Sanjay Hurry - LHA, IR William Clough - President & CEO Daniel Ford - CFO

Eric Stine - Craig-Hallum Rob Brown - Lake Street Capital Liam Burke - B. Riley Jon Fisher - Dougherty & Company Jeff Bernstein - Cowen Mike Wallace - White Pine Capital Orin Hirschman - AIGH Investment Partners

Good day, ladies and gentlemen, and welcome to CUI Global First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call may be recorded. I'd now like to turn the conference call to Sanjay Hurry, Investor Relations. You may begin.

Thank you, Nicole. Good morning, and welcome to CUI Global's first quarter 2018 results conference call. A copy of the Company's earnings press release and accompanying PowerPoint presentation to this call are available for download on the Events & Presentations page of the Investor Relations section of the CUI Global website. With us on the call today are William Clough, President and Chief Executive Officer; and Daniel Ford, Chief Financial Officer. The purpose of today's call is to review the Company's financial results for the first quarter and to provide you with management's perspective on the balance of fiscal 2018. Following management's remarks, the call will be opened to questions-and-answers. A telephonic replay of this call will be made available until May 22nd. You may also access the archived webcast and accompanying PowerPoint at any time on the Investor Relations section of the CUI Global website. As a reminder, this call will contain certain forward-looking statements made within the meaning of 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 among others, the Company's reliance on third-party manufacturers and suppliers, government, agency, budgetary and political constrains, new or increased competition, changes in market demand, and the performance or liability of its products. These factors and others could cause operating results to vary significantly from those in prior periods and to 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. Before starting the call, be advised that management will attend the B. Riley FBR Annual Institutional Investor Conference on May 23rd and 24th in Santa Monica and the Craig-Hallum 15th Annual Institutional Investor Conference on May 30th in Minneapolis. Management is available to meet with investors at both conferences. Schedule a one-on-one with management please contact your B. Riley FBR or Craig-Hallum representative. With that, I'd like to hand the call over to William Clough, Chief Executive Officer. Good morning, Bill.

Thank you, Sanjay. Good morning, everyone, and thank you for joining us on our fiscal first quarter 2018 results conference call. I'll begin this morning with a brief overview of our performance for the quarter, after which, Dan, will review our financial results in greater detail. Following Dan's remarks, I will conclude the call with commentary and the momentum we see on our pipeline of opportunities across both Power & Electromechanical and the Energy segments. To begin, we're very pleased to report higher revenues year-over-year in the first quarter in both of our business segments. We attribute our performance to strong execution across all facets of our business as we leverage our industry disrupting technologies to drive top-line growth. Revenues for the quarter reflect continued strength in our Power & Electromechanical segment and growth in our Energy segment as business development activity in prior quarters and the opening of our new larger facility in Houston begin to bear fruit. As Dan will discuss in his prepared remarks, net loss for the quarter includes an approximate $900,000 royalty payment to Virtual Power Systems included in cost of revenues. To remind you, royalties to VPS decreased considerably after the first $1.4 million in revenues of ICE Technology Products. Therefore future ICE orders will contribute significantly more to future profits. Our performance for the quarter also demonstrates execution of our strategy to broaden our base of business and diversify our revenue streams. In our Power & Electromechanical business, we have been moving to expand our market footprint with the addition of new distributors including Master Electronics which began in quarter one and increase our direct sales business through new design wins and new product introductions to give us a strong foundation for long-term growth. In our Energy segment, we continue to focus on ceding the market with customers that can scale their orders as their confidence in our innovative gas products builds. I'm very pleased to report their efforts have yielded a record consolidated backlog of $43.8 million at the quarter end or $11 million higher than at year-end. I would note that strength in our backlog is broad-based across both our business segments and without the benefits of any new orders from our Italian contract. In our Power & Electromechanical segment, revenues were up approximately 25% due to steps taken during the industry's downturn years to position us the industry's upturn. Revenue growth in the quarter was driven by increased turnover through our distributors and continued sales through our direct customer base including the first revenues associated with the ICE Switch order announced in 2017. As I mentioned, we added Master Electronics, one of the largest global distributors of electronic components to broaden our market footprint and put our product catalogue in front of many new potential customers. Growth in our direct sales channel is being driven by our broad product line as well as the ICE product offering. We deliver our inaugural ICE Switch order in the quarter and also secured our first ICE Block order, a $2.9 million order with a channel partner who has extensively tested the solution over the past 18 months. This order is expected to deliver late this year. Industry awareness of our ICE Technology continued to grow as we move to promote this disruptive technology in the marketplace following the receipt of UL certifications. In March, we and VPS presented our ICE platform at Data Center World Expo within our integration partner Sanmina's booth. And I'm pleased to report that the attendees' interest in the technology was quite high. Power & Electromechanical backlog was a very strong $26.1 million at March 31st, up from $20.2 million at December 31st. Turning to our Energy segment, Energy revenues increased approximately 18% year-over-year due to higher revenue from our Orbital Gas Systems North American subsidiary. With this new larger facility in Houston, Orbital North America is effectively competing for a large dollar integration opportunities in this region and we saw that during the quarter. We secured a $2.1 million sole-source integration project with an EPC company because of our larger facility and because we have established a reputation for outstanding customer service and technical excellence in the industry. We also won this project because we can offer the customer turnkey solution that engineers our Energy products into our integration solutions. No competitor can match the scope of our joint offering or pricing. For us, adding VE and GasPT systems integration work creates significant incremental value and generates higher gross margins. Energy backlog at quarter-end was $17.7 million, up from $12.6 million at December 31st. Now let me turn the call over to Dan Ford, our CFO who will take you through our financial results in greater detail. Dan?

Thank you, Bill, and good morning everyone. Before I review our first quarter results, I want to bring to your attention that CUI Global has adopted the new revenue accounting standard known as ASC Topic 606 for fiscal 2018. These new revenue rules are now GAAP for the company. The financials I present for our first quarter today and those that are found in the associated PowerPoint presentation to this call are based on these new revenue rules unless otherwise stated. Please keep in mind that our financial results for the first quarter under the new revenue rules are not directly comparable to those of the year ago period reported under the old revenue rules ASC Topic 605. We utilize the modified retrospective transition method upon adoption of the new revenue rules. Under this transition method, rather than recast prior periods we are required to report our 2018 financial results on an ASC 606 basis. So alongside our new GAAP, and to give you an apples-to-apples comparison, we are also providing for your convenience what our first quarter results for 2018 would have been as reported under the old revenue rules. And the financial results presented under the old revenue rules are directly comparable to 2017 and can also be found in the PowerPoint presentation. We expect the ongoing impact of the adoption of the new standard to primarily affect the timing of revenue recognition. I refer you to Note 2 of our condensed consolidated financial statements found on our Form 10-Q filed a short while ago for a detailed explanation of revenue recognition under both the old and new rules, but to summarize the cumulative effect adjustment recorded as of January 1, 2018, was a net $1.9 million decrease to cumulative deficit due to a $2.8 million transition adjustment from the Power & Electromechanical segment, partially offset by a negative $900,000 transition adjustment from the Energy segment. Turning to our consolidated results for the quarter, total revenue was $22 million, an increase of 23% from $17.8 million for the first quarter 2017, reflecting a $3.4 million increase in revenues from the Power & Electromechanical segment, and a $764,000 increase in revenue in our Energy segment. In comparison under the old rules for direct comparison against our Q1 2017 results, total revenue for Q1 2018 would have been $21.7 million. The variance in total revenue for Q1 between the new rules and old rules is $262,000 and is primarily attributable to the timing of revenue recognized on Energy segment contracts. Largely as a result of higher contribution from our lower margin integration business with our Energy segment, consolidated gross profit margin was 190 basis points below last year at 29.9%, although consolidated gross profit was higher at $6.6 million. This quarter, as Bill mentioned, we also incurred an approximately $900,000 royalty expense to Virtual Power Systems as included in cost of revenues. Under our agreement with Virtual Power Systems, CUI incurs royalty expenses on sales of our ICE products with the royalty rate highest on the first $1.4 million of ICE product revenues and as expense decreases considerably on future revenues. In comparison under the old rules, gross profit for the first quarter would have been $6 million, a variance of $619,000. This is primarily attributable to the timing of costs recorded on Energy segment contracts. Consolidated selling, general, and administrative expenses for the first quarter were $9.2 million, an increase of $600,000 or 8% compared to the prior year Q1, reflecting increased costs in both of our business segments just for higher sales as well as higher currency translation associated with expenses in the UK. While SG&A expenses increased in absolute dollar terms as a percentage of revenue SG&A declined to 42% of revenue for the quarter. We expect to realize cost savings over the balance of 2018 from various measures applied in 2017. Adjusted EBITDA loss for the first quarter was $2.7 million, a decrease of $500,000 from last year. Turning to our segment revenue and gross margins, I'll start with our Power & Electromechanical segment. Revenues for the quarter were $17 million compared to $13.7 million last year, an increase of approximately 25%. On a sequential basis, Power & Electromechanical segment revenues increased 7% from $15.9 million in Q4 2017 reflecting the continued strong ordering within the segment and their associated delivery as well as the shipment of our first material ICE product order which was secured in the fourth quarter of last year. We continue to benefit from the electronics market upcycle, the broader base of business we have established for the past several years with new distribution partners such as with the addition of Master Electronics most recently, as well as new design wins and new product introductions. The Power & Electromechanical segment has continued to see strong ordering through the first month of Q2 2018. Gross profit for the first quarter was $5.2 million or 30.7%, a 140 basis point decline over last year's 32.1% reflecting the previously discussed significant royalty expense paid related to the revenues of the ICE product order recognized in the first quarter. Our Energy segment produced revenues of $4.9 million, an increase of $764,000 as compared to revenue of $4.2 million last year. This increase was primarily associated with higher revenue from our Houston facility and from higher exchange rate on the British Pound as the Pound has rebounded considerably from its fall -- from its initial fall after Brexit. Revenues for the quarter were more heavily weighted towards lower margin integration projects. On a sequential basis, revenues for Energy segment declined 6% from $5.2 million in Q4 2017 reflecting the typical decrease we see annually in Q1 related to project delivery schedules. As a result, gross margin for the quarter fell to 27.3% from 31% last year. As a reminder, our Energy segment experiences improved margins when it sells more of its leading technology solutions, including GasPT and VE Sampling Systems which offset lower margin integration type project work. As Bill noted, we're increasingly offering turnkey solutions to integrate our Energy projects into our project work which will generate higher gross margins for us. Consolidated backlog was $43.8 million at quarter end compared to $32.8 million at December 31, 2017. Backlog for the Power & Electromechanical segment was $26.1 million, an increase of $5.9 million compared to $20.2 million at December 31, 2017. Reflecting the continued uptick in the Power market as well as the inclusion of the $2.9 million ICE product order we received in the first quarter, which as a reminder, we expect to deliver this order in late 2018. Energy segment backlog at quarter end was $17.7 million compared to $12.6 million at December 31, 2017. The increase in Energy segment backlog reflects previously announced orders including the Orbital UK order for $4.58 million to enhance fuel gas metering and compressor efficiency on a UK gas transmission network, the Orbital North America order for $2.1 million sole-source integration project for a major U.S. Energy Company, as well as the recently announced VE Technology orders also at Orbital North America. In terms of our balance sheet, we ended the quarter with cash and cash equivalents of $9.6 million and restricted cash of $523,000 for a total of $10.2 million of cash. This compares to $12.6 million as of December 31. This concludes my prepared remarks. I will now turn the call back to Bill.

Thank you, Dan. Looking ahead to the balance of the year, we remain focused on developing energy sales opportunities that create revenue optionality for us even as we continue to build demand in our Power & Electromechanical segment. Let me take you through each segment in turn and some of the key opportunities we are pursuing. Our pipeline of potential energy products sales both GasPT and VE Technologies continues to expand as major energy companies come to understand the value proposition of these industry disrupting products. Our GasPT Analyzer in particular takes us to very large market opportunities where we have little or no competition. We are cultivating new GasPT opportunities across the UK, Western Europe, and North America. In the UK, OFGEM's recent certification of GasPT opens up that entire market to our solution for biomethane, low pressure optics, and high pressure intake applications, as well as for the future billing methodology project. This certification is timely as OFGEM is incented to put a physical monitoring application like ours in the hands of the industry that is more efficient, cost effective, and gives users better accuracy throughout the gas distribution system than gas chromatographs. At a time when energy providers are moving to take advantage of a government subsidy program to build biomethane terminals, OFGEM's certification holds a potential to catalyze GasPT sales in the UK. The economics of replacing a $250,000 gas chromatograph that needs $8,000 to $10,000 a year in maintenance gas annually with a much expensive GasPT appeals to all parties. Including our competitors who currently utilize gas chromatographs and have approached us to buy GasPTs to include in their integration solutions. Given our price and technology advantage we can capture both the product sale and the integration work for the biomethane grid skids necessary for these terminals. There are currently more than 100 biomethane terminals on the drawing board in the UK alone. In the two weeks, since we secured certification, we have seen an influx of sales opportunities. To get in front of the decision makers for these build-outs on May 10th, this Thursday, we will be hosting a workshop at our Orbital facility in UK that will be attended by all major gas network companies in the UK as well as biomethane producers to help them become more familiar with the GasPT device. In addition, last Wednesday, May 2nd, we attended and presented our new certified GasPT device to one of the largest gatherings of the Gas-to-Grid industry in Europe the UK biomethane day 2018 in Birmingham. I think it is fair to say that everyone who knew of the GasPT technology were also aware that we had secured certification. Presentations by conference participants also confirm the regulatory statutory and CapEx environments in Europe are driving towards an acceleration in the pace of adoption of renewable sources of energy. Biogas is a central figure in this fundamental change in energy policy and we believe that will serve as a tailwind for our energy business. In Western Europe, we are finalizing a distributorship with an extremely large well-known German supplier of components for the utility industry. This relationship will complement our direct sales force efforts to the national or large energy producers with a focus on a very broad array of low volume opportunities that our large users of natural gas such as glass, ceramic, and steel manufacturers. Further this well-respected German manufacturer and distributor with facilities throughout Western Europe, Russia, the other Commonwealth of Independent States, and China, anticipates opening up new and broader markets for our entire Energy project product line. Staying in Europe, we remain at a standstill regarding our Italy contract. Because no government has been formed in Italy since the March general election, the regulatory body has been unable to move for on its proviso to consolidate ownership and/or management of all major off-takes on the Italian network. We expect to remain in a holding pattern at least until a new government is formed. In France, with ENGIE, we await the order of 1,000 GasPT order for biomethane applications, an award for which we have already been speced in. In North America, we are pursuing a dual-pronged approach to GasPT sales, as a process control application and as a physical monitoring solution. Let me touch on process control first. We received a repeat order for our GasPTi device from a leading power and energy producer. This is their fourth order and a rollout that we believe will ultimately extend to their entire fleet numbering about 400 in total. This customer is implementing GasPTi as they conduct retrofits on their fleet. So while we anticipate no single large purchase order to cover their requirements, we expect the ultimate deployment number to be sizable. I'm also pleased to report; we are seeing forward progress with the global turbine manufacturer that represents our most advanced process control opportunity to-date. Their new budget year starts in June, when we have been assured that they're back and focused on completing their certification process. As a reminder, certification will enable GasPT to be added to the build materials on their new turbines and allow us to sell into their retrofit market for turbines already in the field. As a physical monitoring solution, I have noted on past investor calls, we are engaged on a sales cycle with a major gas transporter. We remain fully engaged with its teams and have two units ready for testing at few locations now identified. We anticipate that they will finalize testing sometime this year. Turning to our VE Technology, we are building demand for our VE probes and thermal wells throughout North America. Last week we announced new orders with several Fortune 100 Energy companies that serve as an important industry validation and should build further interest and demand in our VE Sampling Solutions. And finally, regarding our Power & Electromechanical business, we see continued strong interest in the ICE platform from prospective customers. Our focus this year is on completing proof of concept programs with large customers and building a book of orders that will convert into revenues next year. I hope my prepared remarks have given you a sense of the growing momentum in our business already making itself apparent in our quarterly results and especially in our backlog. We expect continued strong performance in our Power business with our ICE platform, direct sales efforts, new product introductions, and distribution channel serving as key drivers of growth in our Power & Electromechanical segment. Our Energy segment offers significant revenue optionality even as we await a restart to our largest GasPT contract. With our industry disrupting solutions across both segments of our business, together with the Business Development Foundation, and the base business we have built, we are on the path to ensuring our long-term success. This concludes my prepared remarks. Operator, please open the call to questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Eric Stine of Craig-Hallum. Your line is now open.

Hey, maybe just for GasPT process control, can you just talk about the -- you mentioned the large run manufacturer even at restart maybe just some thoughts on why that kind of pause because I know you're engaged in testing, you had to go back and replace I think it was something like a 1,000 or 2,000 hours of that. So maybe just what happened there and then the confidence that you have that you do see a restart and that there's commitment to doing that on the other end?

Yes, without getting into too much detail, Eric that was internal conflicts within their organization. They had a great deal of turmoil going on. They had some restructuring and things happening there that we had no control over. So that's really what happened then and they're not -- they've now assured us that they're back in place. People were staying are staying and that they're very committed to the device and to the project, they like the device, it's obviously cheaper, faster, uses less real estate and so it's just a matter of them getting back into the groove of doing their certification but it was internal of them and had nothing to do with us.

Okay. And in the testing timing is there been any and maybe you're not getting this color from them given their process but any timing I mean does it still need some additional testing hours or it's more internal as far as their process?

I will have -- I have a team there next week and I'll probably know more then but frankly I think there's a combination of both. There's some internal issues that they had that they've got to straighten out now and I think there are some hours that they need to re-run it simply because of the gas. It was put through it for a period of time.

Okay. Got it, all right maybe just turn into Orbital North America. Just I mean you had that new facility opened for a little bit here, I mean how should we think about you going to market, is it going to be more to EPC firms, is it more direct to the customer, maybe it's a little bit of both, but just any thoughts on what -- how the pipeline has expanded and how you expect that to play out throughout 2018?

Yes, we're expanding quite dramatically in both areas both EPCs and with direct to customer sales. I think the reason for that is because it's such a -- first of all it's a very beautiful modern big facility which has crane access which we didn’t have before. We also opened it up in late December, had an open house day where we had several hundred participants come in and view it and we've seen orders starting to pile up from that. We're also seeing excitingly big companies like the Fortune 100 Energy companies coming in and doing vendor audits and certifying us as vendors which we could not have done in the other facility. So I think as the year progresses we're going to see more and more orders coming through there and I think they're going to be like say both the EPC and the direct to consumers.

Okay, got it. Last one from me just in terms of the orders and backlog, I mean anything has that changed given that it's grown in size in terms of being over the next 12 months versus long-term anyway we should think about that differently than maybe in the past?

No, I think well Dan do you want to take that?

Yes, no change as far as no long-term really in there. We expected all to be 12 months or less with similar turnover periods to what we've historically done, so.

Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital. Your line is now open.

On the ENGIE order or ENGIE project, what’s your latest thinking on the timeline there and how that's progressing?

We have no real visibility of that, it's a contract that was tendered -- tender closed I believe last July. Generally speaking it's anywhere from three to six months for them to issue a contract, they have not done that yet. There are no reasons that I know of at least nothing that we're seeing where they have an initiative, they still are very committed to biomethane gas. And we’re not part of the contract bidding, we're not there are four participants in the contract but we've been speced in. They’re going to be using one of our devices for part of the measurement system, once it's left. So we don't have any visibility other than the fact that the contract is out there waiting to be left.

Okay, got it. Good. And then, I guess, maybe the same question with OFGEM certification, I know that gives you an opening to the market but what sort of the progress of how orders kind of start to flow there?

I think we're going to see -- the first orders we’ll see and I think we’ll see them in the next several weeks is biomethane terminals in the UK that are starting to get planned and developed. There are 100 -- I think around 100 to 120 of these units that are planned, being underwritten by the government, almost without exception all of these are going to use GasPTs because obviously that's why the certification was given and I think we’re going to be able to grab a lot of those simply because we own the GasPT technology. We have been approached by competitors who are offering or want to offer the GasPT and we are allowing that to occur obviously, we want to sell the products as well. But equally is obvious is the fact that our pricing since we own the technology is much better than their pricing. So in a competitive bid, we feel we have a leg up. So I think that's where you'll see the first initial impact. The second impact you'll see I think over the next probably 12 to 18 months is this future billing methodology product. We now have identified locations, we’re going to set up for the field testing, we’re actually going to go active, go live later this year, I think it’s scheduled for September or in that timeframe. And then there is still focused OFGEM and the UK government are still focused on beginning to rollout the future billing methodology sometime in late 2019, early 2020. That’s a huge opportunity for us. We have to have the certification from OFGEM both for the low pressure and for the fiscal monitoring and we got that. So I think that’s the other area you will see some movement over the next couple of months.

Okay, great. Good overview and then last question on the ICE Block or the ICE Switch, what was the revenue in the quarter from that product and I guess, and, yes, just good to have thinking?

Dan, do you want to take that?

No problem. The revenue was just right around $1 million for the quarter from ICE.

Thank you. Our next question comes from the line of Liam Burke of B. Riley. Your line is now open.

Bill, first quarter you had a product mix in Energy that held back gross margins, how do you anticipate within backlog, some of that lower margin product working through this year or do you have some longer projects in lower margin products in that backlog?

Yes, lot of that backlog is lower margin integration work frankly, we will see the I think the larger higher margin product when we see the bigger projects across Europe with the -- their pure product base. Italy is a good example of that, that's a pure product based sale, we’re not doing any integration, we’re simply delivering to them GasPTs and the associated material that goes with that. Those are going to be the highest margin and those are still pending. I think right now our biggest part of that backlog is the lower margin integration work.

Okay. Now within that you’ve mentioned integrating the GasPT and VE, are you going to see any lift sequentially with those products this year or do you still have maybe typical integration work?

I know, we have both, make sure both but the advantage we have is that now especially now in Europe that the GasPT is certified for low pressure optics, we can include that in much more of our integration projects. We still have both; we have traditional integration without our new products and new product integration as well.

Okay. And then you announced a new distribution agreement, how does that help on the ICE side of the product sales or is ICE primarily going to be an end-user sales?

Yes, ICE is not going through distribution at all, it’s actually a joint sale process between us and VPS and our channel partners. So that natural electronics will not affect ICE at all.

Thank you. Our next question comes from the line of Jon Fisher of Dougherty & Company. Your line is now open.

Thank you, good morning. A question on the new Houston facility, how would you expect capacity utilization of that facility to exit this year?

I’m not sure, what you’re looking for in that question, I can tell you that right now if you go to that facility it’s at 100% usage, it’s filled up with I think there are six or eight very large like mobile home size kiosks and then there is 17 smaller kiosks that are being worked on as people have extra time. So it’s fully loaded now and from looking at the backlog which increased dramatically quarter-over-quarter, we think for the foreseeable future it’s going to be full, fuller.

So the expansion in and of itself for the facility is not a drag on gross margins for the Energy segment because it’s being underutilized due to lack of more revenues from the Energy segment?

No, it’s definitely not being underutilized. In fact we’re seeing it growth and we’ve actually been approached by one large company that is asking us to extend the size that building actually build a bigger building, so they can give us multiple projects at the same time. So now I can tell you, I can assure you that it’s actually being used and used quite efficiently.

Okay. And then SG&A we saw the absolute number and it was referenced also as a percent of revenues. And just going forward how should we think about SG&A, should we think about it from a Q1 reference standpoint more in the absolute spend sense that we saw in this quarter or should we think of it more as a percent of revenue sense that we saw in Q1 going forward?

I'd say it's going to be between $8.5 million and $9 million a quarter some of that is going to be impacted by what the exchange rates are for our UK operations but it's going to between $8.5 million and $9 million a quarter.

Thank you. Our next question comes from the line of Jeff Bernstein of Cowen. Your line is now open.

Just a couple questions for you. On the turbine OEM, do you already have the aftermarket sort of hunting license in place?

We’re already there I’ll say right now. We already make presentations and we are really just awaiting permission, certification. We’re more than ready to jump into that market especially North America I can say right now, we’ve contacted a number of big turbine operators and all we're waiting for is that permission.

Got it. Okay. So you still are constrained you're not actually able to make sales there yet.

Well, the question generally comes up do you have certification from this and once we get it, they're ready to go.

Got it. Okay, okay that’s great. And then just update on the Canadian pipeline operator what’s gone on there?

That’s what we talked about with the addressing the test. We got to identify locations now that we got the product ready to go out it's just a matter of them getting their ability to install, so we’re ready to move.

And so about how long do you think that whole process will take to them?

Its three to six months task measurement scanned on board, so they’ve already got there, they're sort of first certification ready to move this is we have a device out on an active pipeline, so I think it will be somewhere between three and six months. We expect it to occur this year.

Got you.

That’s in lab environments already. So they’re familiar with how everything works and are pleased with it, they just have to do the field version of that now, so it keeps moving actually.

Understood, okay. And then you mentioned I think the U.S. gas processing company you had your fourth order you said they're retrofitting a fleet of the systems I guess was the number 40?

400. They have a total need for 400 units.

400, got you.

Yes.

Okay, got you. And so you think that will be sort of stretched out over a period of years or whatever.

Yes, I think that's two may be three year project for them.

Got it, okay. And so this is just a first guy that’s a big industry with a lot of units what else are you seeing out there?

We are pushing forward. They're actually well that we can’t use them publically they’re acting as a reference for us. So we’re approaching other large scale compressor companies and they are working with the Group that’s already using it to get data and whatnot, so we think there will be sales as time goes on because again they’re acting as a reference customer for us.

That’s great. And then any kind of update on ethylene or LNG I know there is supposed to be another round of ethylene a plans that are planned down for the Gulf Coast now.

Yes, we have got it second order. We announced that earlier this year. We did get a second order. I think was $2.1 million. So though while we haven’t received any formal results back they haven’t shared any results of those, they’re ordering again we’ve also have been certified now with our new facility as a preferred vendor for them. So I think those will ramp up as time goes on. So we have done what $4 million -- a little over $4 million with the business with that customer on two of their plants they have some big 50 or 54 worldwide. So we have -- there is a hug opportunity there and I think they’re going to move forward.

One of the big pushes open house was demonstrating the sampling systems and with the several hundred gas that Bill mentioned earlier they were there, they got to see the VE Sampling System, working and actually feeling -- providing feedback on mercury content in a live environment. Not in a gas pipeline in a lab environment which was very intriguing to them. So that's generated a lot of more interest in courting going out of the door, so it's been a very busy environment down there.

Got it. Okay. And then lastly every month or so you read about in other geography, India now, Korea, South Korea Biogas I guess this is now the thing on Green Energy, how do you see the whole fiscal piece developing, gas quality piece developing in these countries, are they going to sort of copy Europe or how do you think this is going to happen?

Sure. I could tell you that we have presented the future billing methodology through our Korean distributor and in Japan directly and to Tokyo and Osaka Gas and they are all of them very interested in particular and this is very public information, so it's nothing new Japan over the next year is talking about widening broadening their CB envelope because historically Japan has never produced any natural resources of their own at all, they import everything. Well they are contemplating beginning to produce biomethane in a large scale and they're going to have widen and broaden their CB envelope because of that and because of that, they’re going to need a future billing methodology method of billing much more granularly. So we presented to them, there is interest there, nothing that I can give any timing on but I can say we're in front of it.

So just perspective though on the global opportunity, in the UK National Grid just hosted essentially National Biomethane Gas Day it was a discussion about how to get the grid more energy efficient, more green and there target is to go to 10% biomethane for just the UK alone that’s another 38 new biomethane facilities. So the global opportunity for biomethane should everyone start to adopt is incredible.

Thank you. [Operator Instructions]. Our next question comes from the line of Mike Wallace of White Pine Capital. Your line is now open.

Hey, I just have couple of questions here. Cash flow from ops for the quarter was negative $2.9 million; presumably $900,000 of that or so was due to the payment, the royalty payment in the temp side. So excluding that would be about $2 million, receivables are up about $400,000 from December not sure quite how to think about that, but let’s say $2 million is sort of the burn rate of cash and ops for the quarter, how should we think about cash flow from ops as we go through the rest of the year and what levels of margins and revenues do we need to get to so that turns positive.

There is a lot in that question. We’re expecting to burn cash through Q2, we’re looking to start generating cash the second half of the year, I don’t expect it to be a dramatic cash generator in the second half of the year but we do expect to turn positive the second half of the year from ops, from cash generation standpoint. We are working to manage all of those balance sheet items that are sources or uses of cash as effectively as can be done while growing the business. Margins particularly the GasPT restarting in Italy will have a tremendous impact, initially on AR going up but given the terms that we have with the customer that will train the cash quite rapidly 69 to 90 days is what they paid last five quarters. So we see that really improving the cash flow from operations. But obviously the higher margin, the higher gross margin that we can get on sales the better off it will be.

Is the burn rate still going to be similar if you want Dan do you think or lower?

I would say it will probably be fairly similar.

And so how do you feel about the amount of cash in terms of funding AR for second half assuming Italy and some of these other gas projects start to come in?

We’re in a good spot, we still have our line of credit, it’s $4 million on top line of credit with Wells Fargo got enough cash to get us through there. When we did that rate last year we did take a look out, okay whatever we’re going to need to get through this period, we did some worst case scenarios on timing and we believe we are very adequately positioned for cash.

Is it possible for the year we can be cash flow positive?

I don’t think for the full-year no. But I think the second half of the year is turning too positively and that will be an ongoing go-forward position.

Certainly the turning point the second half of the year. Yes.

That's what the company work.

And then how should we think about gross margins on the P&EM business now that won’t big payments made in go-forward?

Yes. So I would say it’s going to go up into the mid-30s for this next quarter is what I would expect it to be, if not slightly higher than that and then as we continue through the year it should go back up into higher 30s.

So it could be 30% to 35% to 40% by year-end?

Yes.

And then in terms of energy, 27.3 we can -- what can we do to get that north of 30, is there anything we can do cost wise and things by year-end excluding any PT orders and things just the base business?

It’s really about winning higher margin business and so that comes down to what products we’re able to put into it based on what the customers requiring, so that customer often times expects in what they want into the device and we could engineering around that. But we are pushing to push more of our technologies as we possibly we can and that definitely increases our margins. So that’s what we are working towards especially in the UK we’re looking at lot of biogas opportunities where we would be just using our GasPT devices and no chromatographs. So we see that as a huge opportunity to help with margins.

So moving between the lines here 27.3 is probably the bottom from here we go up.

Fair statement.

And then hey Bill just some thoughts on Italy, what are you hearing out there and can you give us some?

Very little. The bottom line is out of everybody's control right now. I can tell you that regulatory wise if they have not -- if they have not set up a government by I believe its May 20th, it's 70 days after the election and they have another election. So the bottom line is they’re going to have to move forward at some level, they do need a government, they don’t have one at this point and frankly if you read the Wall Street Journal and some of the other magazines that are commenting on it, there is three very large egos involved in this and none of them would give anybody else the Prime Ministership and that’s what is coming down to. So I think we have to along with everybody else in Italy sit and wait through even these guys to get their act together or should there be another general election where hopefully somebody wins, I think it’s 60% they have to win that actually be the government and we’ll see what happens. But I think that has to occur on or before May 20th.

Yes that's right until we should see something there reconciliation of the power there or they’re going to go to another general election --

Correct.

Process that probably takes about another month to conclude, would that seem reasonable.

Google, Mike you’re asking me some I couldn’t answer. I couldn’t answer to that seriously. I love to tell you, I'm not, I just don’t know.

Thank you. Our next question comes from the line of Jon Fisher with Dougherty and Company. Your line is now open.

Yes, thank you for taking the follow-up. Just a quick follow-up on the P&EM gross margin discussion and talking about high-30 margins as we exit this year, having seen those types of margins since going back to 2015, just wondering if that’s driven entirely by the benefits from ICE or if there are other things going on in P&EM that are would be contributing to gross margin performance at that level?

The round-about answer is yes ICE plays a large factor in that. But the way ICE plays a factor in that is by increasing the utilization of our Canadian facility which is entirely production facility. So when that production facility is busier, it’s more vision spreading the cost this -- the fixed cost of that facility out over more production. So that will be a dramatic improvement but the back orders increasing across the spectrum of our product line as well is increasing the margin as well.

Thank you. [Operator Instructions]. Our next question comes from the line of Orin Hirschman with AIGH Investment Partners. Your line is now open.

Just a question, putting together two prior questions or few prior questions with the margin improvement coming it sound like they start already this current second quarter, why would the cash negative cash paid similar to this past quarter and not showed a lot of improvement, it has to do with the working capital?

So I got to say first and foremost we don’t forecast. So I think Dan said it will be similar, I’m not going to pin that down, things are improving as we go forward, we believe the second half of the year will be breakeven or maybe slightly cash flow positive. But again I think I’m going to hesitate to comment much more we don’t give forecast, we don’t we just don’t that. So again I don’t want to really get into what the second quarter looks like, this is about the first quarter.

Okay. The huge jump in backlog was some of this is encouraging, is it less relevant to the nearer-term quarters meaning it’s very long-term backlog or it is relevant throughout the year?

No, it’s relevant throughout the year. This was a broad-based increase in business on both segments and it is not much if it is long-term frankly it’s mostly standard backlog, we say that the backlog in the Energy division is something around nine months and the backlog in the Electronics division is generally around somewhere between 90 and 120 days. So again it’s just that type of it's certainly revenue and business will be seen this year.

And does that give you the much better visibility for the next three quarters?

It starts giving us more visibility, yes it does.

Okay. And just I know everybody has asked so many questions on Italy already but I just wanted to recap from an earlier question, much earlier in the call. In Italy, do you feel like you’re going to have to go through a retesting process, I wasn’t clear on that?

Absolutely not. The -- I can tell you that from the perspective of the customer, we are ready to go, they are ready to go, they have roughly 300 and somewhat units that they’re perfectly ready to install. We have a backlog of somewhere around 400 units, so we’re perfectly ready to deliver and the project is set funded and ready to move forward. All we are waiting for is this regulatory approval and that’s being held up because there is no government and that’s simply what's happening. So there is no testing, no more certification, no more no -- we’re just on holding that and I can tell you that both -- I personally and my sales team and my engineering team, in fact we have an engineering group over there next week talking about biomethane but the bottom line is in all regards every contact we had has been very, very positive, they definitely are very interesting moving us forward. At least for them it’s revenues, it’s increased revenues and so they are as anxious to get going as we are.

And just remind me again how many units they actually have in the field today?

Somewhere around 50.

Thank you. And at this time, I’m showing no further questions. I would like to hand the call back to William for any closing remarks.

I'd just like to thank everybody for their time and attention. Again we are pushing forward very hard on both sales and reducing costs and I think over the next year, you're going to see some real improvements on both ends. So again thank you everybody and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.