Quarterly Report (10-q)

Date : 11/06/2018 @ 11:08AM
Source : Edgar (US Regulatory)
Stock : Evans & Sutherland Computer Corp. (PC) (ESCC)
Quote : 0.7  0.0 (0.00%) @ 7:38PM

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

__________________________________________________

 

FORM 10-Q

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,

 

For the quarterly period ended September 28, 2018

or

[   ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,

 

For the transition period from _____ to _____

 

Commission file number 001-14677

__________________________________________________

 

EVANS & SUTHERLAND COMPUTER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Utah

(State or Other Jurisdiction of

Incorporation or Organization)

870278175

(I.R.S. Employer

Identification No.)

 

770 Komas Drive, Salt Lake City, Utah

(Address of Principal Executive Offices)

 

84108

(Zip Code)

 

Registrant's Telephone Number, Including Area Code:  (801) 588-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X    No__

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes   X  No __

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [  ]   

Non-accelerated Filer [X]   

Smaller reporting company [X]

Emerging growth company [  ]

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes __ No X  


 

The number of shares of the registrant’s Common Stock (par value $0.20 per share) outstanding on October 31, 2018 was 11,352,516.



FORM 10-Q

 

Evans & Sutherland Computer Corporation

 

Quarter Ended September 28, 2018

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Page No.

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 28, 2018 and December 31, 2017 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2018 and September 29, 2017 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2018 and September 29, 2017 (Unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

1 8

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

23

 

 

 

Item 6.

Exhibits

23

 

 

 

SIGNATURE

 

24



PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS  

 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except share and per share data)

 

 

 

 

September 28,

 

December 31,

 

 

2018

 

2017

ASSETS

Current assets:

 

 

 

 

Cash and cash equivalents

 

$ 7,636  

 

$ 5,276  

Restricted cash

 

92  

 

312  

Accounts receivable, net

 

6,196  

 

3,794  

Current portion of lease receivable

 

258  

 

247  

Contract revenue in excess of billings

 

4,075  

 

2,763  

Inventories, net

 

2,516  

 

3,973  

Prepaid expenses and deposits

 

623  

 

712  

Total current assets

 

21,396  

 

17,077  

Long-term lease receivable, net of current portion

 

641  

 

836  

Property and equipment, net

 

4,403  

 

4,527  

Goodwill

 

635  

 

635  

Other assets

 

2,160  

 

1,955  

Total assets

 

$ 29,235  

 

$ 25,030  

 

 

 

 

 

LIABILITIESANDSTOCKHOLDERS’EQUITY   

Current liabilities:

 

 

 

 

Accounts payable

 

$ 2,085  

 

$ 1,667  

Accrued liabilities

 

1,560  

 

912  

Billings in excess of contract revenue

 

7,115  

 

7,117  

Current portion of retirement obligations

 

452  

 

500  

Current portion of pension settlement obligation

 

409  

 

409  

Current portion of long-term debt

 

234  

 

224  

Total current liabilities

 

11,855  

 

10,829  

Retirement obligations, net of current portion

 

4,019  

 

4,150  

Pension settlement obligation, net of current portion

 

4,478  

 

4,478  

Long-term debt, net of current portion

 

1,363  

 

1,540  

Deferred rent obligation

 

481  

 

808  

Total liabilities

 

22,196  

 

21,805  

Commitments and contingencies

 

 

 

 

Stockholders’ equity:

 

 

 

 

Preferred stock, no par value: 10,000,000 shares authorized;

no shares outstanding

 

 

 

 

Common stock, $0.20 par value: 30,000,000 shares authorized;

11,616,866 shares issued

 

2,323   

 

2,323   

Additional paid-in-capital

 

53,930   

 

53,818   

Common stock in treasury, at cost, 264,350 shares

 

(3,532)  

 

(3,532)  

Accumulated deficit

 

(43,506)  

 

(47,208)  

Accumulated other comprehensive loss

 

(2,176)  

 

(2,176)  

Total stockholders’ equity

 

7,039   

 

3,225   

Total liabilities and stockholders’ equity

 

$ 29,235   

 

$ 25,030   

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


3



EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

( Unaudited ) ( In thousands, except per share data )

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Sales

 

$ 12,200   

 

$ 8,049   

 

$ 28,653   

 

$ 22,836   

Cost of sales

 

(7,458)  

 

(4,936)  

 

(18,014)  

 

(14,784)  

    Gross profit

 

4,742   

 

3,113   

 

10,639   

 

8,052   

Operating expenses:

 

 

 

 

 

 

 

 

    Selling, general and administrative

 

(1,613)  

 

(1,419)  

 

(5,044)  

 

(4,542)  

    Research and development

 

(615)  

 

(769)  

 

(2,109)  

 

(2,236)  

    Pension

 

(55)  

 

(58)  

 

(163)  

 

(173)  

         Total operating expenses

 

(2,283)  

 

(2,246)  

 

(7,316)  

 

(6,951)  

 

 

 

 

 

 

 

 

 

         Operating income

 

2,459   

 

867   

 

3,323   

 

1,101   

Other expense, net

 

(68)  

 

(100)  

 

(243)  

 

(302)  

Income before income tax provision

 

2,391   

 

767   

 

3,080   

 

799   

    Income tax provision

 

(30)  

 

 

 

(61)  

 

(18)  

         Net income

 

$ 2,361   

 

$ 767   

 

$ 3,019   

 

$ 781   

 

 

 

 

 

 

 

 

 

Net income per common share – basic

 

$ 0.21   

 

$ 0.07   

 

$ 0.27   

 

$ 0.07   

Net income per common share – diluted

 

$ 0.20   

 

$ 0.06   

 

$ 0.25   

 

$ 0.06   

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

11,353   

 

11,353   

 

11,353   

 

11,353   

Weighted average common shares outstanding – diluted

 

12,012   

 

11,964   

 

12,002   

 

12,035   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4



EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

 

 

 

Nine Months Ended

 

 

September 28,

 

September 29,

 

 

2018

 

2017

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

Net income

 

$ 3,019   

 

$ 781   

Adjustments to reconcile net income to net cash provided by

      (used in) operating activities:

 

 

 

 

Depreciation and amortization

 

200   

 

193   

Provision for excess and obsolete inventory

 

219   

 

78   

Other

 

136   

 

47   

Changes in operating assets and liabilities:

 

 

 

 

Increase in accounts receivable

 

(2,450)  

 

(1,281)  

Decrease in lease receivable

 

184   

 

193   

Decrease in inventories

 

315   

 

164   

Increase in contract revenue in excess of billings

 

(558)  

 

(1,281)  

Increase in prepaid expenses and other assets

 

(116)  

 

(774)  

Increase in accounts payable

 

418   

 

66   

Increase in accrued liabilities

 

648   

 

169   

Decrease in accrued pension and retirement liabilities

 

(179)  

 

(172)  

Increase in billings in excess of contract revenue

 

850   

 

51   

Decrease in deferred rent obligation

 

(327)  

 

(317)  

Net cash provided by (used in) operating activities

 

2,359   

 

(2,083)  

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Purchases of property and equipment

 

(80)  

 

(100)  

Proceeds from sale of property and equipment

 

28   

 

 

Net cash used in investing activities

 

(52)  

 

(100)  

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Principal payments on long-term debt

 

(167)  

 

(157)  

Net cash used in financing activities

 

(167)  

 

(157)  

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

2,140   

 

(2,340)  

Cash, cash equivalents, and restricted cash as of beginning of the period

5,588   

 

7,426   

Cash, cash equivalents, and restricted cash as of end of the period

 

$ 7,728   

 

$ 5,086   

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

 

$ 74   

 

$ 83   

Income taxes

 

103   

 

251   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


5


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

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, 2017.

 

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 nine months ended September 28, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.  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

 

As more fully described in Note 2, effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) , which supersedes nearly all existing revenue recognition guidance.  As a result of the adoption of ASU Topic 606, the Company changed its accounting policy for revenue recognition. See Note 2 for the methods used to determine revenue recognition for the periods presented.

 

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 Income (Loss) Per Common Share

 

Basic net income (loss) per common share is computed based on the weighted-average number of common shares outstanding during the period.  Diluted net income 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. Stock options produced common stock equivalents of 649,078 and 682,697 used to compute diluted net income per share for the nine months ended September 28, 2018 and September 29, 2017, respectively.

 

 


6


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 

 

Inventories, net

Inventories consisted of the following:

 

 

September 28,

 

December 31,

 

2018

 

2017

 

 

 

 

Raw materials

$ 5,113   

 

$ 5,458   

Work in process

149   

 

1,011   

Finished goods

392   

 

423   

Reserve for obsolete inventory

(3,138)  

 

(2,919)  

Inventories, net

$ 2,516   

 

$ 3,973   

 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 changes the accounting for leases. In particular, lessees will recognize lease assets and lease liabilities for operating leases. This update will have a minimal effect on lessor accounting. ASU 2016-02 is not effective until 2019. The Company is currently assessing the impact on its financial reporting of implementing this guidance.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash

(“ASU 2016-18”). ASU 2016-18 changes the cash flow presentation and disclosures of restricted cash. The

Company implemented this update in the presented financial statements.

 

2.    REVENUE

The Company adopted Topic 606, Revenue from Contracts with Customers , with a date of the initial application of January 1, 2018. The Company applied Topic 606 using the cumulative effect method, and accordingly recognized the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. As a result, the Company used different methods for recognizing revenue in each of the periods presented as detailed below.

Products and services

The Company generates its revenue through manufacturing, integrating, distributing, and servicing its various products consisting of: Audio-Visual Systems, Domes, Show Content, and Maintenance and Service contracts. All of the Company’s products are sold worldwide.

Audio-Visual Systems consist of standard and customized hardware components integrated with proprietary software. The Audio-Visual Systems are most often used as the primary equipment for planetarium theaters operated by educational institutions. Occasionally, Audio-Visual Systems are sold for other special purposes at various visitor attractions. Audio-Visual System sales include upgrades of existing systems and sub-systems. Sales of typical Audio-Visual Systems range from $200 to $2,000.  

Domes are hemispheric or curved metal structures fabricated from mostly aluminum metal tubing and sheets at the Company’s factory. Some Dome components have a special optical coating applied by a partner vendor. The Dome components are shipped to a customer site and are assembled and installed in or on the customer’s building by a crew of Company employees or subcontractors. Domes are often sold with an Audio-Visual System to serve as projection screens but can also be sold separately. Most often a Dome sold separately is used as a projection screen but occasionally they are used as architectural treatments. Dome projection screens sold separately can be used for existing planetarium theaters or other special visitor attractions such as theme park rides. A typical Dome is a hemispheric structure ranging from 40 to 70 feet in diameter but Domes are also produced in various curved shapes and sizes to accommodate a special purpose. Dome sales typically range from $200 to $1,000 but occasionally exceed this range for sales of multiple complex structures priced at several million dollars.


7


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Show Content is sold under a license agreement. Show Content can also be sold with or without an Audio-Visual System. Most Show Content is sold to planetarium theaters which historically have been used as astronomical simulators; however, digital technologies have expanded capabilities to display a wider variety of content. The Company’s Show Content products include a variety of mostly educational topics including but not limited to astronomy, earth sciences, history, and biology. The Company sells Show Content it produces as well as content produced by other entities under distribution arrangements. Show Content sales typically range from $2 to $80.

Maintenance and Service is sold in the form of spare parts or service agreements that sometimes include an extended warranty feature. Maintenance and Service is sold predominantly for Audio-Visual Systems. Dome products require less maintenance but can benefit from an occasional cleaning. Part sales typically range from $1 to $100. Maintenance and Service contract sales typically range from $3 to $200.  

The Company sells and markets its products through its employee sales team. For many foreign sales, the employee team is assisted by commissioned agents based in the locale of the customer. The Company markets its products through a network of industry associations and by messaging to the designers of planetarium theaters and visitor attractions. For Dome sales other than for planetarium projects, the Company relies on relationships developed with many satisfied customers in the architectural, visitor attraction, and theme park community. Customer decisions are based on price, product features and the experience of the supplier.

Most of the Company’s revenue comes from sales of Audio-Visual Systems and Domes for planetarium theaters or other visitor attractions. Sales can be to existing theaters interested in upgrading or to a new theater. Maintenance and Service and Show Content provide a reasonably steady stream of repeat revenue from existing customers but only at levels that can supplement the volume required from Audio-visual Systems and Domes necessary to sustain the business. As such, the Company relies on sales to new projects each year. Customer sales sometimes can take years to consummate from the initial planning stage to the award of the contract. Often there is a competitive bid process with multiple suppliers involved.

Customer contracts generally provide for progress payments which in many cases provides advance funding for the cost of performance. In some cases, customers hold a small portion of the contract payment for performance security through the warranty. The Company may also be required to provide performance security in the form of a surety bond or international standby letter of credit. Most customers are large public institutions, government or quasi-government entities, and large theme park entities, which carry little credit risk.  

Multiple Deliverable Arrangements  

 

Some contracts include multiple deliverables.  Significant deliverables in such arrangements commonly include Audio-Visual Systems, Domes, Show Content and various Maintenance and Service deliverables.  Revenue earned on deliverables such as products, services and maintenance contracts are allocated to each deliverable based on the relative fair values of the deliverables.  Relative fair values of deliverables are generally determined based on actual and estimated selling price. Delivery times of such contracts vary but typically occur within a three to twelve-month time period.

 

Revenue Recognition Methods for 2017

Percentage of Completion . In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized using the percentage-of-completion method.  In applying this method, the Company utilizes cost-to-cost methodology whereby it estimates the percent complete by calculating the ratio of costs incurred (consisting of material, labor and subcontracting costs, as well as an allocation of indirect costs) for each contract to its total anticipated costs for that contract.   This ratio is then utilized to determine the amount of gross profit earned based on the Company’s estimate of total gross profit at completion for each contract.  The Company routinely reviews estimates related to percentage-of-completion contracts and adjusts for changes in the period the revisions are made.  Billings on uncompleted percentage-of-completion contracts may be greater than or less than revenue recognized and are recorded as an asset or liability in the accompanying condensed consolidated balance sheets.

Completed Contract . Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of products are accounted for using the completed contract method.  Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an


8


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


arrangement exists, title and risk of loss have transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.

Other .  Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element.  Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.  

 

Revenue Recognition Methods for 2018

In 2018, upon adoption of Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following describes the methods used to recognize revenue under the application of Topic 606.

Audio-Visual Systems. The Company’s Audio-Visual Systems are sold for a fixed price under non-cancelable contracts. Because systems are often designed with unique features and constantly changing technology components, there is no practical alternative use for a system after it is sold. Under Topic 606, if an entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for the performance completed to date, then its performance obligation is satisfied and control of the product transfers over time. If control transfers over time, an entity selects a method to measure progress that is consistent with the objective of depicting its performance and recognizes revenue accordingly. The Company has determined the percentage-of-completion method utilizing cost-to-cost methodology best depicts the measure of progress because it tracks the utilization of total resources to fulfill the obligation. This same method has been used prior to the adoption of Topic 606 for recognizing revenue on certain Audio-Visual System sales and most Dome sales. With the adoption of Topic 606, essentially all Audio-Visual Systems and subsystem sales will use the percentage-of-completion method for revenue recognition.  

Domes. The Company’s Domes are sold for a fixed price under non-cancelable contracts. Because Domes have custom design and interface features, there is no practical alternative use for a Dome after it is sold. As discussed above under Audio-Visual Systems, when there is no alternative use for the product and there is an enforceable right to payment, Topic 606 requires revenue to be recognized over the time of performance. Accordingly, the Company continues to use the percentage-of-completion method utilizing cost-to-cost methodology for the recognition of revenue for the sale Domes, as it has prior to the adoption of Topic 606.  

 

Show Content.   Show Content is sold under various license agreements, most often for a fixed price, but occasionally for a variable share of the customer’s theater revenue. Sales of Show Content require no future obligations by the Company after delivery.  The Company recognizes the revenue for fixed price Show Content licenses upon the execution of the license agreement and delivery of media since that is the time control and benefit of the Show Content is transferred. Under Topic 606, an entity does not recognize revenue for the variable amounts related to a royalty until a customer’s subsequent sales or usage occurs. Accordingly, revenue from the variable share of the customer’s theater revenue is recognized when realized. The method used by the Company for recognizing Show Content revenue has not changed with the adoption of Topic 606 .

Maintenance and Service. Maintenance and Service revenue consists of parts sales and service contracts. Parts sales are recognized upon shipment which is when the control and benefit transfers to the customer. Service contracts are sold for a fixed price and provide the customer with various levels of preventive service, support and limited warranty protection. Under Topic 606, the revenue for service contracts is recognized ratably over the term of the contract or upon delivery of a service specified in the contract. The method used by the Company for recognizing Maintenance and Service revenue has not changed with the adoption of Topic 606.

Contract Acquisition Costs

Contract acquisition costs consist of expenditures of Company employee and other resources and, in some cases, the payment of sales commissions to non-employee agents. Expenditures of Company employee and other resources are costs that would be incurred regardless of whether the contract is obtained, are not recoverable, and therefore are expensed as they are incurred under Topic 606. Sales commissions paid to agents are incurred only if the contract is obtained and therefore are incremental costs of acquiring the contract. Rather than capitalize the cost of sales commissions, the Company has elected to expense sales commissions as incurred under the practical expedient permitted by Topic 606, whereby expensing is permitted when the amortization period of the asset that the entity otherwise would have recognized is one year or less.


9


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 

Disaggregation of Revenue

In the following table, revenue reported for the three and nine months ended September 28, 2018 under Topic 606 is disaggregated by primary geographical market, major product line, timing of revenue recognition and product application.

Revenue for the three months ended September 28, 2018

Product Application

Planetarium Theaters

Other Visitor Attractions

Architectural Treatments

Total

 

 

 

 

 

Primary geographic area:

 

 

 

 

 

 

 

 

 

North America

$ 7,545  

$ 12  

$ -  

$ 7,557  

Europe

2,853  

432  

118  

3,403  

Asia

687  

182  

-  

869  

Other

371  

-  

-  

371  

 

$ 11,456  

$ 626  

$ 118  

$ 12,200  

 

 

 

 

 

Products:

 

 

 

 

 

 

 

 

 

Audio-Visual Systems

$ 8,718  

$ 360  

$ -  

$ 9,078  

Domes

1,842  

266  

118  

2,226  

Show Content

382  

-  

-  

382  

Maintenance and Service

514  

-  

-  

514  

 

$ 11,456  

$ 626  

$ 118  

$ 12,200  

 

 

 

 

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

Goods transferred at point in time

$ 472  

$ -  

$ -  

$ 472  

Goods and services transferred over time

10,984  

626  

118  

11,728  

 

$ 11,456  

$ 626  

$ 118  

$ 12,200  

 


10


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 

 

  Revenue for the nine months ended September 28, 2018

Product Application

Planetarium Theaters

Other Visitor Attractions

Architectural Treatments

Total

 

 

 

 

 

Primary geographic area:

 

 

 

 

 

 

 

 

 

North America

$ 16,449  

$ 485  

$ 629  

$ 17,563  

Europe

4,284  

844  

118  

5,246  

Asia

3,366  

1,775  

-  

5,141  

Other

703  

-  

-  

703  

 

$ 24,802  

$ 3,104  

$ 747  

$ 28,653  

 

 

 

 

 

Products:

 

 

 

 

 

 

 

 

 

Audio-Visual Systems

$ 16,713  

$ 772  

$ -  

$ 17,485  

Domes

4,725  

2,332  

747  

7,804  

Show Content

1,552  

-  

-  

1,552  

Maintenance and Service

1,812  

-  

-  

1,812  

 

$ 24,802  

$ 3,104  

$ 747  

$ 28,653  

 

 

 

 

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

Goods transferred at point in time

$ 2,031  

$ -  

$ -  

$ 2,031  

Goods and services transferred over time

22,771  

3,104  

747  

26,622  

 

$ 24,802  

$ 3,104  

$ 747  

$ 28,653  

 


11


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 

Contract Balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of September 28, 2018:

 

September 28, 2018

January 1, 2018

 

 

 

Receivables reported as accounts receivable, net

$ 6,196  

$ 3,794  

Contract revenue in excess of billings

4,075  

3,517  

Billings in excess of contract revenue

7,115  

6,265  

 

 

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

 

$ (4,534)   

 

 

 

Increases due to amounts billed to customers, excluding amounts recognized as revenue during the period

 

$  5,384  

 

 

 

Transferred to receivables from contract assets recognized at the beginning of the period

$ (3,296)  

 

 

 

 

Increases as a result of revenue recognized, excluding amounts transferred to receivables during the period

$    3,854  

 

 

Contract revenue in excess of billings are contract assets that 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. Billings in excess of contract revenue are contract liabilities that 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 2018

2019

2020

2021

 

 

 

 

 

Sales

$ 7,942  

$ 10,182  

$ 436  

$ 225  

 


12


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


3.    CHANGES IN ACCOUNTING POLICIES

Except for the changes disclosed in Note 1 under revenue recognition, the Company has consistently applied the accounting policies to both periods presented in these condensed consolidated financial statements. The Company adopted Topic 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company applied Topic 606 using the cumulative effect method and accordingly recognized the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under prior accounting rules.

The following tables summarize the impacts of adopting Topic 606 on the Company’s condensed consolidated financial statements for the three and nine months ended September 28, 2018:

 

Condensed consolidated balance sheet

 

 

 

 

 

 

Impact of changes in accounting policies

 

 

 

 

 

 

Balances

 

 

 

 

 

 

Without

 

 

 

 

 

 

adoption of

September 28, 2018

 

As reported

 

Adjustments

 

Topic 606

Cash and cash equivalents

 

$ 7,636   

 

$  

 

$ 7,636   

Restricted cash

 

92   

 

 

 

92   

Contract revenue in excess of billings

 

4,075   

 

(903)  

 

3,172   

Inventories, net

 

2,516   

 

1,256   

 

3,772   

Others

 

14,916   

 

 

 

14,916   

Total assets

 

29,235   

 

353   

 

29,588   

Billings in excess of contract revenue

 

7,115   

 

1,230   

 

8,345   

Others

 

15,081   

 

 

 

15,081   

Total liabilities

 

22,196   

 

1,230   

 

23,426   

Accumulated deficit

 

(43,506)  

 

(877)  

 

(44,383)  

Others

 

50,545  

 

 

 

50,545  

Total stockholders’ equity

 

7,039  

 

(877)  

 

6,162  

Total liabilities and stockholders’ equity

 

$ 29,235  

 

$ 353   

 

$ 29,588  

 


13


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 

 

Condensed consolidated statement of operations

 

 

 

 

Impact of changes in accounting policies

 

 

 

 

 

 

Balances

 

 

 

 

 

 

Without

 

 

 

 

 

 

adoption of

For the three months ended September 28, 2018

 

As reported

 

Adjustments

 

Topic 606

Sales

 

$ 12,200   

 

$ 783  

 

$ 12,983   

Cost of sales

 

(7,458)  

 

(498)  

 

(7,956)  

Selling, general and administrative

 

(1,613)  

 

 

 

(1,613)  

Income tax expense

 

(30)  

 

 

 

(30)  

Others

 

(738)  

 

 

 

(738)  

Net income

 

$ 2,361   

 

$ 285  

 

$ 2,646  

 

 

 

 

 

 

 

 

Balances

 

 

 

 

 

 

Without

 

 

 

 

 

 

adoption of

For the nine months ended September 28, 2018

 

As reported

 

Adjustments

 

Topic 606

Sales

 

$ 28,653   

 

$ (527)  

 

$ 28,126   

Cost of sales

 

(18,014)  

 

333   

 

(17,681)  

Selling, general and administrative

 

(5,044)  

 

 

 

(5,044)  

Income tax expense

 

(61)  

 

 

 

(61)  

Others

 

(2,515)  

 

 

 

(2,515)  

Net income

 

$ 3,019   

 

$ (194)  

 

$ 2,825  

 


14


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Condensed consolidated statement of cash flows

 

 

 

 

Impact of changes in accounting policies

 

 

 

 

 

 

Balances

 

 

 

 

 

 

without

 

 

 

 

 

 

adoption of

For the nine months ended September 28, 2018

 

As reported

 

Adjustments

 

Topic 606

Net income

 

$ 3,019   

 

$ (194)  

 

$ 2,825   

Adjustments to reconcile net income to net

  cash provided by operating activities:

 

 

 

 

 

 

Other

 

555   

 

 

 

555   

Changes in:

 

 

 

 

 

 

Inventories

 

315   

 

(333)  

 

(18)  

Contract revenue in excess of billings

 

(558)  

 

903   

 

345   

Billings in excess of contract revenue

 

850   

 

(376)  

 

474   

Other

 

(1,822)  

 

 

 

(1,822)  

Net cash provided by operating activities

 

2,359   

 

 

 

2,359   

Net cash used in investing activities

 

(52)  

 

 

 

(52)  

Net cash used in financing activities

 

$ (167)  

 

$  

 

$ (167)  

 


15


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


4. STOCK OPTION PLAN  

 

As of September 28, 2018, options to purchase 1,001,781 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 nine months ended September 28, 2018 follows (shares in thousands):

 

 

 

 

Weighted-

 

 

 

Average

 

Number

 

Exercise

 

of Shares

 

Price

 

 

 

 

Outstanding as of beginning of the period

1,609   

 

$ 0.66  

Granted

150   

 

1.12  

Exercised

 

 

-  

Forfeited or expired

(162)  

 

1.21  

Outstanding as of end of the period

1,597   

 

0.65  

 

 

 

 

Exercisable as of end of the period

1,128   

 

$ 0.48  

 

As of September 28, 2018, options exercisable and options outstanding had a weighted average remaining contractual term of 4.97 and 5.98 years, respectively, and had an aggregate intrinsic value of $723 and $773, respectively.

 

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 nine months of 2018, were based on estimates as of the date of grant as follows:

 

Risk-free interest rate

2.04%

Dividend yield

0.00%

Volatility

125%

Expected life

3.5 years

 

Expected option life and volatility are based on historical data of the Company.   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.

 

As of September 28, 2018, there was approximately $126 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 2.1 years.

 

Share-based compensation expense included in selling, general and administrative expense in the statements of operations for the nine-month periods ended September 28, 2018 and September 29, 2017 was $112 and $132, respectively. Share-based compensation expense included in selling, general and administrative expense in the statements of operations for the three-month periods ended September 28, 2018 and September 29, 2017 was $37 and $46, respectively.


16


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


5. 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 ten 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 $452 in the next 12 months.  

 

Components of Net Periodic Benefit Expense

 

 

Supplemental Executive

 

Retirement Plan

 

September 28,

 

September 29,

For the nine months ended:

2018

 

2017

 

 

 

 

Interest cost

$ 103  

 

$ 117  

Amortization of actuarial loss

60  

 

56  

Net periodic benefit expense

$ 163  

 

$ 173  

 

 

 

Supplemental Executive

 

Retirement Plan

 

September 28,

 

September 29,

For the three months ended:

2018

 

2017

 

 

 

 

Interest cost

$ 35  

 

$ 39  

Amortization of actuarial loss

20  

 

19  

Net periodic benefit expense

$ 55  

 

$ 58  

 


17



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

 

The results for the three and nine months ended September 28, 2018 produced net income of $2,361 and $3,019, respectively. The 2018 results exceeded expectations and are unusually high compared to the three and nine months ended September 29, 2017 as well as reported earnings in the Company’s recent history. The outstanding 2018 results were attributable to higher sales from an unusually large volume of work performed on customer planetarium projects in the third quarter of 2018. The work completed on customer projects in the third quarter of 2018 included expenditures of resources required to complete several planetarium installations and to meet customer schedules for upcoming installations. Although exceeding our expectations, the results of third quarter of 2018 demonstrate the degree of variability in sales that can occur from the timing of customer orders and deliveries. We do not expect sales at this level in any foreseeable quarterly reporting periods.

 

The high volume of sales from work on prior customer orders combined with a low volume of orders booked in the third quarter of 2018 significantly depleted the sales backlog to $18,785 as of September 28, 2018. This compares to a sales backlog ranging approximately from $26,000 to $27,000 at the end of recently reported periods. New orders to replenish the sales backlog will be critical to produce sufficient sales for profitable results in future periods. 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 accelerated sales in the third quarter of 2018 will result in lower sales for near term reporting periods that may be below profitable levels.

 

As described in the notes to the condensed consolidated financial statements, the Company adopted Topic 606, Revenue from Contracts with Customers, with a date of the initial application of January 1, 2018. The Company applied Topic 606 using the cumulative effect method and accordingly recognized the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. As a result, the Company used different methods for recognizing revenue in each of the years presented as detailed below.

The adoption of Topic 606 changed the method of recognizing revenue for certain customer contracts. More specifically, for some contracts, revenue previously was not recognized until the product was accepted by the


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customer. Under Topic 606, revenue for these contracts will be recognized over time using the percentage completion method, which is the method used for most of our customer contracts. The immediate effect of the change was to accelerate earnings on the revenue backlog for the effected contracts. Much of this acceleration was recorded in a cumulative transition adjustment, whereby $682 of gross profit on $1,606 of sales was recorded directly to stockholders’ equity.  Although the benefit of the earnings from the transition adjustment is reflected in the financial position of the Company on the balance sheet, it will not be reported in the statement of operations. Going forward, we believe Topic 606 will create a smoother revenue stream by spreading more revenue over the period of performance as opposed to previously when some contract revenue was recorded in a lump sum in the period of acceptance by the customer.  

 

The change in the method of recognizing revenue as explained above had a contrasting effect on the sales for third quarter and nine month periods which was not very significant in light of the high sales reported. As more fully described in the footnotes to the financial statements, under the accounting methods used in 2017, the three months ended September 28, 2018 would have reported $285 more net income while the nine month period ended September 28, 2018 would have reported $194 less net income.

 

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, 2017.  In addition, the Company considers the new revenue standard, adopted January 1, 2018 and described in Note 2, to be a critical accounting policy. 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

 

Nine Months Ended

 

September 28, 2018

 

September 29, 2017

 

September 28, 2018

 

September 29, 2017

 

 

 

 

 

 

 

 

Sales

$ 12,200   

 

$ 8,049   

 

$ 28,653   

 

$ 22,836   

 

 

The higher 2018 sales were attributable to an unusually high volume of work performed on customer planetarium projects in the third quarter of 2018; otherwise the contribution to sales from other products was comparable in the periods presented. See Note 2 and Note 3 to the condensed consolidated financial statements for explanations of changes in the accounting method for revenue recognition. Sales for the three and nine months ended September 28, 2018 would have been $12,983 and $28,126 using the same accounting method used in 2017.

 

Revenue backlog decreased to $18,785 as of September 28, 2018, compared to $27,360 as of December 31, 2017. 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 orders booked in the third quarter of 2018. To a lesser extent the change in accounting method for revenue recognition also decreased the backlog. As discussed in Note 2 and Note 3 to the condensed consolidated financial statements, the cumulative effect of the change was recorded as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. This adjustment recorded the gross profit on $1,606 of sales from the revenue backlog. Also, the changes in the accounting method for revenue recognition resulted in $527 of additional sales in the nine months of 2018. Hence, the change in the accounting


19



method for revenue recognition reduced the backlog by a total $2,133. Had it not been for the change, the sales backlog would have decreased to $20,918.    

 

Gross Profit

The following table summarizes our gross profit and the gross profit as a percentage of total sales:

 

 

Three Months Ended

 

Nine Months Ended

 

September 28, 2018

 

September 29, 2017

 

September 28, 2018

 

September 29, 2017

 

 

 

 

 

 

 

 

Gross profit

$ 4,742   

 

$ 3,113   

 

$ 10,639   

 

$ 8,052   

Gross profit percentage

39%

 

39%

 

37%

 

35%

 

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 higher 2018 sales resulted in efficiencies that lowered overhead cost of as a percentage of sales.  

 

Operating Expenses

The following table summarizes our operating expenses:

 

 

Three Months Ended

 

Nine Months Ended

 

September 28, 2018

 

September 29, 2017

 

September 28, 2018

 

September 29, 2017

 

 

 

 

 

 

 

 

Selling, general and

 

 

 

 

 

 

 

administrative

$ 1,613   

 

$ 1,419   

 

$ 5,044   

 

$ 4,542   

Research and development

615   

 

769   

 

2,109   

 

2,236   

Pension

55   

 

58   

 

163   

 

173   

Total operating expenses

$ 2,283   

 

$ 2,246   

 

$ 7,316   

 

$ 6,951   

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses were higher in 2018 compared to 2017. This was due to the timing of expenditures and costs related to a bi-annual industry conference in 2018. Also, in 2017, there was a reduction in the allowance for doubtful accounts receivable resulting in a credit which reduced 2017 expenses.  

 

Research and development expenses were lower in 2018 due to a lower use of employee resources on research and development projects in order to complete customer projects. Research and development expenses generally vary with use of engineering resources for product improvement projects and customer delivery activities.

 

Pension expense declined slightly in 2018 compared to 2017 due to a decrease in the interest cost on the SERP.


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Other Expense, net

 

The following table summarizes our other expense:

 

 

Three Months Ended

 

Nine Months Ended

 

September 28, 2018

 

September 29, 2017

 

September 28, 2018

 

September 29, 2017

 

 

 

 

 

 

 

 

Total other expense, net

$ 68   

 

$ 100   

 

$ 243   

 

$ 302   

 

Other expense decreased in 2018 compared to 2017 due to declining interest expense on the Pension Settlement Obligation and mortgage notes along with offsetting increase of interest income from a capital lease receivable and other income.   

 

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 nine months of 2018, $2,359 of cash provided by operating activities was attributable to $3,574 of cash provided by the net income for the period, after the effect of non-cash items of $555 which was offset by cash used by changes to working capital of $1,215. The significant uses of cash from changes to working capital were increases in accounts receivable and contract revenue in excess of billings.  This was partially 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.   

 

In the first nine months of 2017, $2,083 of cash used in operating activities was attributable to $1,099 of cash provided by the net income for the period, after the effect of $318 of non-cash items and an unfavorable change to working capital of $3,182. The change to working capital was driven by increases in receivables and costs and estimated earnings in excess of billings on uncompleted contracts.  These increases are attributable to the timing of billings, customer payments and new customer orders.   The change in working capital was also affected by an increase in prepaid expenses and other assets.

 

Cash used in investing activities was $52 for the nine months ended September 28, 2018 compared to $100 for the same period of 2017.  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 nine months ended September 28, 2018, financing activities used $167 of cash compared to $157 in 2017 for principal payments on mortgage notes.


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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 September 28, 2018.

 

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 September 28, 2018 there were outstanding letters of credit and bank guarantees of $92, which are scheduled to expire during the year ending December 31, 2018.  

 

Mortgage Notes

As of September 28, 2018, Spitz had obligations totaling $1,597 under its two mortgage notes payable.

 

Item 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected.

 

Changes in Internal Control over Financial Reporting

 

On January 1, 2018 the Company’s subsidiary began processing inventory transactions on the integrated accounting software system it uses for all other transactions. Prior to 2018 the subsidiary’s inventory and product bills of material were accounted for using a legacy system. This change was made to improve the efficiency of the accounting function through improved integration of all transactions. Also, transitioning off the legacy system provides better security and assurance of system support. The Company has made changes to its internal control over financial reporting in connection with this transition from the legacy system.

Other than the improvements noted above, there has been no change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the three months ended September 28, 2018, or subsequent to that date, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.


22



PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS  

 

In the normal course of business, we become involved in various legal proceedings.  Although the final outcome of such proceedings cannot be predicted with certainty, we believe the ultimate disposition of any such proceedings will not have a material adverse effect on our consolidated financial position, liquidity, or results of operations.

 

Item 6. EXHIBITS  

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.  

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.  

32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.  

101 The following materials from this Quarterly Report on Form 10-Q for the period ended September 28, 2018, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.  


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SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

EVANS & SUTHERLAND COMPUTER CORPORATION

 

 

 

 

 

 

Date:

November 5, 2018

By:    /s/ Paul Dailey       

 

 

Paul Dailey, Chief Financial Officer

 

 

and Corporate Secretary

 

 

(Authorized Officer)

            

 

(Principal Financial and Accounting Officer)


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