Notes to Condensed Consolidated Financial Statements
(Unaudited)
All dollar amounts (except share and per share amounts) in thousands.
1.
GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company” or “E&S”) have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flows, in conformity with U.S. generally accepted accounting principles (“US GAAP”). This report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2018.
The accompanying unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the three months ended March 29, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. The Company operates on a calendar year with the first three fiscal quarters ending on the last Friday of the thirteenth week in the quarter.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
. In accordance with Topic 606, the Company recognizes revenue at a point of time or over the time of performance depending on the nature of the obligation.
Stock-Based Compensation
Compensation cost for all stock-based awards is measured at fair value on the date of grant and is recognized over the service period for awards expected to vest. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the value of share-based awards that are expected to be forfeited. Actual results and future estimates may differ from the Company’s current estimates.
Net Loss Per Common Share
Basic net loss per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed based on the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. When the Company incurs a loss, potentially dilutive common stock equivalents are excluded as their effect would be anti-dilutive, thereby decreasing the net loss per common share.
7
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Inventories, net
Inventories consisted of the following:
|
March 29,
|
|
December 31,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Raw materials
|
$
|
6,096
|
|
$
|
5,979
|
Work in process
|
|
181
|
|
|
116
|
Finished goods
|
|
419
|
|
|
323
|
Reserve for obsolete inventory
|
|
(3,346)
|
|
|
(3,346)
|
Inventories, net
|
$
|
3,350
|
|
$
|
3,072
|
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,
Leases
(
Topic 842) ("Topic 842"). Topic 842 changes the accounting for leases. In particular, lessees will recognize lease assets and lease liabilities for operating leases. Effective January 1, 2019, the Company implemented Topic 842 as described in Note 3.
8
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. REVENUE
Disaggregation of Revenue
In the following tables, revenue reported for the periods presented is disaggregated by primary geographical market, major product line, timing of revenue recognition and product application.
Three months ended March 29, 2019
|
|
|
|
|
Product Application
|
Planetarium Theaters
|
Other Visitor Attractions
|
Architectural Treatments
|
Total
|
|
|
|
|
|
Primary geographic area:
|
|
|
|
|
|
|
|
|
|
North America
|
$
4,179
|
$
215
|
$
76
|
$
4,470
|
Europe
|
1,373
|
316
|
-
|
1,689
|
Asia
|
485
|
38
|
-
|
523
|
Other
|
483
|
-
|
-
|
483
|
|
$
6,520
|
$
569
|
$
76
|
$
7,165
|
|
|
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
Audio-Visual Systems
|
$
4,396
|
$
151
|
$
-
|
$
4,547
|
Domes
|
801
|
418
|
76
|
1,295
|
Show Content
|
771
|
-
|
-
|
771
|
Maintenance and Service
|
552
|
-
|
-
|
552
|
|
$
6,520
|
$
569
|
$
76
|
$
7,165
|
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
Goods transferred at point in time
|
$
816
|
$
-
|
$
-
|
$
816
|
Goods and services transferred over time
|
5,704
|
569
|
76
|
6,349
|
|
$
6,520
|
$
569
|
$
76
|
$
7,165
|
9
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three months ended March 30, 2018
|
|
|
|
|
Product Application
|
Planetarium Theaters
|
Other Visitor Attractions
|
Architectural Treatments
|
Total
|
|
|
|
|
|
Primary geographic area:
|
|
|
|
|
|
|
|
|
|
North America
|
$
3,133
|
$
120
|
$
360
|
$
3,613
|
Europe
|
333
|
11
|
-
|
344
|
Asia
|
2,456
|
847
|
-
|
3,303
|
Other
|
321
|
-
|
-
|
321
|
|
$
6,243
|
$
978
|
$
360
|
$
7,581
|
|
|
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
Audio-Visual Systems
|
$
3,986
|
$
11
|
$
-
|
$
3,997
|
Domes
|
1,375
|
967
|
360
|
2,702
|
Show Content
|
326
|
-
|
-
|
326
|
Maintenance and Service
|
556
|
-
|
-
|
556
|
|
$
6,243
|
$
978
|
$
360
|
$
7,581
|
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
Goods transferred at point in time
|
$
481
|
$
-
|
$
-
|
$
481
|
Goods and services transferred over time
|
5,762
|
978
|
360
|
7,100
|
|
$
6,243
|
$
978
|
$
360
|
$
7,581
|
Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of March 29, 2019:
|
March 29, 2019
|
December 31, 2018
|
|
|
|
Receivables reported as accounts receivable, net
|
$
3,794
|
$
3,250
|
Contract revenue in excess of billings
|
2,525
|
3,484
|
Billings in excess of contract revenue
|
4,414
|
5,959
|
10
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
|
Contract Assets
|
Contract Liabilities
|
|
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the period
|
|
$
(3,265)
|
|
|
|
Increases due to amounts billed to customers, excluding amounts recognized as revenue during the period
|
|
$ 1,720
|
|
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
$
(1,343)
|
|
|
|
|
Increases as a result of revenue recognized, excluding amounts transferred to receivables during the period
|
$ 384
|
|
Contract assets arise when revenue recognized on a contract exceeds the cumulative progress billings. Contracts generally provide for an enforceable right to payment for performance completed to date but do not necessarily have a present right to consideration payment for performance completed until the event that triggers the progress billing. The contract assets are transferred to the receivables when the rights to payment occur and amounts are billed. Contract liabilities arise when progress billings on a contract exceed the revenue recognized. Contract liabilities are relieved as the performance obligation is completed and revenue is recognized. Progress billings vary among contracts and can be triggered by chronological milestones, performance events or other various measurements of performance.
Backlog of Remaining Customer Performance Obligations
The following table includes estimated revenue expected to be recognized and recorded as sales in the future from the backlog of performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
|
|
Remainder of 2019
|
2020
|
2021
|
2022
|
2023
|
|
|
|
|
|
|
|
Sales
|
|
$
14,233
|
$
535
|
$
256
|
$
54
|
$
50
|
3. OPERATING LEASE
The Company adopted Topic 842,
Leases
, effective January 1, 2019 and adjusted the 2018 comparative period presented by applying the new standard as of January 1, 2018. As a result, the 2018 periods presented for comparative purpose have been adjusted to reflect the application of Topic 842 with an adjustment to opening balance of stockholders’ equity at January 1, 2018 for cumulative effect of the initial application (see Note 4).
The Company leases its office, shop and warehouse space in Salt Lake City, Utah under a non-cancellable operating lease agreement with an amended term that ended on April 30, 2019 (the “
Facility Lease”). On April 15, 2019, the Company signed an amendment to the
Facility Lease, for newly defined space with a term beginning on May 1, 2019 (see Note 7).
As a result of the adoption of ASC 842, the Company recognized an operating liability with a corresponding right-of-use (“ROU”) asset of the same amount based on the
present value of the minimum rental payments of the Facility
11
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Lease as of January 1, 2018. The discount rate used to compute the present value of the minimum rental payments of the lease is the Company’s estimated borrowing rate of 7.5%. The operating lease expense is computed on straight-line basis which amounted to $142 reported as rent expense in each of the three-month periods presented.
Balance sheet information related to the lease is as follows:
|
|
|
March 29,
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Operating lease right-of-use asset
|
|
|
$
|
49
|
|
$
|
187
|
Operating lease liability, current portion
|
|
|
|
49
|
|
|
188
|
Maturities of the lease liability is as follows:
Future Minimum Lease Payments
|
|
|
|
|
2019
|
|
$
|
47
|
Other information related to the lease:
|
|
|
March 29,
|
|
March 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Operating cashflows
|
|
|
|
|
|
|
|
Cash paid related to operating lease obligation
|
|
|
$
|
143
|
|
$
|
137
|
Remaining lease term (in years)
|
|
|
|
|
|
|
|
Operating lease
|
|
|
|
0.08
|
|
|
1.08
|
4. CHANGES IN ACCOUNTING PRINCIPAL
As described in Note 3, the Company adopted Topic 842
Leases
, effective January 1, 2019 resulting in the retrospective adjustment of the comparative 2018 periods presented. Prior to the application of Topic 842, the rent expense was recorded in the amount of the lease payments, adjusted on straight-line basis over the lease term, less the amortization of a deferred gain from a 2014 sale leaseback transaction. Under Topic 842, this gain would be recognized at the time of the transaction and not deferred. As a result, there was an adjustment to eliminate the unamortized balance of the deferred gain for cumulative effect of the initial application which increased the opening balance of stockholders’ equity in the amount of $808 at January 1, 2018. The presented condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three-month period ended March 30, 2018 is adjusted to reflect an increase in rent expense in the amount of $110. The balance sheet presented as of December 31, 2018 is adjusted to reflect the ROU asset and operating lease liability described in Note 3 along with an increase stockholders’ equity of $369.
12
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5.
STOCK OPTION PLAN
As of March 29, 2019, options to purchase 876,981 shares of common stock under the Company’s stock option plan were authorized and reserved for future grant.
A summary of activity in the stock option plan for the three months ended March 29, 2019 follows (shares in thousands):
|
|
|
Weighted-
|
|
|
|
Average
|
|
Number
|
|
Exercise
|
|
of Shares
|
|
Price
|
|
|
|
|
|
Outstanding as of beginning of the period
|
1,597
|
|
$
|
0.65
|
Granted
|
165
|
|
|
0.80
|
Exercised
|
(130)
|
|
|
0.17
|
Forfeited or expired
|
(40)
|
|
|
0.66
|
Outstanding as of end of the period
|
1,592
|
|
|
0.71
|
|
|
|
|
|
Exercisable as of end of the period
|
1,164
|
|
$
|
0.61
|
As of March 29, 2019, options exercisable and options outstanding had a weighted average remaining contractual term of 5.72 and 6.54 years, respectively, and had an aggregate intrinsic value of $317.
The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company’s stock option plan.
The weighted average values of employee stock options granted under the stock option plan, as well as the weighted average assumptions used in calculating these values during the first three months of 2019, were based on estimates as of the date of grant as follows:
Risk-free interest rate
|
2.64%
|
Dividend yield
|
0.00%
|
Volatility
|
81.16%
|
Expected life
|
3.5 years
|
Expected option life and volatility are based on historical data. The risk-free interest rate is calculated based on the average US Treasury bill rate that corresponds with the option life. Historically, the Company has not declared dividends and there are no foreseeable plans to do so.
The options exercised in the three-month period ended March 29, 2019 had an intrinsic value of $69.
As of March 29, 2019, there was approximately $122 of total unrecognized share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.4 years.
Share-based compensation expense included in selling, general and administrative expense in the statements of operations for the three-month periods ended March 29, 2019 and March 30, 2018 was $26 and $39, respectively.
13
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6.
EMPLOYEE RETIREMENT BENEFIT PLANS
Pension and Retirement Obligations
In 2015, the Company terminated a defined pension plan and settled the resulting liabilities in exchange for a fixed obligation secured by the Company’s assets (the “Pension Settlement Obligation”). The remaining payments due under the Pension Settlement Obligation consist of eight installments of $750 to the Pension Benefit Guaranty Corporation due annually on October 31. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as a liability on the balance sheet.
The Company’s only remaining pension obligation is the Supplemental Executive Retirement Plan (“SERP”).
Employer Contributions
The Company is not currently required to fund the SERP. All benefit payments are made by the Company directly to those who receive benefits from the SERP. As such, these payments are treated as both contributions and benefits paid for reporting purposes. The Company expects to contribute and pay SERP benefits of approximately $438 in the next 12 months.
Components of Net Periodic Benefit Expense
|
Supplemental Executive
|
|
Retirement Plan
|
|
March 29,
|
|
March 30,
|
For the three months ended:
|
2019
|
|
2018
|
|
|
|
|
|
|
Interest cost
|
$
|
37
|
|
$
|
34
|
Amortization of actuarial loss
|
|
20
|
|
|
20
|
Net periodic benefit expense
|
$
|
57
|
|
$
|
54
|
7.
SUBSEQUENT EVENTS
On April 15, 2019, the Company signed the second amendment to the Facility Lease (“Lease Amendment”). The Lease Amendment effectively terminated, as of April 30, 2019, the current term of the Facility Lease, which was previously set to expire October 2019. Under the Lease Amendment, effective May 1, 2019, the Company will continue to lease 60% of the space, while the other 40% will be leased from the Landlord by a third-party tenant. The Company will continue to pay 100% of the maintenance and utility costs for the buildings and grounds, of which approximately 40% will be reimbursed by the third-party tenant in accordance with terms set by the Lease Amendment. The lease has a seven-year term with two five-year renewal options. The monthly base rent will be $35 during the first year with a 3% escalation per year.
14
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company,” “E&S,” “we,” “us” and “our”) included in Item 1 of Part I of this quarterly report on Form 10-Q. In addition to the historical information contained herein, this quarterly report on Form 10-Q includes certain "forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years.
Although the Company believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.
All dollar amounts are in thousands.
EXECUTIVE SUMMARY
As described in the notes to the condensed consolidated financial statements, the Company adopted Topic 842,
Leases,
with a date of the initial application of January 1, 2018. The Company applied Topic 842 by retrospectively adjusting the 2018 financial statements presented for comparison in this Form 10-Q. The retrospective adjustment increased the rent expense by $110 per quarter. The balance sheet effect of this increase in expense was offset by an adjustment for the cumulative effect of the application that resulted in a net increase to stockholders’ equity of $369 as of December 31, 2018.
The results for the first quarter of 2019 produced a net loss of $643 on sales of $7,165 compared to a net loss of $71 on sales of $7,581 for the comparable period of 2018, as adjusted for the application of Topic 842 described above. Sales for 2019 were lower due to the acceleration of customer deliveries in 2018 and a low volume of new customer orders. In addition to the lower sales, lower profit margins and higher operating expenses contributed to the 2019 net loss. The lower profit margins were attributable to the types of customer projects and higher fixed overhead as a percentage of sales. Operating expenses increased mainly due to an increase in Research and Development activities aimed at new business development.
The low volume of new customer orders decreased the sales backlog to $15,128 as of March 29, 2019 compared to $17,366 as of December 31, 2018. New orders to replenish the sales backlog will be critical to produce sales at sufficient levels for profitable results. We remain encouraged that the Company’s sales prospects will produce sufficient orders to sustain sales at profitable levels over the long term; however, we anticipate that the low backlog as of March 29, 2019 could continue to challenge profitability in 2019. Notwithstanding the loss in the first quarter of 2019, profitable results over the past few years have strengthened the Company’s financial position. This presents an opportunity in periods of low sales to redirect staff and resources, which would otherwise be working on customer projects, toward research and development activities to expand our products for future sales growth.
15
The Company continually evaluates its business for opportunities to reduce operating costs. These efforts led the Company to amend the lease for its facility in Salt Lake City effective May 1, 2019. Prior to the amendment the Company occupied 100% of two buildings totaling approximately 68,000 square feet. Upon review of its current requirements, the Company determined that its operations could be served efficiently with approximately 60% of its currently leased space. Under the Lease Amendment, effective May 1, 2019, the Company will lease approximately 60% of the current lease space, while the other 40% will be leased from the Landlord by a third-party tenant. The initial annual rent payments will be reduced $148 annually. Also, the Company estimated that’s its utility and maintenance costs will be reduced by about $200 for a total estimated annual cost reduction of approximately $348.
CRITICAL ACCOUNTING POLICIES  
Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements. Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2018. For all of these policies, management cautions that future results rarely develop exactly as forecasted, and the best estimates routinely require modification.
RESULTS OF OPERATIONS
Sales and Backlog
The following table summarizes our sales:
|
|
Three Months Ended
|
|
|
March 29,
|
|
March 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Sales
|
|
$
|
7,165
|
|
$
|
7,581
|
The lower sales in 2019 were attributable to the acceleration of customer deliveries in 2018 and a low volume of new customer orders.
Revenue backlog decreased to $15,128 as of March 29, 2019, compared to $17,366 as of December 31, 2018. The decrease in the revenue backlog was mainly attributable to the high volume of sales from work on prior customer orders combined with a low volume of new orders booked in the first quarter of 2019.
Gross Profit
The following table summarizes our gross profit and the gross profit as a percentage of total sales:
|
|
Three Months Ended
|
|
|
March 29,
|
|
March 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
2,204
|
|
$
|
2,609
|
Gross profit percentage
|
|
|
31 %
|
|
|
34 %
|
The mix of products delivered and the types of customer contracts that contributed to the revenue in the periods presented, causes variability in the gross profit percentage. Also, the low 2019 sales resulted in higher fixed overhead cost of as a percentage of sales.
16
Operating Expenses
The following table summarizes our operating expenses:
|
|
Three Months Ended
|
|
|
March 29,
|
|
March 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
1,817
|
|
$
|
1,773
|
Research and development
|
|
|
902
|
|
|
767
|
Pension
|
|
|
57
|
|
|
54
|
Total operating expense
|
|
$
|
2,776
|
|
$
|
2,594
|
Selling, general and administrative expenses were slightly higher in 2019 compared to 2018, mainly due to inflationary cost increases.
Research and development expenses were higher in 2019 due to the deployment of more engineering resources to R&D activities made possible by lower customer delivery activities. Research and development expenses generally vary with use of engineering resources for product improvement projects and customer delivery activities.
Pension expense increased slightly in 2019 compared to 2018 due to an increase in the interest cost on the SERP.
Other Expense, net
The following table summarizes our other expense:
|
|
Three Months Ended
|
|
|
March 29,
|
|
March 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
(71)
|
|
$
|
(75)
|
Other expense decreased in 2019 compared to 2018 mainly due to declining interest expense on the Pension Settlement Obligation and mortgage notes.
LIQUIDITY AND CAPITAL RESOURCES
Outlook
As discussed above in the executive summary, we believe existing liquidity resources and funds generated from forecasted revenue will be sufficient to meet our current and long-term obligations. We continue to operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures.
Cash Flows
In the first three months of 2019, $1,994 of cash used in operating activities was attributable to $455 of cash used by the net loss for the period, after the effect of non-cash items of $188, and cash used by changes to working capital of $1,539. The significant uses of cash from changes to working capital were an increase in accounts receivable and a decrease in billings in excess of contract revenue. This was partially offset by a decrease in contract revenue in excess of billings. These changes are attributable to the timing of billings, customer payments and new customer orders.
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In the first three months of 2018, $386 of cash used in operating activities was attributable to $318 of cash provided by the net loss for the period, after the effect of non-cash items of $389 which was offset by cash used by changes to working capital of $704. The significant uses of cash from changes to working capital were increases in accounts receivable, contract revenue in excess of billings and inventory with a decrease in accounts payable. This was mostly offset by an increase in billings in excess of contract revenue resulting from advance billings to customers. These changes are attributable to the timing of billings, customer payments and new customer orders.
Cash used in investing activities was $58 for the three months ended March 29, 2019 compared to $11 for the same period of 2018. Investing activities for both periods presented consisted of property and equipment purchases. In 2018 investing activities included proceeds from the sale of equipment no longer being used.
For the three months ended March 29, 2019, financing activities used $38 of cash compared to $55 in 2018 for principal payments on mortgage notes. Proceeds of $21 for the sale of common stock pursuant to the exercise of employee stock options partially offset the principal payments on the mortgage notes in 2019.
Line of Credit
The Company is a party to a line-of-credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund the working capital requirements of Spitz. Under the line of credit agreement, interest is charged on amounts borrowed at the lender’s prime rate less 0.25%. Any borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The line-of-credit agreement and mortgage notes (with the same commercial bank) contain cross default provisions whereby a default on either agreement will result in a default on both agreements. There were no borrowings outstanding under the line-of-credit agreement as of March 29, 2019.
Letters of Credit
Under
the terms of financing arrangements for letters of credit, the Company is required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure obligations with the financial institutions who issue the letters of credit. As of March 29, 2019, there were outstanding letters of credit and bank guarantees of $251, which are scheduled to expire during the year ending December 31, 2019.
Mortgage Notes
As of March 29, 2019, Spitz had obligations totaling $1,481 under its two mortgage notes payable.