Casey Stegman - Investor Relations Bill Clough - CEO Dan Ford - CFO

Joe Maxa - Dougherty & Company Eric Stine - Craig-Hallum Capital Andrew DSilva - Merriman Capital Marco Rodriguez - Stonegate Capital Jim Kennedy - Marathon Capital Management Roger Liddell - Clear Harbor Asset Management

[Call Starts Abruptly] the CUI Global Inc Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. Casey Stegman of Investor Relations. Sir, please begin.

Thank you and good morning. Welcome to the CUI Global 2015 second quarter Earnings Conference Call, we appreciate you joining us today. With me on the call is Mr. Bill Clough, Chief Executive Officer; and Dan Ford, Chief Financial Officer. The purpose of today’s call is to review the Company’s financial results for the second quarter, as well as provide you with some additional color on the business going forward. Following management’s remarks, the call will be opened up for questions. Many of you have seen the company’s release that was issued today. If you haven’t, it can be accessed to the Company’s website at www.cuiglobal.com. A replay of this call will be available until August 22nd, details can be found in the press release. Today during the course of the presentation, we will be directing your attention to a series of slides. Those slides can be accessed during the call from the link in the press release that went out yesterday or from the Investor Relations section of the website. As a reminder, this call will contain certain forward-looking statements within the meaning Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in the forward-looking statements. The company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, including and among other things our reliance on third-party manufacturers and suppliers, the government agency budgetary and political constrains, new or increased competition, changes in market demand, and the performance or liability of our products, these factors and others could cause operating results to vary significantly from those in prior periods and those projected in forward-looking statements. Additional information with respect to these and other factors, which could materially affect the company and its operations, are included in certain forms the company has filed with the Securities and Exchange Commission. With that I’d like to introduce Mr. Bill Clough, CEO of CUI. Bill?

Thank you, Casey and thank you everyone for taking the time to join us on this morning’s call. I'm going to start with a brief overview of the quarter and then I’ll hand the call over to Dan to review the financials in more detail. When Dan is finish with his remarks, I’ll provide some additional commentary on some of the key initiatives we are currently working on the CUI Global. We’ll then open the floor up for Q&A. First, I’d like to highlight the change in the company’s communication related to divulging customer name. Due to the type and size of contracts as we engage in as well as market conditions, we recently adopted a policy, not to identify parties who are selling to by name. From time to time you may have seen announcements from us identifying the [indiscernible] order partnership but in a regular course of business, we do not share company names. We hope you understand this change of practice which will benefit our customers as well as [indiscernible] and should actually allow us to be more informative in public announcements. Turning to the results, there is positive momentum in CUI's business supported by a strong second quarter. We are pleased with top and bottom line results and believe our current business and future opportunities will lead to a solid second half of the year performance. Revenues fell $23 million, an increase of 20% compared to the prior year. From a second perspective revenue for the power and electromechanical segment contributed $16.6 billion, an increase of 23% from Q2 14. And the gas segment contributed $6.3 million, an increase of 12% from the prior-year quarter, back learning strong for both business segments representing $40.9 million of open customer orders as of June 30 which makes us optimistic as we look ahead. The power and electromechanical segment which represented 72% of our revenues in the second quarter showed positive revenue growth, both year-over-year and sequential. While we did the Tectrol acquisition, now called CUI Canada that closed in March. We're estimated that CUI Canada would add an incremental $10 million to $12 million in revenue to the P&E segment in fiscal year 2015, and we still believe that will be in a good range. We continue to expect the acquisition to breakeven or even lose some money this year as we move forward with increased efficiencies improvements and sales efforts. The gas segment are presented 28% of our revenues also showed positive year-over-year and sequential growth. We are starting to see traction developing at both VE and GasPT technology, significant progress and trace element detection and an uptick with [indiscernible] customers, in particular our ability to quickly and accurately detect mercury has become more and more recognized within the industry because Mercury is highly corrosive to aluminium and therefore can create catastrophic damage to liquid natural gas terminals. We have been very aggressive in that market. However we are beginning to see significant results in Australia and elsewhere. Earlier this month we announced that we are going to receive approval from one of the UK's largest pipeline operators to install and commission four of its previously purchased [indiscernible]. We also received a purchase order from the same customer for additional high risk gas to be produced at our UK facility for insulation in air conditioning later this year. Our integration efforts in CUI Canada continue. This acquisition has already enhanced the capabilities of our power group and among other things has broadened the customer base for our proprietary electronic product line. We continue to analyze our ability to manufacture more of our product line in Canada. Let me turn the microphone over to Dan for our CFO, so he can run through the numbers in more detail.

Thank you Bill, I will discuss not only the second quarter results, but year-to-date 2015 as well. As Bill mentioned the company's revenues were $23 million for the quarter, up 20% from the second quarter of 2014. Year-to-date revenues were $39.8 million, up 10% from the first six months of 2014. The cost of revenues for the quarter was 14.7 million versus 11.5 million for the same period last year. Cost of revenues as a percentage of revenue for the three months ended, increased to 64% from 60% during the prior-year comparative period. And for the year-to-date period, cost of revenues was $25.3 million versus $21.4 million for the comparable period in 2014. As a percentage of revenue, the cost revenues for the year-to-date period increased to 63% from 59% during the prior-year comparable period. The cost of revenues as a percentage of revenue will vary based upon the product mix sold during the period, the mix of natural gas systems sold during the period, contract labor necessary to complete gas related projects and is also [indiscernible] competitive market in which the company competes as well as foreign exchange rates. The company expects 2015 cost of revenue to remain in the low 60% of revenues range during 2015 consistent with the past three fiscal years and resulting from consistent margins and core power segment products, lower margins on gas integration related projects and higher margins on technology-based products offerings in both segments. [indiscernible] audited sales our backlog June 30, 2015 was a consolidated $40.9 million, and of that the power and electromechanical segment held and an audited backlog of customer orders of approximately $23.7 million and the gas segment health approximately $17.2 million on audit backlog. Moving on to the financial overview. Gross profit for the quarter was $8.3 million or 36% as compared to $7.7 million or 40% in the second quarter 2014, and $14.5 million or 37% for the year-to-date period, versus $14.7 million or 41% during the prior-year. For the three and six months ended June 30, 2015, the power and Power and Electro-Mechanical segment generated gross profit margins of 37%, while the Gas segment generated gross profit margin of 34% and 35%, respectively. SG&A expenses increased by $1.4 million to $7.9 million during the second quarter compared to $6.5 million for the same period in 2014. SG&A expenses increased to 35% as a percentage of revenues compared to 34% for the prior year. For the six months ended June 30th, the SG&A increased $4 million to $16.7 million versus $12.7 million during the prior year period and as a percentage of revenue increased to 42% from 35% for the same comparable period. The increase in SG&A costs for the three and six months versus a prior year comparable period are primarily associated with the addition of the SG&A activities of Orbital Gas Systems North America and the addition of the operations related to CUI-Canada. The remaining increases in SG&A are associated with the ongoing activities to reach new customers, promote new product lines including Novum, GasPT, IRIS and VE-Probe as well as continued new product introductions. The company reported a net loss of $504,000 or $0.02 per share EPS for the quarter ended June 30, 2015 and a prior year period the company reported a net loss of $66,000 or $0.00 per share and for six months ended June 30th, the company reported a net loss of $4.6 million or $0.22 for this year compared with a loss of $554,000 or $0.03 per share in the prior year period. The net loss for the three and six months ended June 30th, it was primarily the result of increased selling, general and administrative expenses related to the opening of Orbital Gas Systems, North America facility in January 2015 and the addition of CUI-Canada, Incorporated in March 2015, coupled ongoing amortization of intangible assets related to the Orbital Gas Systems Limited and CUI-Canada acquisitions. Adjusted net income which represents net income or loss, plus the amortization expense of the intangible assets acquired with those two acquisitions and plus the expense associated with stock and options issued for compensation royalties and services. For the second quarter, it was $101,000 or $0.00 per share, as compared adjusted net income $1 million or $0.05 for the second quarter of 2014. Year-to-date adjusted net loss was $3 million or $0.14 per share, as compared to net income of $1.6 million or $0.08 per share in 2014. As of June 30, 2015, CUI Global held cash and cash equivalents of $5.2 million, a decrease of $6.5 million since December 31. The company had additional short term investments of $4 million at June 30th, a decrease of $7.2 million since December 31, 2014. Operating activities generated negative cash flow from operations of $6.9 million during the six months ended versus positive cash flow in the prior year period of $49,000. The change in cash used in operations is primarily the result of the net loss for the six months ended June 30th, before non-cash expenses as well as changes in assets and liabilities, particularly the assets and liabilities associated with the activities of Orbital Gas Systems North America and CUI-Canada. Further to the overall change in cash and cash equivalents and short term investments, the company has utilized those assets to fund the acquisition of CUI-Canada this year, as well as to fund investments in property and equipment including the construction of the new manufacturing and research facility for Orbital Gas Systems Limited in the United Kingdom, which is expected to be complete during the third quarter. As of June 30, 2015, the company had 20,793,207 common shares outstanding. EBITDA for the quarter was a profit of $180,000 or $0.01 per share versus a profit of 868,000 or $0.04 per share for the same quarter in 2014. EBITDA for the six months ended June 30, 2015 was a loss of $2.8 million, or $0.14 per share, as compared the profit of $1.6 million of $0.08 per share for the first six months of 2015. Adjusted EBITDA for the second quarter of 2015 was 376,000 or $0.02 per share per share versus $1.3 million or $0.06 per share in second quarter of 2014. Adjusted EBITDA for the first six months of 2015 was a loss of $2.2 million or $0.11 per share, compared with $2.2 million profit or $0.10 per share profit for the first six months of 2014. The EBITDA and adjusted EBITDA were primarily impacted by the previously discussed items regarding operating costs associated with launching overall gas system North America. And now I will turn the call back to Bill.

Thank you, Dan. Before we begin taking questions, let’s talk in more detail about some of our new technology accomplishments. In second quarter, we continue to see increased demand and interest in GasPT and VE Technology product lines. We delivered and received purchase orders for 7 GasPTIs and have another 22 units out to bid. Most significantly, we have now received NMi certification for our device including full electromagnetic compatibility certification. It's now fully qualified, the device could be deployed across the entire European Union. We have been prequalified as potential supplier as one of the largest pipeline companies in Europe and fully expect their significant near-end project to move forward in the second half of the year with purchase orders for 2016 delivery of product. Moving to the VE technology sale, revenue is also quite positive. In the second quarter we delivered an additional 10 VE sampling systems bringing out total delivery to 108 units this year. We delivered additional 89 VE thermal well applications bringing the total deliveries of thermal wells to 412 units. Furthermore we have outstanding purchase orders for another 63 VE sampling systems representing more than £1.4 million or $2.2 million in revenues. We continue to receive enquires and are working with numerous potential VE technology customers. Additional highlights from our second quarter include the reception of our NMi certification for the GasPT completing all necessary EU requirements. We received orders for 30 additional VE Mercury measurement systems for large Australasian LNG project. We delivered 99 additional VE Probes/Sampling/Spares to a variety of new customers. We continue to incorporate CUI-Canada and new Houston offices for Orbital Gas. We successfully closed out all of the existing 2014 Bio-Methane Projects; and we began operational testing with large UK pipeline partner of a new IRIS light kiosk. In conclusion we are pleased not only with a solid second quarter but also with a strong backlog, continued interest in traction with our new technology as well as initial interactions with customers about our new product portfolio acquired with CUI Canada. We look to build on the solid second quarter and the significant recent company developments including new partnerships, CUI Canada acquisition and the new Orbital Gas Systems North America operations. These, together would strengthen the business and product demand, places us in a strong position as we enter the second half of the year. Finally, I would like to thanks everyone for your continued interest and support of CUI. Now, let's open the floor for questions.

Yes, sir. [Operator Instructions]. And our first question is from Joe Maxa from Dougherty & Co. your line is open.

Bill and Dan, just wanted to go through a little bit more on your thoughts on the opportunity in Italy. The indication is that you are still expecting PLs to come in the second half of the year, I think you said the revenue starting in 2016, there is no changes from previous expectations on that. Can you give us a little more color on the process and perhaps so where you are at in that status?

Yes. I think the centralized certification is a big deal, frankly it's the final step that we need to make sure that we could be deployed across Europe which we now have incomplete. And every indication is that they are moving forward as I thought for Orbital Gas. They are still very committed to the project. They are still tracking about 5000 of units, in excess of 3,000 units. They are still targeting installation to begin first quarter of 2016, which means they’re going to have to start ordering some time later this year. So we see the project moving forward as it has been discuss previously. There's been no change. Everything is very positive. Large part what we are doing now, frankly Joe, as you might have mentioned is setting ourselves up, to have the corporate supply chain to give them what they need. We've got now design work, begun concluded on our calibration of operation that we're going to have at our new facility. We have got full confidence now in our supply chain when it comes to individual suppliers and in [indiscernible] they are going to build and that we are going to start ordering units in the very short-term to start building a backlog, so we are ready to deliver since they need product. And that is, as I think you know and I have talked about in the past, we have several hundred units on the shelf ready to go. So we're very prepared to do quickly when they want that movement to begin. So again we have seen no indications that are moving forward as discussed previously.

And along those lines if you are building backlog and you have these big products coming, are you comfortable with your cash position as where it stands?

Yes, we are. Frankly, Dan and I keep very close eye on that, because he is obviously someone who wants to take into GAAP, but we feel very comfortable with it. There is a lot of cash still available to us, not only do we have, of course the $9 million in the bank we have excess capital once the project is done in England. We've funded that manufacturing research solely ourselves. Obviously there is not too to take a mortgage out of that if we want to. There is also a $4 million line of credit that we have in lines from the bank that is untouched. We haven't used it at all. And to be honest we talked to Wells Fargo about any purchase order that we get from a company like The [indiscernible] 0:18:13.1 Group. And they are more than happy to fund that project exclusively when we need it. There is a great deal of interest on their part, and you might want to put that kind of money to work. So I think we’re in a strong position, but I will tell you Dan and I are quite -- we watch that quite closely.

So two other things on the project front, so you talked about 2.2 million in backlog or purchase orders outstanding on your VE technology; those firm purchase orders and do you have a timing associated with when you may see that revenue?

Yes, they are in hand right now, and we shall see that through the rest of the year but that is the revenue we should see this year.

Okay. All right, so you will see that this year. And then this IRIS white kiosk, can you give some more color on that product. Is that to go after those 200 or 300 units or availability with your customer in the UK or is that a incremental opportunity?

No, it's an incremental opportunity. That's a quite interesting -- it's a partnership that we are with a large UK pipeline company. They are actually funding it to about a million pounds, and its started about four months ago, five months ago now. It's a kiosk designed to operate independent of the group. So it operates on wind and solar power. It will allow that company and others without matter to operate our balancing metering stations that are still remote that they cannot be powered by grid tower. So the opportunity is quite large as in UK because you have a lot of those types of -- in Northern Ireland and up in Scotland. We feel that the opportunity will be the bigger in North America we have the same situation out in some of the more remote areas in North America. It's a device that will run somewhere between 60 and 100,000 pounds and it is quite a high-tech kiosk and what we are doing right now is we have the kiosk, actually operating solely in UK. We have one still and is operating using, I can’t believe, solar power in the UK, but it's using solar power and we ended it operating quite effectively. They are going to operate and we’re going to operate it jointly with them for years. So it's got another seven to eight months or so to go. Once it operate successfully for year and we've got no hiccups from that at all, so far, and they are going to certify and want to start deploying it to some of these remote locations. It’s the same arrangement we had with the same thing before. Whatever we produced we own, so it's a technology, at the end of day, while we deploy it than first, it's something that we can sell to our North America offices as well. It's a very exciting prospect, but it's incremental and its new to the company.

Thank you, our next question comes from the line Eric Stine from Criag Hallum Capital. Your line is open.

So maybe just touching you call that a number of purchase orders and I know announced this within the last month. But just maybe thoughts on next step, now that you’ve got companies going from testing to actual commercial installations, I mean do you think that this is something than is followed up by larger orders, or do you believe that this is just now going to be part of kind of their regular buying patterns?

It really depends on the customer and I think again, we started back this in the past. We believe this technology especially GasPTI is revolutionary. It has changed the way gas is measured. And certainly if we get this large order which we've completed really in Europe, Western Europe it literally moves as that we have to, the largest pipeline company in Western Europe, when they move everybody else in Western Europe move. So in the case of those customers we think that the ramp up could be quite significant. On the other hand if you look at some of the compressor companies are all quite now, for example, they are going to roll out we think tens if not hundreds of units, but they will be with over their timeframe, frankly -- as they retrofit these individual compressor units. So again it really depends on the customer, but I think we’re still very confident that once we starting seeing traction nebula, because the device is cheaper because it is faster, because it is low maintenance and accurate; once it becomes the standard if you will, I think you are going to see a fairly dramatic increase in sale. That's what our sales people out there doing now, is pushing very hard, announced credit throughout the industry. So we see that launch.

And then you talked about NMi certification and EU certification as well for GasPT. I mean is that something that you think has kind of been a limiting factor to sales or is it more about as you said getting the opportunity in Italy rolling having a referenced customer and then that sort of market growth?

Actually it’s very responsive to that large because, I mean frankly the NMi certification format is very-very important to them, although not quite as important to the rest of Europe. It is a certification that under the EU treaties it is supposed to be had by any metering device being used in gas or oil for that matter. But frankly other than the large customer ordering after often times, people just ignore. But we wanted to be totally responsive to that. And it’s a very difficult, very prolonged, quite extensive certification to get and that’s why many entities just don’t bother with that. And we wanted to be very responsive to that and I think it’s another indication. But we’ll able to go back to them, say okay, this is something else you wanted, we’ve got it. Just take it much easier for them to go forward on the project with obviously a new technology.

Maybe just turn into VE-Probe, you called out the 13, for the large LNG project, I mean clearly that project is very large. So wondering what is the opportunity for follow-on orders for that specific project. But then that project owner has a lot of LNG projects as well. So I mean have there been discussions which Chevron in terms of their plans across more of their LNG plans?

Well absolutely not going to identify the Chevron. So let me correct you there

Alright, sorry about that.

There is an opportunity. And frankly they have added their representative actually last week, their representatives came to our ICU, -- solely to an essence and inspect and do due diligence. They were quite impressed in what they saws I understand it. I’m actually going to be back there next week to get a call report. But I was told they were very-very impressed and understand that this 13 sampling testers for them amount to about £1.3 million of business. So they are very expensive. They are by and large mercury censors, so that very technically advanced. And I think what we’ve been less of -- there is considerable amount of opportunity in the Australian project and in others. The Australian project, we’ve been told could be as much as £10 million to £15 million over the next three years. Well again that significant amount of work for us. And you’re absolutely right, this is a Fortune100 oil and gas company that has partners all over the world. They have sent two new people to our facilities to we make sure we are, who say we are and then we can provide what we spoke or say we can provide. And again they could've actually seen the company at a better time, because we’re just opening, we're in the process of opening this branded manufacturing research facility. So they saw very high-tech operation and it’s obviously growing, and it’s obviously getting money best of interest. And I think again my understanding is they were quite impressed.

Maybe this one last one, there is a large pipeline company in the UK with IRIS, is that you still expect that RFP comes out, I mean is it still -- I think you’ve sized it at a 150 units to 200 units. Is that how we should think about that starting in 2016?

Yes. I think that’s correct. And again I think, I am even more confident about that since they’re beginning to order piece, of which is up in base that they would not do. Well if they’re doing because they have certain units within their infrastructure that are literally obsolete and are approaching situation they could have catastrophic failures. So they have to get those equations but the fact that they’re ordering to use at your premise makes new more confident. But at the end of the day, no matter who get the Tier 1 contract, the civil engineering contract, I believe the IRIS technology is going to be used to monitor the entire grid. So yes, I see that moving forward. My only question is when they get that big tender out, it seems like a very difficult thank for them and is it very complex process and you'd get those things done, but again they seem be have a little bit of difficulty getting it up.

And our next question comes from the line of Andrew DSilva from Merriman Capital. Your line is open.

A lot of my questions were already answered, but just, as far as your technology goes particularly with GasPT, it’s been a while since that technology was introduced to the market. Now I was wondering if you could maybe give an idea what the current landscape looks. You are running into new technology, there is legacy gas meta-graphs, so really growing primary competition out there for you? Any color on that would be very useful.

Sure. I will say Andrew and again I talked about this before. There was a time when I worried significantly about competitive technology. We have seen literally nothing on the market. Interestingly ABB actually sold one of the pipeline companies we were deal with, about four or five months ago that they thought they had a solution that mirrored some of the features that we have. They provided that solution to that company who stepped it for one day and failed miserably, at which point they went back to the customer, said they need two more years of development. So we've seen nothing that comes even closer to even what we do. I think I've mentioned that one competitor we've seen in Europe is the Elster Lab Series which is a device that is relatively accurate, not quite as fast as ours, probably that has and that acquires daily calibration with pure methane gas. So it's got to have a purer take of methane gas sitting right next to it and someone need sot calibrate each day, and even read automated calibration, you're still talking about that someone getting out there a couple or three times a month and look at it and you're replacing that methane gas which is highly volatile. So that's the only one device that comes anywhere near to our speed and accuracy compactness, and you still have the problem with service gas. So I would tell you that by and large the industry has still very much committed to the old technology that the gas matters, and that has not changed and there is nothing out there that is competing with us which I think again leads me to be very confident about the opportunity. Because once we show the reliability, durability, the accuracy and the acceptance of our device with some of these bigger companies, I think it becomes clearly and no brainer for these companies to start changing to newer technology which is our technology. So now in case of any type that there are any technologies out there which has got seen it, and really at this point if you get a new technology adopted, it would take literally two or three gears, because we have seen that cycle. You've got to get safety testing. You have got to be years of field test, it's a very laborious, very expensive, very-very long process that no one even start at this point.

I guess kind of follow up to that, do you think the reason you are not seeing new technology is more related to the fact that it's so difficult to actually penetrate the market or do you think it is more related around the fact that your technology is that good that there isn’t anything that's able to actually come out that can compete with it.

Yeah. I think it's a rocket science. I would say, which is again tactical, it is rocket science, what Advantica did, what British Gas -- was monumental. They literally were able to develop an algorithm which the other invented more for than anything else, that allowed them to actually mimic what a gas is measured up -- without any calibration gas. They did that in a way that was unique to the market and the problem that people would have now trying to catch up is frankly that algorithm becomes more and more accurate on more information that we receive. As we receive more information from the field, our engineers were able to tweak that algorithm and make it more and more accurate. So we are always approaching the accuracy of what supportably the gas coming out of this -- which is better than 0.1% accurate. Our field units now are in the range of 0.15% accurate. So they are approaching the GC accuracy levels and with the amount of the maintenance or gas or time delay problem, and it is just a very difficult thing to do. I mean I think I have mentioned this before; when we first bought the product to the market a very senior executive at a pipeline company in North America said that the market has been looking for this for 20 years. They have been working on trying to get something like this for 20 years and just have not been able to develop it, or British Gas, simply because they have the money, the time, the expertise we are able to do it and I think it's just a very difficult problem. Gas especially now has become very-very changeable. It has numerous elements in it that affects its volatility , it's color for value, and as with the chemical analysis that a meta gas provides no one's been able to come up with the concept that approaches what we do.

Okay. And then moving over CUI Canada, what's your baseline gross margin we should expect out of the products that are coming out of there? Is it maybe the low to mid 30s, or is it slightly below traditional business segment that you had prior?

Dan, you answer that.

Absolutely, I’ll pick that up. Andrew, yes that's correct. Right now it is in the lower margin, lower 30s as we’re building of efficiencies there. The plan as you know, if we acquired that in solvency, so it's not a fully loaded highly efficient plant yet, which means there is more overhead being allocated to the lower volumes. As those volumes increase our margins to climb up into the 40% range where the rest of the power category is, but for now we are seeing margins in the lower to mid 30s from a gross standpoint and we are working on, otherwise to rectify that that as well beyond just increase in the flow through the factory, we’re also working on setting appropriate pricing on the orders that are net worth -- so we feel some of those may have been not quite priced practically for the current model that is an operation at that facility. So as we work with the customers on the orders we’re being quite realistic with them on pricing and coming to a win-a-win situation for everyone.

Okay. Got it and this might not be a relevant to you guys but do need any sort of EPA certification or a regulatory certification to your mass distributed products in any part of the U.S. or any other type of standards that we should be thinking about internationally for GasPT or IRIS strengthening to that nature?

Okay. I wish lI’ll question, as far as Orbital goes, I know couple or maybe a year ago or so we were discussing international, by international I mean outside of the UK, opportunities for the company in the Middle East, Africa and parts of South America; are those still viable what’s on your legacy Biomethane in authorization projects, or are you kind of seeing that transition to more domestic UK opportunities for them now?

For them to involve it is actually explaining a pretty significant opportunity in Venezuela, which we are working on it. It's just again they will launch sales cycles but they would be big projects, but their eyes are open and they are certainly looking outside of UK. Obviously our first commitment was with the British, however business is inside the UK with big pipeline companies in the UK, but we are looking out and there are projects out in the horizon that could be significant.

Thank you and our next question comes from the line Marco Rodriguez from Stonegate Capital Partners. Your line is open.

I apologize I was having some technical difficulties in my phone so I had to jump off and come back and so if you covered questions these questions, then I will just coming on to follow-up with you later. Just kind of wanted to understand a little bit here, I think there are chance if there is a write-down with the gross margin by segment, what was those numbers again for the quarter?

They wanted to disclose in the Q but we do have them. I think they already disclosed in the press release. For the quarter power and electromechanical segment gross margin was 37% and the gas segment was 34% and then year-to-date the power and electro was 37% and gas segment was 35%.

And then SG&A had a pretty large sequential decline here, just trying to get a sense as far as what was going on in the quarter with any sort of one-time items and might have lowered it, and what are sort of the expectations as we go through the rest of the year?

Good question, what happen is that the first quarter was more expensive as it there is a lot of startup cost including recreating cost in the first quarter as we’re setting up the new operation in Houston and then also completing the acquisition of CUI-Canada. So we feel like the Q2 SG&A is pretty stabilize now for where we believe the two new operating segments are going to require and as well as the ongoing operation side. So I think the Q2 SG&A is maybe pretty consistent for the remainder of the year.

And if you could talk a little bit about the balance sheet, receivables picked up pretty substantial sequentially. Can you talk a little bit about the drivers there and then obviously you mentioned in the prepared remarks that this product kind of impacted your cash flow from operations and free cash flow and also if maybe you can talk a little about the expectations of cash flow for the remainder of the year?

Sure. So the uptick in receivables is really to the U.S. for the increased in business associated with overall growth, but really the addition of CUI-Canada operations and the related customers are going to CUI’s power group now and then also the uptick in business through the Houston overall UK, overall U.S. office. So those two entities and the growth in general brought in 23 million of revenue for Q2 as compared with 16 million in Q1. So that’s the general increase. And the receivable balance, I’m sorry could you repeat your first question or rest of that question?

Yes. Just kind of how we should be thinking about cash flow from operations for remainder of the year and free cash flow as well?

In general, the balance sheet looks like it’s probably going to stay in this territory from receivables inventory in such standpoint, payable should remain consistent as well. So we don’t expect to cash using operations to be millions of dollars each quarter now. It should be more just based on flux for the P&L impact and smaller changes in the balance sheet. So it should start to see some smaller usage for the rest of the year. As Bill mentioned, we’re not thinking about the cash balance so we’ve got right now and we don’t believe we’re going to burning through much of that for the rest of the year.

Okay, I’m sorry. I guess I might be having some more problems in my phone. Then last quick question, I just want to get clarification on one of the earlier questions, the large Italian opportunity. I believe on the last call, you guys were talking about there should be some award announcements coming this summer, obviously the summers not done yet but we’re most kind of lapping that. Is that expectation still there or is that being pushed a little bit. Can you help me understand that part?

Yes, it’s obviously internal with them. We’re intentionally not announcing much of anything until we actually have a confirmed formal tender out there that we win, because obviously I don’t want to ride through it, waving red flag in front of my competitors. And we’ve been told that should still be done this summer, I expected it actually by now, but these bid processes are very complex as evidence by the one in UK. They are moving forward according to what they tell us and we still expect something this summer. You know when I say this summer, I suspect something in some late this month or early September.

Our next question comes from the line of Jim Kennedy from Marathon Capital Management. Your line is Pennsylvania n.

A couple of questions for you. We will start with ZE, could you remind us what is it about that technology that you feel caused it to be selected both in Australia as well as other places globally. What is it doing that other technology cannot do?

So that’s a great question and it’s a little bit technical, but I will try and summarize as much as I can. It obviously has been supervise for me, because I’m aware by trade not an engineer. But in traditional sampling systems what you have is a very large amount of gas sample taken up through a very large tube and then goes into a filter system that is also quite a large compartment comparatively where it sits for a period of time and then goes into whatever your analyzer is. That period of time from sampling to receipt of the analyzers can be anywhere from two as many as five or six minutes. More importantly for trace elements like Mercury that large tube and especially the large filtration system creates a pocket for the Mercury which is heavier than all of the elements settles to the bottom. So many times the Mercury has to build up at such an intense level before it gets to the detector, that by the time they realize there is Mercury content in the gas it’s too late or in some cases a good example was a catastrophic failure at STAT oil in the Netherland, where you had built up of Mercury that no one appreciated, because the sampling system simply didn’t get the Mercury to detector. The VE Technology, because of the aerodynamics created by the fans, the helical fans allows us to pick up a very-very small amount of gas, I think it’s a 4 millimeter tube that brings the gas up. The reason that's important is it requires no filtration, it’s not being forced out through a pressure drop like is it is a normal sampling systems, so it’s coming up to its own and the input it allows the gas from the pipelines to reach the analyze in less than 2 seconds. It’s almost instantaneous. It comes from the pipeline to the sampling system and there is no large filtration or other large compartment within the sampling system. It goes straight from the pipeline into the analyzer. In the case of Mercury as an example, it becomes very-very accurate, because the place where the Mercury settles is on to the gold foil that is in fact the analyzer process. So the sampling system is very-very accurate for trace elements like Mercury, like H2S, like water and moisture H2O. All things it can be damaging especially in the LNG process in the liquificaton process of LNG. Obviously any water in the gas or moister in the gas in that liquification process turn into ice which again can be catastrophic when you’re dealing with an LNG plan. The Mercury as I mentioned is very corrosive for aluminum, so also potential catastrophy. And then there is very-very small trace element in the gas pipeline. So if you have a sampling system that mixes the gas and allows that trace element to find and get another place to hide in the filtering system you have simply another method of not being able to detect those trace elements. So what the VE Technology does is, it allows for very quick, very small, very accurate samples to be taken. On top of that obviously because of the helical fan it reduces and eliminates that vortex, which causes a vibration and ultimately closes the pipeline or the probe itself to break. So twofold, one is that the initial invention which was simply to target to stop the vibration and two is then kind of unintended consequence to that, the ability to withdraw very fast, very accurate samples.

So, Bill the potential market here as you’ve described; are we talking strictly LNG projects, and are they new builds, can it be retrofit?

No, that's strictly LNG. The probe, the sampling system could be used with any analyzer, anything. It makes a gas come out of that faster as well, because obviously instead of taking five to ten minutes to get the sample, you're getting the sample within two seconds. So it’s obviously integral for GasPTI, because it makes the GasPT that much quicker. But it can be used with any sampling system or rather any analyzer to sample any form of gas. So it could be used throughout the system. And in the case of sampling system, it’s most particularly in use of LNG, because the LNG has the most probably trace elements and the most danger from these trace elements, because they’re actually liquefying the gas. The other area that we’re seeing some pretty good takeaway as you can tell is in the area of thermal wells, which is at actually price point; but is much more prevalent throughout our industry. Thermal wells are everywhere. It’s not hundreds of thousands, millions of pipelines all over the world. So the difference is with there, where now you have a very strict calculation you have to do. Whenever you put a thermal well into a pipeline, where you have calculated what the vibration is, when the vibration is going to cause weakness, how long that device can last, when t has to be replaced, you eliminate all of these calculations, all of that replacements or all of that issue when we use the thermal well design around our VE Technology. And you have don’t have that vibration issue, so they are pretty quite a large.

When you went through the evaluation phase and the testing here, where you competing against other technologies or is this perceived to be the only technology that can do this or does it better than competing technologies, what was the criteria there?

The sampling probes and thermal wells have been very, so it's just basically up until we introduced this VE Technology, they were simply using to stick a pipe into the pipeline, it was nothing technical about it. You set the pipe in the pipeline, it had in angle dip on it, so you had a pressure drop as it went past and everything went up, everything including all of the garbage, everything else you see in that pipeline would go up into tube, that’s why you to have such large filtering, because you're drawing up dirt and mud and crud and all stuff using that pipeline. We don’t do that. We only draw the gas. But again there is nothing particularly scientific about what was done in the past. We have the patents all around this helical fans which really is a historic systems that's been used to create this vibration elimination by smoke stag, by car antennas, anywhere you have a flow going across, in essence an insertion into a pipeline, I mean the airspace of any type is going to have this problem and the say helical fan to be used to avert that problem. We simply have the patent on using that technology in the pipeline, oil or gas pipeline.

So is that you could become an industry standard with the right adoption rates?

Yeah. I think that's correct. And I think again it's kind of thing where you do not have regulator requirement. It's people starting to look at it and realize what it does and how it works and I think that's what we are seeing now in Australia. We went down there and I think as mentioned before, we went down there for a 280,000 pound or $400,000 opportunity. We went down there, we get full -- because we saw the opportunity, and the minute they started seeing the results, the minute they started seeing what it could do, all of a sudden now I think we are up to somewhere around 3.3 million tons, almost $300 million worth of sales we have got down there.

Other question for you Bill and Dan. When the North America gas transport and compression company that is now starting to order PT2; number one, is this a referenceable customers? Will they allow you to share their name with others and allow people to come and see the technology in the field?

Yeah. We have had really good cooperation in that regard. They are very as I think we talked it about in the past. They are very hesitant, if you allow anything to do with press releases or any of that kind of announcement, but within the industry themselves they've been very-very good about acting as a reference, they have made their engineers available to talk to other people. And yes, we have our sales group out of North America using them quite often as a reference and they are in fact opening up their facility to allow other engineers to take a look at what's going on, so we feel that's good.

Do we, again you again, you are not going to mentioned the company, but do we know approximately what percentage footprint they have in the U.S., I mean do they control 5% of the transmission, 3%, 10%?

I say it’s probably -- it's certainly less than 2% as a transmission. It's not so much that they control so much the transmission, It's that they are very respected as very high tech and very advanced, they're a company that is to some extend that Bell was there in the industry, they7 always helped, so that really was their stake advance. You try and do that in the U.S., you are talking about 350 almost 400,000 miles of pipeline now. You've got some major pipeline players, the Kinder Morgan, the ETPs that are controlling a lot of their own compression. But again for an independent operation, they are very significant in sense of the industry looks for them for direction.

Okay. And last question, your press release from July, I believe that was 21st, mentioned Asian gas turbine manufacturer comment on the number of systems deployed where they purchased, what is the ongoing relationship there?

Yes, I think now we delivered four systems there, I think that was delivered -- a big issue was their factory acceptance. They are very particular about the -- what they will take. They are in fact running her systems, as I understand it now as they are in essence conducting their own testing to see what the affects are. We’re confident that they are going to see what are real to see that it will see an uptick in efficiencies and improvement in ignitions, but again they are not really sharing with us, what it is they are doing or how long it's going to take. But they are moving forward and they have now the devices in place, and then you have same figure. They purchased to the life.

Thank you. And next question comes from the line of Joe Maxa from Dougherty and Co. your line is open.

Yeah. Hi. Just a couple of modeling questions. I was looking at the gross margin and with the gas being down sequentially 34%, I am assuming like what color was that driven by these biomethane is finalizing those and with the backlog looking to include more of the e-technology I would expect that to pick back up in the second half perhaps back to your 37% or 40% range. Is that the right way to look at it?

So there was some downpush in that from as you mentioned the biomethane. The other downturn in that are decreasing that margin is we had an increase in integration work through the North American office. Those margins are in the mid to high-20% range up to 30% range, so that pulls that down as you now the VE margins are in the 40% ranges and so those will help offset that. So I think for the gas operation for what we’re seeing for the remainder of the year and given the integration work in the U.S., it’s looking like probably 35% to 37% range target for that segment for us right now.

And similarly on the P&EM side 37% peers to be the number look to quarters in a row and commentary earlier sounds like that going to be somewhere in that same range?

We’re working in backup to the 38% to 40% range, but 37% pretty close there. I think we’re going to get a backup in fairly short order, but that’s going to take turning through new orders their price differently and just in general continue to pump through the new facility in Canada to get more efficiency is there. So that margin should start to turn backup over the next couple of quarters.

And then depreciation, amortization couple of moving parts with the acquisitions. What should we be modeling in the back half?

The number that you saw for Q2 should be consistent for the back half for the year.

Our next question comes from the line of Roger Liddell from Clear Harbor Asset Management. Your line is open.

I wanted to pick-up on Jim’s question of just couple of minutes ago on the PT Technology and thermowell, let’s say sensing capability and with your discussion of the importance of Mercury detection by had on the system could do that. I am wondering if there is a multi-application opportunity out there with contaminants, platelets that have nothing to do with energy for say. Can you elaborate on that?

Yes, I’m not sure how to answer your question. The sampling system, our application sampling system is strictly for natural gas, that’s how with used to natural gas. So you’re targeting trace elements of natural gas and what those operators are really most concerned about in the trace element any elements that are going to close damage to their facilities or obviously contaminant to get itself. Now realize there is not going to be much it’s into the system on a general basis, when you have a standard gas pipeline system, because of the entry point you’re going to have gas that will give the operator a very exact chemical composition with gas. In the gas have problems again some of the trace elements, but it will be a very-very accurate chemical make-up with the gas and then what you trying to do after that this pickup thing it get through in such my new amounts, but they have to build up or for the detectable that what beatings like Mercury or moister that current condensation or you might have very-very trace amounts if H2S and generally it will be much further upstream. Again I think at this point our applications are all energy related. So I’m not sure how to answer your question, it’s all for gas it will be.

Sure. I don’t want to pursue it further, we got enough opportunity to work on right here. In the 10-Q, in the section in General Electric Intelligent Platform Arena. You point out that CUI Orbital was name just a premier solution partner. In that reference, you mentioned both natural gas energy primary market and then separately there is a reference to Electro-Mechanical Intelligent Power applications as a secondary. I understand you might be significantly constraint by in NDA, but this mentioned of Electro-Mechanical Intelligent Power found like IRIS to me. Is there a second application that you are now designated as a premier solution partner?

Yes, I think that was to say that and I think really they did that more because they worked at the company and what we do generally but our relationship with them at this point is mostly outer space. I mean there is still other, we're working with them, I mean gasPTI with application so that we're still working on that but again I think most of what that intelligent platform is about is Irus.

Yes, ok. Turbine control applications, A UK Transmission Company has been using them for approaching two years now and turbine control. Is there anything concrete right now on turbine control versus the other applications for gasPTI.

I know we talked about that already, I mean we talked about the manufacturer, we still living in that market, that's a very senior and we have a great application for process control so again we show that we're still working towards that but other than what we've already talked about, there is nothing really to talk about.

Okay, final question. I know that there is something like 1.4 million shares for the company. And are you aware of any particular short-players or what is their holding.

Yes, in fact, it seems like that to me, because I think we talked to some extent about the of 2000. I think the last we got pulled under the rush of 2000. We obviously didn't make the loss of 2000 this year and as a result of that, at one point, you know, just to pull out of we got over 2.2 or 2.3 million shares short. We now are [indiscernible] manage around 1.38 - 1.4 million short shares which is more in line with what we had before the loss of 2000 situation occurred, it was somewhere around 1.2 million but now I can't tell you who or what that 1.2 million represents. That its obviously a bet by some people iin the market that were not going to deliver on what we say we are going to deliver on. We don't make them.

Thank you. [Operator instructions]. At this time, I am showing no further questions. I would like to turn the call back over to Mr Bill Clough for closing remarks.

Thank you everyone for attending through the call. Again, I think it is pretty obvious from this call that we are very enthusiastic about the company and the direction it is going forward. As always, I just want to thank everybody on this call and shareholders generally for being supportive and patient and I am going to show you that the time has come when all of our employees are working very-very hard to deliver on the promise that I think this company brings. So, again with that piece said, thank you and that concludes the call.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the program. You may all disconnect.