Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Important Note about Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our audited financial statements as of December 31, 2012 and un-audited 10-Q filings for the first three quarters of 2012 and the notes thereto, all of which are included elsewhere in this Form 10-K. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed elsewhere in this Form 10-K.

The statements that are not historical constitute "forward-looking statements". Said forward-looking statements involve risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, express or implied by such forward-looking statements. These forward-looking statements are identified by their use of such terms and phrases as "expects", "intends", "goals", "estimates", "projects", "plans", "anticipates", "should", "future", "believes", and "scheduled".

The variables which may cause differences include, but are not limited to, the following: general economic and business conditions; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employment benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with various government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate; therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate.

In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any person that the objectives and expectations of the Company will be achieved.

Losses from Operations and Accumulated Deficit

Historically, the Company has not generated sufficient revenues from operations to self-fund its capital and operating requirements. Following the equity raises closed in 2012 and subsequent reductions of debt coupled with the continued improvement in the Company's operations, management believes the company has sufficient resources and that it is generating significant revenues that it expects will provide the Company with the ability to self-fund its capital and operating requirements. If that is not possible, the Company will seek additional working capital from funding that will primarily include equity and debt placements.

Overview

CUI Global, Inc. is dedicated to maximizing shareholder value through the acquisition, development and commercialization of innovative companies and technologies. From its GasPT2 platform targeting the energy sector, to its subsidiary CUI, Inc.'s industry leading digital power platform targeting the networking and telecom industries, CUI Global has built a diversified portfolio of industry leading technologies that touch many markets.

In May 2008, CUI Global formed a wholly owned subsidiary that acquired the assets of CUI, Inc., a technology company dedicated to the development, commercialization and distribution of new, innovative electro-mechanical products. Over the past 20 years, CUI has become a recognized name in electronic components worldwide in the areas of power, interconnect, motion control, and sound. In that time, the company has been able to leverage many long-standing relationships in Asia to create a flexible, responsive business model that ultimately benefits CUI customers. Today, its industry leading technology platforms which include Novum Advanced Power, Solus Power Topology and AMT Capacitive Encoders are quickly positioning CUI, Inc. as a global leader in the fields of power electronics and motion control. Through the acquisition of CUI, Inc. the Company obtained 352,589 common shares representing an 11.54% interest in Test Products International, Inc., a provider of handheld test and measurement equipment.

In July 2009, CUI Global acquired, as a wholly owned subsidiary, Comex Instruments, Ltd., now known as CUI Japan and 49% of Comex Electronics Ltd. Both companies are Japanese based providers of electronic components. Effective July 1, 2011, CUI Global entered into an agreement to convey its 49% ownership interest in Comex Electronics to the owners of the remaining 51% who are the original founders and were the original owners of Comex Instruments, for $617,975 in the form of a five year note receivable bearing interest at 4% per annum. As of December 31, 2012 the Comex Electronics note receivable is current in accordance with the agreed terms. The operations of CUI Japan are not affected by this divestment. As such, the operations of Comex Electronics are reported as discontinued operations for the current and comparable periods. CUI Global will continue to maintain its 100% ownership of CUI Japan.

For the years ended December 31, 2012 and 2011, the Company has identified a single operating segment based on the activities of the company in accordance with the ASC 280-10-50-1 for which the operating results are regularly reviewed by the Company's chief operating decision makers.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that have a significant impact on the results the Company will report in the Company's financial statements. Some of the Company's accounting policies require the Company to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Actual results may differ from these estimates under different assumptions or conditions.

Long-Lived Assets

Long-lived assets and certain identifiable assets related to those assets are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. In performing the review for recoverability, the future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized as the excess of the carrying amount over the fair value. Otherwise, an impairment loss is not recognized. Management estimates the fair value and the estimated future cash flows expected. Any changes in these estimates could impact whether there was impairment and the amount of the impairment. There were $278,428 and $0 of impairment expenses recorded by the Company in 2012 and 2011.

Stock-Based Compensation

The Company accounts for stock based compensation using FASB Accounting Standards Codification No. 718 ("FASB ASC 718"), "Compensation - Stock Compensation". FASB Codification No. 718 requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related vesting period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. Employee stock compensation is recorded at fair value using the Black Scholes Pricing Model. The underlying assumptions used in the Black Scholes Pricing Model by the Company are taken from publicly available sources including, volatility is calculated using historic stock price information from online finance websites such as Google Finance and Yahoo Finance, the stock price on the date of grant is obtained from online finance websites such as those previously noted, appropriate discount rates are obtained from the United States Federal Reserve economic research and data website and other inputs are determined based on previous experience and related estimates. See Note 13 STOCK-BASED EMPLOYEE COMPENSATION for additional disclosure and discussion of the employee stock plan and activity.

Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by FASB ASC 505, which is measured as of the date required by FASB ASC 505, "Equity - Based Payments to Non-Employees". In accordance with FASB ASC 505, the stock options or common stock warrants are valued using the Black-Scholes option pricing model on the basis of the market price of the underlying common stock on the "valuation date," which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.

Revenue Recognition

The recognition of the Company's revenues requires judgment, including whether a sale includes multiple elements and, if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. Customers may receive certain elements of our products over a period of time. These elements could include licensing rights to manufacture and sell our proprietary patent protected products. The ability to identify VSOE for those elements and the fair value of the respective elements could materially impact the amount of earned and unearned revenue. The Company does not have any history as to the costs expected to be incurred in granting licensing rights relating to its products. Therefore, revenues may be recorded that are not in proportion to the costs expected to be incurred in performing these services.

Liquidity and Capital Resources

General

The Company's cash and cash equivalents balance at December 31, 2012 are $3,039,840. During the year ended December 31, 2012, operations and investment activities have been funded through cash from operations, proceeds from sales of equity and warrant exercises, and borrowings from financial institutions.

Cash from operations

Operating activities generated negative cash flow of $1,803,659 during the year ended December 31, 2012 as compared with positive cash flow of $860,705 during the prior year ended. This decrease is primarily the result of a larger net loss attributable to CUI Global, Inc. in 2012 of $2,526,321 which included increased sales related travel for CUI, Inc. to manage third party sales representatives, reach new customers, maintain existing customers, and promote new product lines including Novum and Solus, professional fees expenses related to engineering support, testing fees and travel expenses related to the Vergence GasPT2 product as the Company increased the Vergence GasPT2 exposure to customers in North America, parts of Europe and elsewhere, increased expenses associated with being a public company such as filing services and fees, professional fees, and listing fees among others, increased advertising costs for company products, increased commissions to third party sales representatives related to the increase in sales, increased expenses associated with the growth in operations at CUI Japan, operating costs associated with the newer technologies Novum and Solus and the overall growth of the business in relation to revenues. Additional factors that impacted the cash from operations include increases in trade accounts receivable, inventory, accounts payable and unearned revenue of $1,337,048, $1,290,794, $382,852, and $300,786, respectively, and decreases in prepaid expenses and other current assets of $280,917. The increase in trade accounts receivable is largely attributed to the increased revenues in the fourth quarter of 2012, $11,890,762, as compared to $9,744,499 during the same period in 2011. The increase in inventory is primarily related to the inventory on hand associated with the increased back log of customer orders at December 31, 2012 of $14,149,352 as compared with $9,244,748 at December 31, 2011 and increased inventory of GasPT2 units on hand at year end to prevent potential shortages in 2013 associated with manufacturing and calibration lead times. The increase in accounts payable is associated with the increase in inventory levels and fourth quarter activity during 2012 as well as timing in relation to payment terms with vendors. The increase in unearned revenue is related to an increase in the accrual for potential returns from customers and deposits received from customers for orders that have not been fulfilled as of December 31, 2012. The decrease in prepaid expenses and other current assets is primarily related to decreases in prepayments for inventory purchases as compared to the prior year, which will vary based on the products purchased and the vendors utilized.

During 2012 and 2011, the Company used stock and warrants as a form of payment to certain vendors, consultants and employees. For 2012 and 2011, respectively, the Company recorded a total of $1,190,081 and $227,867 for compensation and services expense including amortization of deferred compensation related to equity given, or to be given, to employees and consultants for services provided. The large increase in 2012 is attributable to increased stock compensation issued for stock issued to consultants for strategic investor marketing services, employee stock compensation and options expenses.

During 2012, CUI Global recorded two significant non-cash entries - $73,333 of non-cash interest expense, including amortization of debt offering costs and $278,428 for the impairment of intangible, trademark and trade name V-Infinity. The intangible, trademark and trade name V-Infinity was determined to have a finite life and an impaired value during 2012. As a result of this evaluation and the impairment, management determined the trademark and trade name V-Infinity no longer has an indefinite life, and will instead be amortized over the estimated remaining useful life of 5 years. During 2011, the Company recorded one significant non-cash entry - $334,747 of non-cash interest expense, including amortization of debt offering costs. The decrease in the non-cash interest expense, including amortization of debt offering costs is the result of the completion in mid year 2011 of the amortization of the beneficial interest associated with debts from the CUI, Inc. acquisition offset by an increase in the amortization of debt issuance costs associated with the Wells Fargo debts.

During 2012 the Company had no cash flows from discontinued operating activities where as in 2011, the Company had positive cash flow from discontinued operations of $22,141.

As the Company continues to focus on technology development and product line additions during 2013, it will continue to fund research and development together with related sales and marketing efforts for its technology platforms including the Vergence GasPT2, Novum Advanced Power, Solus Power Topology, AMT Capacitive Encoders and its other electromechanical products.

Capital Expenditures and Investments

During the years ended 2012 and 2011, the Company invested $685,269 and $422,970, respectively, in fixed assets. Among the larger investments in fixed assets were additions to equipment and software for engineering and research and development, tooling for manufacturing, and regular computer equipment and software upgrades for office personnel. The Company anticipates further investment in fixed assets during 2013 in support of its on-going business and continued development of product lines and technologies.

The Company invested $0 and $6,646, respectively, in patent costs during 2012 and 2011. The Company expects its investment in patent costs will continue throughout 2013 as it invests in patents to protect the rights to use its product and technology developments.

The Company invested $80,343 and $37,418, respectively in other intangible assets during 2012 and 2011. The 2012 investments were related to the new CUI, Inc. website. The 2011 investments were related to the new CUI Global and CUI Japan websites. The Company's websites are utilized to communicate with our investors, customers, vendors and other stakeholders. The Company expects its investment in other intangible assets may continue throughout 2013.

During 2012 and 2011, CUI Global had proceeds from notes receivable of $46,808 and $63,506, respectively.

Also during 2012 and 2011, the Company received proceeds of $0 and $425,000, respectively, from the sale of technology rights. The 2011 proceeds of $425,000 were in relation to the sale of our WayCool and WayFast patent portfolio to Olantra Fund X LLC.

There were no cash flows in 2012 associated with discontinued investing activities. For the year ended December 31, 2011, there was $195,278 provided by discontinued investing activities.

Financing activities

See, above, the section entitled Recent Sales of Unregistered Securities for a complete listing of all securities transactions.

During 2012, the Company received proceeds of $13,532,285 from the sales of common stock, net of offering costs and the exercise of warrants, $1,069,452 of payments were made against the demand notes payable, $4,000,000 of payments were made against the term note with the Business Credit division of Wells Fargo Capital Finance, Wells Fargo Bank, N.A., $3,000,000 was paid against the principal balance of the IED related party note payable associated with the acquisition of CUI Inc., and $35,000 was utilized to repay a related party convertible note payable owed to an officer of the Company.

Included in these equity financing transactions were the following items, discussed in greater detail at Note 8 STOCKHOLDERS' EQUITY:

During February 2012, the issued and outstanding shares of the Company's $0.001 par value common stock were reverse split at a ratio of one for thirty (1:30) as a part of our plan to up-list our common stock on to the NASDAQ Stock Market.

During February 2012 our Form S-1 registration statement became effective that allowed us to sell 2,222,222 shares of common stock to our underwriter. We received $8,913,302 in net proceeds from this sale after related costs for this transaction.

Our Form S-1 registration statement included 333,333 shares of common stock that were sold in March 2012 to our underwriter pursuant to the over-allotment provision of our underwriting contract. We received $1,387,499 in net proceeds from this sale after related costs for this transaction.

Also in March 2012, pursuant to stock purchase agreement, we sold to seven investors a total of 570,000 shares of common stock at $4.50 per share. We received $2,253,008 in net proceeds from this sale after related costs for this transaction.

During March 2012, a beneficial owner of approximately 8% exercised 10,071 warrants he previously received in relation to a note provided to the Company which has since been paid in full. The company received $3,021 from this transaction.

During June and July 2012, we sold 234,332 shares of common stock to nine investors at $4.50 per share pursuant to stock purchase agreements with net proceeds of $975,455 after related costs for this transaction.

During 2011, $50,000 of proceeds were received from the exercise of warrants and options.

In February 2011, two former employees exercised options for 269 shares of common stock.

In April 2011, a director exercised a warrant for 23,333 shares of common stock.

In May 2011, an owner of 10% of the voting rights attached to outstanding shares exercised a warrant for 133,333 shares of common stock. Also in May 2011, an investor exercised a warrant for 10,000 shares of common stock.

CUI Global may raise additional capital needed to fund the further development and marketing of its products as well as payment of its debt obligations.

Financing activities - related party activity

During 2012, a short term convertible loan from July 2011 of $35,000, with interest accrued at 6% per annum, convertible at $5.10 per common share was repaid to a CUI Global officer. There was no beneficial conversion on the convertible note as the conversion price was equal to the fair value on the date of grant.

Pursuant to a September 1, 2010 agreement with the holder of the $14,000,000 promissory note, IED, Inc., the Company paid $492,508 of the principal balance during the first quarter of 2011. The revised terms set the interest rate at 6% per annum with monthly interest payments and a May 15, 2018 balloon payment. Please see Note 9. Related Party Transactions and Note 5. Notes Payable, for further discussion of this transaction. During 2012 and 2011, $3,468,221 and $1,110,809, respectively, in principal and interest payments were made in relation to the promissory notes issued to related party, IED, Inc. The 2012 payment utilized $3,000,000 from the equity sale proceeds for the repayment of principal. The 2011 payment included a note receivable balance of $192,508 held by CUI Global that was conveyed to IED, Inc. and applied towards the promissory note balance in accordance with a settlement agreement.

Recap of liquidity and capital resources

During 2012, the Company continued to improve its financial strength with the equity raise in early 2012, the significant reductions in debt coupled with the continued growth of revenues. As a result of the financing activities completed in 2012, management believes the Company has sufficient resources and is generating sufficient revenues to fund operations. As of December 31, 2012 the Company had an accumulated deficit of $76,171,822. As of December 31, 2012, the Company had cash and cash equivalents of $3,039,840 and an unused availability under the asset based line of credit of $3,119,857 (available borrowing capacity of $3,579,305 less outstanding borrowings of $459,448).

The Company may seek to raise additional capital for the continued development and commercialization of its various technology product lines. The Company believes its operations and existing financing structure will provide sufficient cash to meet its short term working capital requirements for the next twelve months. As the Company continues to expand and develop its technology and product lines as well as retire debt, additional funding sources may be required. The Company may attempt to raise these funds through borrowing instruments or issuing additional equity.

As of December 31, 2012 CUI, Inc. maintained a revolving working capital line of credit with the Business Credit division of Wells Fargo Capital Finance, part of Wells Fargo Bank, National Association (NYSE: WFC), granting borrowings of up to $4,000,000 with interest payable monthly at the Daily Three Month LIBOR plus 3.25% (3.56% at December 31, 2012). At December 31, 2012, there is an outstanding balance of $459,448 on this line of credit.

The Company expects revenues to help cover the operating and other expenses. If revenues and cash on hand are not sufficient to cover all operating and other expenses, additional funding may be required. There is no assurance the Company will be able to raise such additional capital. The failure to raise additional capital or generate product sales in the expected time frame will have a material adverse effect on the Company.

Off-Balance Sheet Arrangements

As of December 31, 2012 the Company had no off-balance sheet arrangements.

Results of Operations

The accompanying financial statements reflect the operations of the Company for the fiscal years ended December 31, 2012 and 2011.

Revenue

During the year ended 2012, revenue was $41,084,589 and $38,938,326 for the same period during 2011. The growth in 2012 from 2011 is primarily due to management's decision to continue to push smaller sales through the distribution sales channel and focus on larger value direct sales through CUI, Inc. as well as the continued expansion of CUI's product offering and further penetration in the Japanese market through CUI Japan. This change resulted in a 4.7% decrease in the total number of customer sales orders processed, while total revenue increased $2,146,263, or 5.5% for the year.

The Company introduced 207 new products during the year ended 2012. The continued product expansion and moving smaller sales through the distribution channel is expected to continue to result in revenue growth in future periods as CUI's sales group and support staff continues to reach new customers, further expand relationships with existing customers and while the Company introduces new products in efforts to have CUI products designed into new projects.

The revenue for the year ended December 31, 2012 is comprised of $39,802,620 from CUI products, $1,228,430 from CUI Japan products and $53,539 from freight. The revenue for the year ended December 31, 2011 is comprised of $38,366,403 from CUI products, $511,295 from CUI Japan products and $60,628 for freight.

During 2012, 59% of revenues were derived from five customers at 47%, 4%, 3%, 3%, and 2%. During 2011, 55% of revenues were derived from six customers at 41%, 4%, 3%, 3%, 2% and 2%. The Company's major product lines in 2012 and 2011 were external power, internal power and industrial controls.

Cost of revenue

The cost of revenue for the year ended December 31, 2012 and 2011 was $25,707,893 and $24,133,073, respectively. The significant increase during 2012 compared to the prior year is primarily the result of the overall growth in sales. As a percentage of sales, the cost of revenue remained relatively consistent at 62.5% for 2012 compared with 62.0% in 2011.

Selling, General and Administrative Expenses

Selling, General and Administrative (SG&A) expenses includes such items as wages, consulting, general office expenses, business promotion expenses and costs of being a public company including legal and accounting fees, insurance and investor relations.

SG&A expenses increased to $16,221,373 for the year ended December 31, 2012 from $13,347,853 for the same period during 2011. This increase of $2,873,520 is primarily the result of an increase of $616,695 of stock compensation expense for issuances to consultants related to strategic investor marketing services, an increase of $400,290 for investor relations related expenses including travel, supplies, conferences, meetings and cash expenses for strategic investor marketing services, $371,574 increase in sales related travel for CUI, Inc. related sales activity to manage third party sales representatives, reach new customers, maintain existing customers, and promote new product lines including Novum and Solus, $298,600 of stock compensation expenses for issuances to officers and employees as bonuses for achieving corporate goals, $242,352 in expenses associated with professional fees related to engineering support, testing fees and travel expenses related to the Vergence GasPT2 product as the Company increased the Vergence GasPT2 exposure to customers in North America, parts of Europe and elsewhere, $177,039 increase in depreciation and amortization associated with investments in capital assets as well as the amortization of the intangible, trademark and trade name V-Infinity which began in 2012, an increase of $130,206 in costs associated with being a public company such as filing services and fees, professional fees, and listing fees among others, increase in costs associated with an increase in advertising costs for . . .