
Total liabilities and stockholders' equity	$	70,167		$	75,068		$	(4,901	)

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 supply solutions

- including external and embedded ac-dc power supplies, dc-dc converters, basic digital point of load modules, ICE (Intelligent Control of Energy) products enabled by the VPS patented software system 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, among others. 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 Gas Systems (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, petrochemical, emissions, manufacturing and automotive industries, among others.

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 service 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 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.

Activity in the current contract liabilities for the year ended

December 31, 2018

was as follows:

(In thousands)
Current contract liabilities - January 1, 2018	$	4,661
Long-term contract liabilities - January 1, 2018 (1)		84
Total contract liabilities - January 1, 2018	$	4,745

Total contract liabilities - January 1, 2018	$	4,745
Contract additions, net		2,168
Revenue recognized		(4,356	)
Translation		(202	)
Total contract liabilities - December 31, 2018	$	2,355

Current contract liabilities - December 31, 2018	$	2,226
Long-term contract liabilities - December 31, 2018 (1)		129
Total contract liabilities - December 31, 2018	$	2,355

(

)

Long-term contract liabilities are included in Other long-term liabilities on the Consolidated Balance Sheets.

Refund Liabilities and Corresponding Inventory Adjustment

Refund liabilities primarily represent estimated future new product introduction returns and estimated future scrap returns. Estimated future returns and allowances are reserved based on historical return rates. 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

December 31, 2018,

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

months.

Any 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 on a cumulative catch-up basis in the period they become known, 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

84%

of revenues for the year ended

December 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 introduction returns and scrap return 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. These amounts 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 year ended

December 31, 2018:

(In thousands)	Power and Electromechanical		Energy		Total

Distributor sales	$	43,795	$	—	$	43,795
Direct Sales		32,652		20,342		52,994
Total revenues	$	76,447	$	20,342	$	96,789

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

December 31, 2018:

(In thousands)	Power and Electromechanical		Energy		Total

Revenues recognized at point in time	$	76,447	$	4,391	$	80,838
Revenues recognized over time		—		15,951		15,951
Total revenues	$	76,447	$	20,342	$	96,789

The following table presents our revenues disaggregated by region for the year ended

December 31, 2018:

(In thousands)	Power and Electromechanical		Energy		Total

North America	$	58,006	$	4,311	$	62,317
Europe		4,195		15,620		19,815
Asia		13,727		205		13,932
Other		519		206		725
Total revenues	$	76,447	$	20,342	$	96,789

Revenue Recognition -

2017

and

2016

As discussed above, ASC

606

was adopted on a modified retrospective basis and accordingly the

2017

and

2016

financial statements were

not

restated for ASC

606.

For

2017

and

2016,

revenue was recognized as follows.

Power and Electromechanical segment

Product revenue was recognized in the period when persuasive evidence of an arrangement with a customer existed, the products were shipped and title had transferred to the customer, the price was fixed or determinable, and collection was reasonably assured. The Company sells to distributors pursuant to distribution agreements that have certain terms and conditions such as the right of return and price protection, which inhibited revenue recognition unless they could be reasonably estimated as we could

not

assert the price was fixed and determinable and estimate returns. For

one

distributor that comprises

26%

of consolidated revenue in

2017,

we had such history and ability to estimate and therefore recognized revenue upon sale to the distributor and recorded a corresponding reserve for the estimated returns. For

three

other distributor arrangements that represented a combined

15%

of revenue in

2017,

we recognized revenue on a sell-through basis, and accordingly deferred revenue and the related costs until such time as the distributor resold the product.

Energy segment

For production-type contracts meeting the Company’s minimum threshold, revenues and related costs on these contracts were 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 were 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 included direct material, direct labor, subcontract labor and any allocable indirect costs. The Company captured certain job costs as work progressed, including labor, material and costs

not

invoiced. Margin adjustments were made as information pertaining to contracts changed. All un-allocable indirect costs and corporate general and administrative costs were charged to the periods as incurred. The amount of costs

not

invoiced were captured to ensure an estimated margin consistent with that expected at the completion of the project. In the event a loss on a contract was foreseen, the Company recognized the loss when it was determined. Contract costs plus recognized profits were accumulated as deferred assets, and billings and/or cash received were recorded to a deferred revenue liability account. The net of these

two

accounts for any individual project was presented as ‘‘Costs in excess of billings,’’ an asset account, or ‘‘Billings in excess of costs,’’ a liability account.

Production-type contracts that did

not

qualify for use of the percentage of completion method were accounted for using the ‘‘completed contract method’’ of accounting in accordance with ASC

605

57.

Under this method, contract costs were accumulated as deferred assets, and billings and/or cash received was recorded to a deferred revenue liability account, during the periods of construction, but

revenues, costs, or profits were recognized in operations until the period within which completion of the contract occurred. A contract was considered complete when all costs except insignificant items were incurred; the equipment was operating according to specifications and was accepted by the customer.

For product sales in the Energy segment, revenue was recognized in the period when persuasive evidence of an arrangement with a customer existed, the products were shipped and title had transferred to the customer, the price was fixed or determinable, and collection was reasonably assured.

Revenues from warranty and maintenance activities were recognized ratably over the term of the warranty and maintenance period and the unrecognized portion was recorded as deferred revenue.

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, and were approximately

$27

thousand,

$17

thousand, and

$23

thousand, for the years ended

December

31,

2018,

2017

and

2016,

respectively. The Company expenses inbound shipping and handling costs as cost of revenues.

Warranty Reserves

A warranty reserve liability is recorded based on estimates of future costs on sales recognized. At

December

31,

2018

and

2017,

the balance of approximately

$37

thousand and

$40

thousand, respectively, for warranty reserve liability is included in accrued expenses on the balance sheet.

Advertising

The costs incurred for producing and communicating advertising are charged to operations as incurred. Advertising expense for the years ended

December

31,

2018,

2017

and

2016

were

$2.0

million,

$1.8

million, and

$1.7

million, respectively. In addition to these advertising costs, the Company also incurs advertising related costs for advertising completed in partnership with its distributors. These costs are offset against revenues. During

2018,

2017

and

2016,

the advertising costs offset against revenues were

$0.6

million,

$0.3

million, and

$0.3

million, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method of FASB Accounting Standards Codification

No.

740

(‘‘FASB ASC

740’’

), ‘‘Income Taxes.’’ Under FASB ASC

740,

deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that management believes it is more likely than

not

that such deferred tax assets will

not

be realized.

Valuation allowances have been established against all domestic based deferred tax assets and U.K. based deferred tax assets due to uncertainties in the Company’s ability to generate sufficient taxable income in future periods to make realization of such assets more likely than

not.

In future periods, tax benefits and related domestic and U.K. deferred tax assets will be recognized when management considers realization of such amounts to be more likely than

not.

The Company has

not

provided for valuation allowances on deferred tax assets in any other jurisdiction.

The Company recognizes interest and penalties, if any, related to its tax positions in income tax expense.

CUI Global files consolidated income tax returns with its U.S. based subsidiaries for federal and many state jurisdictions in addition to separate subsidiary income tax returns in Japan, the United Kingdom and Canada. As of

December

31,

2018,

the Company is

not

under examination by any income tax jurisdiction. The Company is

longer subject to USA examination for years prior to

2015.

Net Loss per Share

In accordance with FASB Accounting Standards Codification

No.

260

(‘‘FASB ASC

260’’

), ‘‘Earnings per Share,’’ basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock method. Due to the Company’s net loss in

2018,

2017

and

2016,

the assumed exercise of stock options using the treasury stock method would have had an antidilutive effect and therefore all options for each of the

three

years were excluded from the calculation of diluted net loss per share. Accordingly, diluted net loss per share is the same as basic net loss per share for

2018,

2017

and

2016.

The weighted average shares outstanding included

1,844;

63,602

and

25,811

of shares that are considered outstanding, but unissued as of

December

31,

2018,

2017

and

2016,

respectively, for shares to be issued in accordance with a royalty agreement pertaining to sales of the GasPT devices and unpaid equity share bonuses in

2017

and

2016.

The following table summarizes the number of stock options outstanding excluding amounts applicable to contingent conversion option, which

may

dilute future earnings per share:

	As of December 31,
	2018		2017		2016
Options, outstanding		923,898		964,180		966,681

Any common shares issued as a result of stock options would come from newly issued common shares as granted under our equity incentive plans.

The following is the calculation of basic and diluted earnings per share:

	For the Years Ended December 31,
(In thousands, except share and per share amounts)	2018			2017			2016
Net loss	$	(17,325	)	$	(12,589	)	$	(7,266	)
Basic and diluted weighted average number of shares outstanding		28,517,339			22,397,865			20,897,812
Basic loss per common share	$	(0.61	)	$	(0.56	)	$	(0.35	)
Diluted loss per common share	$	(0.61	)	$	(0.56	)	$	(0.35	)

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. Statement of Operations amounts have been translated using an appropriately weighted average exchange rate for the year. The translation gains and losses resulting from the changes in exchange rates during

2018,

2017

and

2016

have been reported in accumulated other comprehensive income (loss), except for gains and losses resulting from the translation of intercompany receivables and payables, which are included in earnings for the period.

Segment Reporting

Operating segments are defined in accordance with ASC

280

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 measurement basis of segment profit or loss is income (loss) from operations. Management has identified

six

operating segments based on the activities of the Company in accordance with ASC

280

10.

These operating segments have been aggregated into

three

reportable segments. The

three

reportable segments are Power and Electromechanical, Energy and Other. The Power and Electromechanical segment is focused on the operations of CUI Inc., CUI-Canada, Inc. and CUI Japan for the sale of internal and external power supplies and related components and industrial controls. The Energy segment is focused on the operations of Orbital Gas Systems Ltd. and Orbital Gas Systems, North America, Inc. which includes gas related test and measurement systems, including the GasPT. The Other segment represents the remaining activities that are

not

included as part of the other reportable segments and represent primarily corporate activity.

The following information represents segment activity as of and for the year ended

December

31,

2018:

(In thousands)	Power and Electro- mechanical		Energy			Other			Total
Revenues from external customers	$	76,447	$	20,342		$	—		$	96,789
Depreciation and amortization (1)		1,480		1,525			—			3,005
Interest expense		221		23			258			502
Impairment of goodwill and other intangible assets		—		4,347			—			4,347
Income (loss) from operations		5,332		(17,168	)		(4,942	)		(16,778	)
Segment assets		45,553		19,034			5,580			70,167
Other intangibles assets, net		8,547		5,314			—			13,861
Goodwill		13,089		—			—			13,089
Expenditures for segment assets (2)		1,299		235			—			1,534

The following information represents segment activity as of and for the year ended

December

31,

2017:

(In thousands)	Power and Electro- mechanical		Energy			Other			Total
Revenues from external customers	$	64,432	$	18,843		$	—		$	83,275
Depreciation and amortization (1)		1,505		1,345			—			2,850
Interest expense		249		1			250			500
Impairment of goodwill and other intangible assets		3		3,152			—			3,155
Income (loss) from operations		2,355		(11,366	)		(4,918	)		(13,929	)
Segment assets		49,392		26,512			12,005			87,909
Other intangibles assets, net		8,899		6,669			—			15,568
Goodwill		13,092		4,549			—			17,641
Expenditures for segment assets (2)		955		576			—			1,531

The following information represents segment activity as of and for the year ended

December

31,

2016:

(In thousands)	Power and Electro- mechanical		Energy			Other			Total
Revenues from external customers	$	58,403	$	28,058		$	—		$	86,461
Depreciation and amortization (1)		1,445		1,401			2			2,848
Interest expense		221		6			240			467
Income (loss) from operations		645		(1,676	)		(5,479	)		(6,510	)
Segment assets		49,830		29,632			381			79,843
Other intangibles assets, net		9,262		6,939			—			16,201
Goodwill		13,083		7,042			—			20,125
Expenditures for segment assets (2)		1,032		642			—			1,674

(

)

For the years ended

December

31,

2018,

2017

and

2016,

depreciation and amortization totals included

$0.9

million,

$0.7

million and

$0.5

million, respectively that were classified as cost of revenues in the Consolidated Statements of Operations.

(

)

Includes purchases of property, plant and equipment and investment in other intangible assets.

The following information represents revenue by country:

	For the Years Ended December 31,
(In thousands)	2018					2017					2016
	Amount		%			Amount		%			Amount		%
USA	$	59,319		61	%	$	50,875		61	%	$	46,514		54	%
United Kingdom		15,185		16	%		14,522		17	%		17,337		20	%
China		5,463		6	%		5,381		7	%		5,930		7	%
All Others		16,822		17	%		12,497		15	%		16,680		19	%
Total	$	96,789		100	%	$	83,275		100	%	$	86,461		100	%

The following information represents long-lived assets (excluding deferred tax assets) by country:

	As of December 31,
(In thousands)	2018		2017
USA	$	23,544	$	27,662
United Kingdom		9,647		17,739
Other		1,495		1,232
	$	34,686	$	46,633

Reclassifications

Certain reclassifications have been made to the

2017

consolidated balance sheet, and

2017

and

2016

statements of operations and statements of cash flows in order to conform to the

2018

presentation.

Recent Accounting Pronouncements

August 2018,

the FASB issued Accounting Standards Update ("ASU")

No.

2018

15,

Intangibles - Goodwill and Other - Internal-Use Software (Subtopic

350

): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

("ASU

2018

15"

). The amendments in ASU

2018

align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The guidance will be effective for the fiscal year beginning after

December 15, 2019,

including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements and will adopt the standard in

2020.

August 2018,

the FASB issued ASU

No.

2018

13,

Fair Value Measurement (Topic

820

): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

(“ASU

2018

13”

). The amendments in this update modify the disclosure requirements on fair value measurements in Topic

820,

Fair Value Measurement, including requiring the disclosure of the range and weighted average of significant unobservable inputs used to develop Level

fair value measurements. The guidance will be effective for the fiscal year beginning after

December 15, 2019,

including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements and will adopt the standard in

2020.

June 2018,

the FASB issued ASU

No.

2018

07,

Compensation-Stock

Compensation (Topic

718

): Improvements to Nonemployee Share-Based Payment Accounting

("ASU

2018

07"

). These amendments expand the scope of Topic

718,

Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The guidance will be effective for the fiscal year beginning after

December 15, 2018,

including interim periods within that year. The Company does

not

expect there to be a material impact of this ASU on its consolidated financial statements and will adopt the standard in

2019.

June 2016,

the FASB issued ASU

No.

2016

13,

Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments

(“ASU

2016

13”

). ASU

2016

is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This ASU is effective for fiscal years and interim periods within those years beginning after

December 15, 2019

and early adoption is permitted for fiscal years and interim periods within those years beginning after

December 15, 2018.

The Company is currently assessing the impact of this ASU on its consolidated financial statements and will adopt the standard in

2020.

February 2016,

the FASB issued ASU

No.

2016

02,

Leases (Topic

842

)

(‘‘ASU

2016

02’’

). ASU

2016

requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance will be effective for public business entities for fiscal years beginning after

December 15, 2018

including interim periods within that fiscal year. We will adopt the standard in the

first

quarter of

2019.

As part of the transition, we will utilize the effective date method of implementation. Under the effective date method, we will include the new required disclosures for the current period and provide the disclosures required by the previous guidance found in ASC

840

for the prior year comparative periods. In addition, we will elect to utilize the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow us to carry forward the historical lease classifications and allow us to exclude leases with an initial term of

months or less from being recorded on the Company's balance sheet; we will recognize lease expense for these short-term leases on a straight-line basis over the lease term.

Upon adoption, we expect to record a right-of-use asset and a corresponding lease liability for the Company's operating leases where the Company is the lessee. The potential effect on the Company's consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. The present value of future minimum lease payments totaled

$7.8

million as of

December 31, 2018.

In addition, we will have a

$2.9

million adjustment to retained earnings at

January 1, 2019

as a result of recognizing the gain on the sale-leaseback transaction. We do

not

expect material changes to the recognition of operating lease expense in the Company's consolidated statements of operation.

Estimated

Useful

Life (years)

Buildings and improvements

Furniture and equipment