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CUI GLOBAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) General
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate," or "continue" or use of
negative or other variations or comparable terminology.
CUI Global cautions that these forward-looking statements are further qualified
by important factors that could cause actual results to differ materially, are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements.
Overview
CUI Global, Inc. is a Colorado corporation organized on April 21, 1998. The
Company's principal place of business is located at 20050 SW 112th Avenue,
Tualatin, Oregon 97062, phone (503) 612-2300. CUI Global is a platform company
dedicated to maximizing shareholder value through the acquisition, development
and commercialization of new, innovative technologies. Through its subsidiaries,
CUI Global has built a diversified portfolio of industry leading technologies
that touch many markets.
During the nine months ended September 30, 2012, CUI Global had a loss from
operations of $1,773,190. During the nine months ended September 30, 2012, CUI
Global had a consolidated net loss of $2,249,646, with a net loss attributable
to CUI Global of $2,249,646. The net loss is primarily the result of the
decrease in revenues and related gross profits during the nine month period, an
increase in sales, general and administrative expenses incurred in relation to
the indirect costs associated with the equity raises completed during the first
nine months of the year and increased sales efforts and related costs for the
Vergence GasPT2 product which required significant travel and some continuing
development and costs associated with safety certification of the device prior
to sale and installation, continued development of the Novum and Solus products,
as well as stock compensation expenses for issuances to officers and employees
as bonuses for achieving corporate goals, stock issued to consultants related to
investor relations activities and an impairment loss recognized related to the
intangible, trademark and trade name V-Infinity during the nine months ended
September 30, 2012.
CUI, Inc. - Subsidiary
CUI, Inc., is a Tualatin, Oregon based provider of electronic components
including power supplies, transformers, converters, connectors and industrial
controls for Original Equipment Manufacturers (OEMs). Through CUI, Inc., the
Company holds 352,589 common shares (representing an 11.54% interest) in Test
Products International, Inc., a provider of handheld test and measurement
equipment. Since its inception in 1989, CUI has been delivering quality
products, extensive application solutions and superior personal service. CUI's
solid customer commitment and honest corporate message are a hallmark in the
industry.
Through CUI's capabilities and extensive contacts throughout Asia, CUI Global is
able to continue to identify, acquire and commercialize new proprietary
technologies. CUI Global will use CUI's market partners and global distribution
capabilities to bring other products to market, including the Novum Digital
Power Modules, Solus Power Topology, Vergence GASPT2 and other proprietary
devices, described below. CUI's testing and R&D capabilities allow CUI Global to
commercialize and prototype its products more efficiently and economically.
CUI defines its product into three categories: components including connectors,
speakers, buzzers and control solutions including encoders and sensors; power
solutions which include Novum and Solus; and test and measurement which include
the Vergence GasPT2. These offerings provide a technology architecture that
addresses power and related accessories as well as test and measurement
capabilities to industries ranging from consumer electronics to defense and
alternative energy.
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V-Infinity Power
Our current power line, V-Infinity, consists of external and embedded ac-dc
power supplies, dc-dc converters and basic digital point of load modules. This
dynamic, broadly applicable product line accounts for a significant portion of
our current revenue and recent revenue growth.
Novum™ Advanced Power
CUI entered into a non-exclusive Field of Use Agreement with Power-One, Inc.
(Nasdaq: PWER) to license Power-One's Digital Power Technology patents. The
license provides access to Power-One's portfolio of Digital Power Technology
patents for incorporation into CUI's new line of digital point of load power
modules. CUI, through its power division, manufactures a range of embedded and
external power electronics devices for OEM manufacturers.
We have developed the first fully featured digital point of load dc-dc converter
in the power market under our Novum Advanced Power line of products. This
product is a next generation product targeted at the intermediate bus power
architecture that is prolifically used in the telecom and networking
communications market. In September of 2010 we released full production versions
of two point of load modules. We were finalists for the prestigious Golden
Mousetrap Award and EDN Innovation Award for these parts in 2010. With the shift
towards smarter, smaller, and more energy efficient power requirements,
engineers are seeking innovative solutions that allow them to keep pace with
lower core voltages, faster transient response needs, and increasing thermal
issues that they face in their designs. Our recently introduced Novum NDM2
modules, with a full suite of digital features, specifically address these
growing system complexities through intelligent power management. The NDM2
series is the first to be designed by the company as part of the Ericsson
cooperation announced in July 2011. The agreement formalizes a plan between the
two companies to offer a multi-source digital POL platform based on the Ericsson
BMR46X series, with future plans to co-develop modules outside the existing
range of 10~50A. We have also developed a middle ground product to ease the
customer base into the benefits of digital in power. We developed a "smart
module" that allows for the benefits of digital in the design cycle but when
installed functions like a highly optimized analog unit.
Solus™ Power Topology
CUI entered into an exclusive Field of Use Agreement with California Power
Research to license their BPS-5 topology, now marketed as the Solus
Topology. Through the Solus Topology, we have a proprietary patented power
topology for designing unique power circuits. This topology allows for higher
efficiencies, densities, response time, and price competitiveness that is
otherwise unavailable. Our initial product designed using this topology is in
the quarter brick dc-dc converter market. Solus is an entirely new topology,
rich in features that accelerate the performance trend trajectories for the
big-four power conversion needs in the telecom and server markets: greater
efficiency; higher power density; reduced EMI (electro-magnetic interference);
and faster transient response four times as fast. We have introduced the NQB2060
Novum® one quarter brick bus converter as a prime example of the benchmark 720
watts output power performance using the Solus Topology. Since the Solus
Topology maintains its effectiveness independent of the control method used, it
can operate with analog voltage mode control, analog current mode control, and
various digital control profiles. That unique feature opens the door for the
company to implement this topology in a wide variety of power supply product
platforms. We believe that this topology will allow for at least a decade of new
product designs and introductions.
As the large scale networking and telecommunications companies convert to
digital power, our early entry into the market, our unique Solus Topology, and
our relationship with Ericsson should enhance our ability to penetrate this
(according to the Darnell Group) multi-billion dollar market.
AMT ™ Encoder
Through a licensing agreement, the company has an exclusive agreement to
develop, sell and distribute the AMT encoder worldwide. The AMT series modular
encoder is designed with proprietary, capacitive, code-generating technology as
opposed to optical or magnetic encoding. This unique device allows breakthroughs
in selectable resolution, shaft-adaptation and convenient mounting solutions to
bring ease of installation, reduction in SKU's, and economies of scale in
purchasing. The AMT amounts to almost 2000 different encoders in one
package. The company is selling and distributing the AMT through various
customers. Moreover, the product is being marketed by multiple DC motor
manufacturers. The AMT has been awarded several design wins from Motion Control
OEM's producing a wide range of products from cash machines to robotics.
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Vergence ™ GasPT2
Through an exclusive licensing contract with GL Industrial Services UK, Ltd.
(GL), formerly British-based Advantica, Ltd., CUI Global owns exclusive rights
to manufacture, sell, and distribute a Gas Quality Inferential Measurement
Device (GASPT2) designed by GL on a worldwide basis, now marketed as the
Vergence TM GasPT2.
The Vergence natural gas inferential metering device, the GasPT2, is a low cost
solution to measuring natural gas quality. It can be connected to a natural gas
system to provide a fast, accurate, close to real time measurement of the
physical properties, such as thermal conductivity, speed of sound and carbon
dioxide content. From these measurements it infers an effective gas mixture
comprising four components: methane, propane, nitrogen, and
measured carbon dioxide and then uses ISO6976 to calculate the gas quality
characteristics of calorific value (CV), Wobbe index (WI), relative density
(RD), and compression factor (Z)." An ISO, International Organization for
Standardization, is a documented agreement containing technical specifications
or other precise criteria to be used consistently as rules, guidelines or
definitions of characteristics to ensure that materials, products, processes and
services are fit for their purpose.
This new and innovative technology has been certified for use in fiscal
monitoring by Ofgem in the United Kingdom and SNAM RETE in Italy. At present,
there is no equivalent product competition. There are instruments like gas
chromatographs ("GC"), but they are slow, complicated to use, and as much as
double the price of the GasPT2.
By way of example, in the case of SNAM RETE, the Italian gas transmission
company, there are 13 natural gas injection points for the SNAM RETE
system. Those injection points will continue to use GC's for monitoring. On the
other hand, there are 7,500 customer access points in the system. Those would
include city gates, large industrial users, power generation plants and
others. All of those customer access ports would be applicable for the Vergence
Technology. In the case of ENAGAS in Spain that ratio is 6 injection points and
over 300 access points.
In addition to these numbers, there are currently 8,000 gas turbines in
operation worldwide. Each of those turbines is subject to variances in natural
gas quality. Depending on the quality of the gas, those very expensive machines
can be tuned to run more efficiently and therefore longer with much cleaner
emissions. Currently, because of the delay in information from the GC's, such
tuning cannot be effectively accomplished. Operators attempt to deal with the
delay by placing the monitoring station miles away from the turbine or creating
large holding tanks to maintain the gas until an analysis can be completed. The
use of the Vergence Technology, will enable those operators to place the GasPT2
units right next to the turbines and by interfacing them with the machine's
process control software, the tuning can be accomplished on almost a real-time
basis; thus, allowing the turbines to run longer, more efficiently, and cleaner.
ISO 9001:2008 Certification
CUI, Inc. is certified to the ISO 9001:2008 Quality Management Systems standards
and guidelines. CUI is registered as conforming to the requirements of standard:
ISO 9001:2008, The Quality Management System is applicable to Design,
Development and Distribution of electromechanical components for OEM
manufacturing. ISO 9001 is accepted worldwide as the inclusive international
standard that defines quality.
The certification of compliance with ISO 9001:2008 recognizes that our policies,
practices and procedures ensure consistent quality in the design services,
technology and products we provide our customers.
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CUI Japan and the discontinued operations of Comex Electronics -Subsidiaries
In July 2009, CUI Global acquired, as a wholly owned subsidiary, Comex
Instruments, Ltd., now known as CUI Japan and 49% of Comex Electronics Ltd. Both
companies are Japanese based providers of electronic components. Effective July
1, 2011, CUI Global entered into an agreement to convey its 49% ownership
interest in Comex Electronics to the owners of the remaining 51% who are the
original founders and were the original owners of Comex Instruments, for
$617,975 in the form of a five year note receivable bearing interest at 4% per
annum. As of September 30, 2012 the Comex Electronics note receivable is current
in accordance with the agreed terms. The operations of CUI Japan are not
affected by this divestment. As such, the operations of Comex Electronics are
reported as discontinued operations for the current and comparable periods. CUI
Global will continue to maintain its 100% ownership of CUI Japan.
Intellectual Property
The Company relies on various intellectual property laws and contractual
restrictions to protect its proprietary rights in products, logos and services.
These include confidentiality, invention assignment and nondisclosure agreements
with employees, contractors, suppliers and strategic partners. The
confidentiality and nondisclosure agreements with employees, contractors and
suppliers are in perpetuity or for a sufficient length of time so as to not
threaten exposure of proprietary information.
CUI Global continues to file and protect its intellectual property rights,
trademarks and products through filings with the US Patent and Trademark Office
and, as applicable, internationally.
Liquidity and Capital Resources
General
Cash and cash equivalents from continuing operations at September 30, 2012 are
$3,451,087. Operations and investments in patents and equipment have been funded
through cash from operations, proceeds from equity financings and borrowings
from financial institutions during the three month period.
Cash provided by (used in) operations
Operating requirements generated negative cash flow from continuing operations
of $1,098,022 for the nine months ended September 30, 2012, versus positive cash
flow from continuing operations of $264,625 for the same period last year. The
change in cash provided by (used in) operations is primarily the result of the
increased net loss incurred during the first nine months of 2012, an increase in
trade accounts receivable, an increase in inventory, a decrease in prepaid
expenses and other current assets, decreased deposits, increase in accounts
payable, increased accrued expenses and an increase in unearned revenue.
During the first nine months of 2012 and 2011 common stock and stock options
have been used as a form of payment to certain consultants, note holders,
employees and directors. For the first nine months of 2012 and 2011, a total of
$948,370 and $183,532, respectively, was recorded for compensation and services
expense including amortization of deferred compensation related to equity given,
or to be given, to employees, directors and consultants for services provided.
During the nine months ended September 30, 2012 the Company had no cash flow
from discontinued operations as compared to a positive cash flow in the prior
year comparative period of $22,141.
As the Company focuses on technology development and product line additions
during 2012, it will continue to fund research and development together with
related sales and marketing efforts for its various product offerings with cash
flows from continuing operations and cash on hand.
Capital Expenditures and Investments
CUI Global invested $0 in patent costs during the first nine months of 2012 as
compared to $6,646 for the same period last year. It is expected that investment
in patent costs will continue throughout 2012 as patents are pursued in order to
protect the rights to use its product developments.
The Company invested $39,940 in other intangible assets during the first nine
months of 2012 as compared to $37,418 for the same period last year.
During the first nine months of 2012 and 2011, there was $559,713 and $343,086
invested in property and equipment, respectively.
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During the nine months ended September 30, 2012 the Company had no cash flow
provided by or used in discontinued investing activities as compared to a
positive cash flow in the prior year comparative period of $195,278.
Financing activities
During the first nine months of 2012, the Company received proceeds of
$13,532,285 from the sales of common stock and exercise of warrants, $1,528,900
of payments were made against the demand notes payable, $4,000,000 of payments
were made against notes and loans payable, $3,000,000 of payments were made
against related party notes and loans payable, and $35,000 of payments were made
against convertible notes payable, related party. During the first nine months
of 2011, the Company received proceeds of $673,652 on demand notes payable,
$58,531 of payments were made against notes and loans payable net of proceeds,
$487,208 of payments were made against notes and loans payable, related party,
$35,000 of proceeds were received from a convertible note payable, related party
and $50,000 of proceeds were received in relation to the exercise of warrants.
CUI Global may raise the capital needed to fund the further development and
marketing of its products as well as payment of its debt obligations.
During the nine months ended September 30, 2012, there was no cash flow related
to discontinued financing activities. During the nine months ended September 30,
2011, net cash used in discontinued financing activities for discontinued
operations included $648,218 of payments made against notes and loans payable.
Recap of liquidity and capital resources
During the first nine months of 2012, the Company continued to improve its
financial strength which included raising $13,532,285 from the sales of common
stock and exercise of warrants, net of offering costs, as well as significant
reductions of debt principal. As of September 30, 2012 the Company had an
accumulated deficit of $75,895,147.
The Company may seek to raise additional capital for the commercialization and
further development of its product and technology offerings as well as to
further reduce debt. The Company believes its operations and existing financing
structure will provide sufficient cash to meet its short-term working capital
requirements for the next twelve months. As the Company continues to expand and
develop its technology and product lines as well as retire debt, additional
funding sources may be required. The Company will attempt to raise these funds
through borrowing instruments or issuing additional equity. However, there is no
assurance the Company will be able to raise such additional capital. The failure
to raise capital or generate product sales in the expected time frame will have
a material adverse effect on the Company.
At September 30, 2012, the Company maintained a $4,000,000 revolving working
capital line of credit with the Business Credit division of Wells Fargo Capital
Finance, part of Wells Fargo Bank, National Association (NYSE: WFC), interest
payable monthly at the Daily Three Month LIBOR plus 3.25% (3.61225% at September
30, 2012). Effective April 3, 2012, the Wells Fargo LOC expiration was extended
to July 31, 2015 and the interest rate reduced to the Daily Three Month LIBOR
plus 3.25%. As of the date of this filing, the Company is compliant with all
covenants on the line of credit with Wells Fargo Capital Finance. At September
30, 2012, there was no balance outstanding on the line of credit.
The Company expects the revenues from CUI, Inc. and CUI Japan to help cover
operating and other expenses for the next twelve months of operations. If
revenues and the funds raised in 2012 through the sales of equity are not
sufficient to cover all operating and other expenses, additional funding may be
required. There is no assurance the Company will be able to raise such
additional capital. The failure to raise capital or generate product sales in
the expected time frame will have a material adverse effect on the Company.
Results of Operations
Revenue
During the nine months ended September 30, 2012 and 2011, revenue was
$29,193,827 and $30,147,628, respectively. The revenue for the nine months ended
September 30, 2012 is comprised of $28,202,861 from CUI products, $954,549 from
CUI Japan products, and $36,417 for freight. The revenue for the nine months
ended September 30, 2011 is comprised of $29,799,472 from CUI products, $298,402
from CUI Japan products, and $49,754 for freight.
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During the three months ended September 30, 2012 and 2011, revenue was
$10,712,306 and $10,728,215, respectively. The revenue for the three months
ended September 30, 2012 is comprised of $10,355,624 from CUI products, $341,847
from CUI Japan products and $14,835 from freight. The revenue for the three
months ended September 30, 2011 is comprised of $10,498,181 from CUI products,
$217,382 from CUI Japan products and $12,652 from freight.
The decrease in revenues during the nine months ended September 30, 2012 is
primarily the result of the slow first quarter of 2012 associated with a
decrease in electronic components orders received during the fourth quarter of
2011 which occurred in conjunction with an overall slow down within the
electronic components industry during that period.
There was a slight decrease in revenues during the three months ended September
30, 2012 which is primarily attributable to the timing of customer orders and
production schedules.
Although sales revenues during the first nine months were less than the previous
year, the Company experienced a significant uptick in orders received during the
nine months and held a backlog of customer orders of approximately $14.7 million
as of September 30, 2012 as compared to a backlog of customer orders of
approximately $9.1 million as of September 30, 2011.
Cost of revenues
For the nine months ended September 30, 2012 and 2011, the cost of revenue was
$18,174,099 and $18,565,279, respectively. For the three months ended September
30, 2012 and 2011, the cost of revenue was $6,778,965 and $6,706,311,
respectively.
The cost of revenues as a percentage of revenue for the nine months ended
September 30, 2012 increased to 62.25% from 61.58% during the prior year
comparative period. For the three months ended September 30, 2012, the cost of
revenue as a percentage of revenue increased to 63.28% from 62.51% in the prior
year period. This percentage will vary based upon the product mix sold during
the period and is also dependent upon the competitive markets in which the
Company competes as well as foreign exchange rates.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses include such items as wages,
commissions, consulting, general office expenses, business promotion expenses
and costs of being a public company, including legal and accounting fees,
insurance and investor relations.
For the nine months ended September 30, 2012 compared to the same period in
2011, SG&A expenses increased $1,698,405. The increase is primarily associated
with indirect expenses incurred in relation to the equity raises completed
during the first nine months of the year, increased sales efforts and related
costs for the Vergence GasPT2 product which required significant travel and some
continuing development and costs associated with safety certification of the
device prior to sale and installation, as well as stock compensation expenses
for issuances to officers and employees as bonuses for achieving corporate goals
and stock issued to consultants related to investor relations activities during
the nine months ended September 30, 2012. As a percentage of total revenue, SG&A
expenses increased 6.93% as compared to the first nine months of 2011.
Management expects the SG&A expenses as a percentage of revenues to improve
during the remainder of 2012 as there were significant expenses in early 2012
associated with the aforementioned items along with lower revenues during the
first nine months of 2012 as compared to the prior year.
Research and Development
The research and development costs are related to the development of technology
and products. Research and development costs were $558,833 and $529,863, for the
nine months ended September 30, 2012 and 2011, respectively. The expense is
associated with continued research and development of new and existing
technologies including the Novum digital power modules, Solus advanced power
topology, Vergence GasPT2, and other products.
Impairment Loss
The Company recorded a $278,428 impairment loss related to intangible, trademark
and trade name V-Infinity during the first nine months of 2012, and $0 during
the first nine months of 2011.
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Bad Debt
The bad debt expense for the nine months ended September 30, 2012 and 2011 was
$32,979 and $77,449, respectively. The bad debt expense for both periods relates
to several individual customers.
Other Income
Other income for the nine months ended September 30, 2012, consisted of $20,622
of interest income, $19,177 of gain on foreign exchange, $2,000 of rental
income, $1,323 of miscellaneous income and $339 from the recovery of bad debts.
Other income for the nine months ended September 30, 2011, consisted of $17,614
from the recovery of bad debts, $9,762 of gain on foreign exchange, $8,542 of
interest income and $235 of miscellaneous income.
Investment Income
The Company recognized income of $36,473 on equity investment in affiliate for
the nine months ended September 30, 2012. For the same period ended 2011, the
Company recognized income of $21,457 on equity investment in an affiliate.
Convertible debt and amortization of debt discount and debt offering costs
The Company recorded an expense of $18,333 and $55,000 for the three and nine
months ended September 30, 2012, respectively, and $19,167 and $316,414 for the
same periods in 2011, for the amortization of debt discount and debt offering
costs. The decrease in expense in 2012 is related to the reduction in the debt
discount related to the 2009 and 2010 reductions of debt and related debt
discounts associated with the convertible note and note payable used to fund the
acquisition of CUI, Inc.
Interest Expense
The interest expense of $460,510 and $686,913 for the nine months ended
September 30, 2012 and 2011 respectively is for interest on the bank operating
line of credit, bank loans, and secured and unsecured promissory notes. The
decrease is primarily due to the reduction of debt in 2011 and during the first
nine months of 2012 through principal payments.
Profit (loss) from discontinued operations
During the nine months ended September 30, 2012 there was no activity associated
with the discontinued operations of Comex Electronics which were divested
effective July 2011. During the nine months ended September 30, 2011, there was
a profit from discontinued operations of $442,881 which included a gain on the
divestment of Comex Electronics during the period of $603,034.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported. Note 2 of Notes to the Consolidated Financial Statements describes the
significant accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) we are required to make
assumptions about matters that are highly uncertain at the time of the estimate;
and 2) different estimates we could reasonably have used, or changes in the
estimate that are reasonably likely to occur, would have a material effect on
our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the consolidated
financial statements as soon as they became known. In addition, our Management
is periodically faced with uncertainties, the outcomes of which are not within
our control and will not be known for prolonged periods of time. Based on a
critical assessment of its accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, our Management
believes that our consolidated financial statements are fairly stated in
accordance with accounting principles generally accepted in the United States
(GAAP), and present a meaningful presentation of our financial condition and
results of operations.
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Our Management believes that the following are our critical accounting policies:Asset Acquisitions and Intangible Assets
We account for asset acquisitions in accordance with ASC 350, Intangibles-
Goodwill and Other. The acquisition method of accounting requires that assets
acquired and liabilities assumed be recorded at their fair values on the date of
an asset acquisition.
The judgments that we make in determining the estimated fair value assigned to
each class of assets acquired and liabilities assumed, as well as asset lives,
can materially impact net income in periods following an asset acquisition. We
generally use either the income, cost or market approach to aid in our
conclusions of such fair values and asset lives. The income approach presumes
that the value of an asset can be estimated by the net economic benefit to be
received over the life of the asset, discounted to present value. The cost
approach presumes that an investor would pay no more for an asset than its
replacement or reproduction cost. The market approach estimates value based on
what other participants in the market have paid for reasonably similar assets.
Although each valuation approach is considered in valuing the assets acquired,
the approach ultimately selected is based on the characteristics of the asset
and the availability of information.
Long Lived Assets
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
Determining whether an impairment has occurred typically requires various
estimates and assumptions, including determining which cash flows are directly
related to the potentially impaired asset, the useful life over which cash flows
will occur, their amount and the asset's residual value, if any. In turn,
measurement of an impairment loss requires a determination of fair value, which
is based on the best information available. We use quoted market prices when
available and independent appraisals, as appropriate, to determine fair value.
Fair Value Measurement
The Company's capital structure includes the use of warrants and convertible
debt features that are classified as derivative financial instruments.
Derivative financial instruments are recognized as either assets or liabilities
and are measured at fair value under ASC 815 Derivatives and Hedging. ASC 815
requires that changes in the fair value of derivative financial instruments with
no hedging designation be recognized as gains/ (losses) in the earnings
statement. The fair value measurement is determined in accordance with ASC 820
Fair Value Measurements and Disclosures.
Deferred Revenue
Deferred revenue represents cash advances received in excess of revenue earned
on on-going contracts. Payment terms vary with each contract but may include an
initial payment at the time the contract is executed, with future payments
dependent upon the completion of certain contract phases or targeted milestones.
In the event of contract cancellation, the Company is generally entitled to
payment for all work performed through the point of cancellation.
Revenue Recognition Policy
The Company recognizes revenues, for both financial statement and tax purposes
in accordance with SEC Staff Accounting Bulletin No. 104 "Revenue Recognition in
Financial Statements (SAB 104)" (Codified within Accounting Standards
Codification (ASC) Revenue Recognition ASC 605). Under these arrangements, the
Company recognizes revenue when all of the following conditions are satisfied:
(1) there is persuasive evidence of an arrangement; (2) the service has been
provided to the customer and/or delivery has occurred; (3) the collection of
fees is probable; and (4) the fee is fixed or determinable.
Stock Based Compensation
The Company accounts for its employee equity incentive plans under ASC 718,
Compensation - Stock Compensation which addresses the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services, with a primary focus on transactions in which an entity obtains
employee services in share-based payment transactions.
ASC 718 requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Consolidated
Statements of Income. The Company currently uses the Black-Scholes option
pricing model to determine grant date fair value.
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Recent Accounting Pronouncements
In December 2011, FASB issued Accounting Standards Update 2011-11, Balance Sheet
- Disclosures about Offsetting Assets and Liabilities" to enhance disclosure
requirements relating to the offsetting of assets and liabilities on an entity's
balance sheet. The update requires enhanced disclosures regarding assets and
liabilities that are presented net or gross in the statement of financial
position when the right of offset exists, or that are subject to an enforceable
master netting arrangement. The new disclosure requirements relating to this
update are retrospective and effective for annual and interim periods beginning
on or after January 1, 2013. The update only requires additional disclosures, as
such; we do not expect that the adoption of this standard will have a material
impact on our results of operations, cash flows or financial condition.
In July 2012, the FASB issued updated guidance on the periodic testing of
indefinite-lived intangible assets, other than goodwill, for impairment. This
updated guidance will allow companies the option to first assess qualitative
factors to determine if it is more-likely-than-not that an indefinite-lived
intangible asset might be impaired and whether it is necessary to perform the
quantitative impairment test required under current accounting standards. This
guidance is applicable for reporting periods beginning after September 15, 2012.
This updated guidance is not expected to have a material impact on our results
of operations, cash flows or financial condition.
Off-Balance Sheet Arrangements
None.
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