CUI Global, Inc.

16.

INCOME TAXES

Consolidated loss before income taxes consisted of the following:

	For the Years Ended December 31,
(In thousands)	2017			2016			2015
U.S. operations	$	(7,420	)	$	(8,442	)	$	(5,937	)
Foreign operations		(6,775	)		1,214			(458	)
(Loss) before income taxes	$	(14,195	)	$	(7,228	)	$	(6,395	)

The income tax (benefit) expense consisted of the following:

	For the Years Ended December 31,
(In thousands)	2017			2016			2015
Current:
Federal	$	—		$	—		$	—
State and local		60			81			59
Foreign		101			64			67
Total current provision		161			145			126
Deferred:
Federal		(887	)		—			—
State and local		—			—			—
Foreign		(880	)		(107	)		(534	)
Total deferred (benefit)		(1,767	)		(107	)		(534	)
Total income tax (benefit) expense	$	(1,606	)	$	38		$	(408	)

The following table provides a reconciliation of the federal statutory tax rate to the recorded tax provision (benefit):

	For the Years Ended December 31,
(In thousands)	2017			2016			2015
Computed federal income taxes at the statutory rate (benefit)	$	(4,826	)	$	(2,457	)	$	(2,174	)
State income taxes (net of federal benefit)		39			53			37
Permanent tax differences		(262	)		(415	)		(372	)
Foreign tax rates and tax credits differing from USA		887			4			(60	)
Purchased goodwill impairment		1,072			—			—
Net operating loss and other adjustment		(256	)		216			—
Change in enacted tax rates applied to foreign deferred taxes		122			(38	)		(114	)
Change in valuation allowance		2,505			2,675			2,275
Change in enacted tax rates applied to USA deferred taxes		(887	)		—			—
Total income tax (benefit) prvision	$	(1,606	)	$	38		$	(408	)

The Company accounts for income taxes under the asset-liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when it is

‘‘more likely than

not’’

that the benefits of existing deferred tax assets will

not

be realized in a future period. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	As of December 31,
(In thousands)	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	16,905		$	21,704
Contribution and other carryforwards		218			370
Inventory and accounts receivable reserves		549			441
Other		676			1,051
Valuation allowance		(17,662	)		(23,503	)
Deferred tax assets after valuation allowance		686			63
Deferred tax liabilities
Intangible assets		(2,914	)		(3,754	)
Property, plant and equipment		(186	)		(414	)
Total deferred tax liabilities		(3,100	)		(4,168	)
Net deferred tax liabilities	$	(2,414	)	$	(4,105	)

The Company adopted the provisions of ASU

2015

2015.

ASU

2015

requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The net deferred tax liability is recorded as follows:

	As of December 31,
(In thousands)	2017			2016
Noncurrent deferred tax assets	$	—		$	15
Noncurrent deferred tax liability		(2,414	)		(4,120	)
Net deferred tax liability	$	(2,414	)	$	(4,105	)

Noncurrent deferred tax assets are included in the Deposits and other assets line of the balance sheet. The Company

’s consolidated deferred tax liability as of

December 31, 2017

relates to intangibles recorded in connection with prior acquisitions. Approximately

$1.9

million of the liability relates to indefinite-lived intangibles, which will only reverse at the time of ultimate sale or impairment of the underlying intangible assets. Additionally,

$1.1

million of the deferred tax liability relates to finite-lived intangibles as a result of a foreign acquisition, which reverses as the intangibles are amortized. The foreign deferred tax liabilities are decreased by the deferred tax assets from foreign net operating losses, which are netted against the deferred tax liabilities.

As of

December

31,

2017

and

2016,

the Company recorded a valuation allowance of

$17.7

million and

$23.5

million, respectively. During the years ended

December

31,

2017,

2016

and

2015,

the Company recorded a decrease in valuation allowance of

$5.8

million, and an increase in valuation allowance of

$2.7

million, and

$2.3

million, respectively. The Company has provided for a full valuation on existing deferred tax assets in the United States. As of

December

31,

2017,

the Company has available federal, state and foreign net operating loss carry forwards of approximately

$62.2

million,

$57.2

million, and

$5.0

million respectively, and for which the federal and state net operating loss carry-forwards will expire between

2018

and

2037.

Our ability to utilize federal net operating loss (NOL) carry-forwards to reduce future taxable income

may

be limited under Section

382

of the Internal Revenue Code if certain ownership changes in our company occur during a rolling

three

-year period. If such ownership changes by

-percent-shareholders result in aggregate increases that exceed

percentage points during the

three

-year period, then Section

382

imposes an annual limitation on the amount of our taxable income that

may

be offset by the federal NOL carry forwards or tax credit carry-forwards at the time of ownership change.

CUI Global files consolidated income tax returns with its domestic 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,

2017,

the Company is

not

under examination by any income tax jurisdiction. The Company is

longer subject to examination in the USA for years prior to

2014.

The Company accounts for income tax uncertainties using a threshold of

‘‘more-likely-than-

not’’

in accordance with the provisions of ASC Topic

740,

Income Taxes

(‘‘ASC

740’’

). As of

December

31,

2017,

the Company has reviewed all of its tax filings and positions taken on its returns and has

not

identified any material current or future effect on its consolidated results of operations, cash flows or financial position. As such, the Company has

not

recorded any tax, penalties or interest on tax uncertainties. It is Company policy to record any interest on tax uncertainties as a component of income tax expense.

December 22, 2017,

the USA passed sweeping tax legislation, which reduced the federal corporate tax rate for years beginning after

December 31, 2017

to a flat

21%

(with an approximate

state tax effect) in addition to requiring the deemed repatriation of all foreign undistributed earnings. As such, as of

December 22, 2017,

the Company restated existing USA deferred tax assets and liabilities to

26%

resulting in a net income tax benefit of approximately

$887

thousand. As of

December 31, 2017,

the Company does

not

have any undistributed foreign earnings subject to deemed repatriation. The Company has

plans to repatriate any excess cash balances which

may

be available from its foreign subsidiaries in the foreseeable future. The new tax provisions surrounding the repatriation of foreign earnings are extremely complex and

may

require further evaluation to determine the correct reporting and inclusion for USA purposes. The Company does

not

anticipate any material changes to the amounts determined as of

December 31, 2017.

The Company adopted ASU

2016

09,

Compensation - Stock Compensation (Topic

718

)

effective

January 1, 2017

on a modified retrospective basis, whereby a cumulative-effect adjustment to equity as of the beginning of the period is required. Upon evaluation,

adjustment was required as of

January 1, 2017.