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 30, 2016
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
(Exact Name of Registrant as Specified in Its Charter)
Utah (State or Other Jurisdiction of Incorporation or Organization) | 87-0278175 (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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large“large accelerated filer," "accelerated” “accelerated filer,"” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | 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. [ ] Accelerated filer [ ]
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'sregistrant’s Common Stock (par value $0.20 per share) outstanding on November 3, 2016May 2, 2017 was 11,352,516.
FORM 10-Q
Evans & Sutherland Computer Corporation
Page No. | ||
PART I – FINANCIAL INFORMATION | ||
13 | ||
PART II – OTHER INFORMATION | ||
14 | ||
14 | ||
15 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
(Unaudited) (In thousands, except share and per share data)
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,557 | $ | 3,734 | ||||
Restricted cash | 602 | 601 | ||||||
Accounts receivable, net | 6,125 | 4,825 | ||||||
Costs and estimated earnings in excess of billings on | ||||||||
uncompleted contracts | 1,511 | 2,695 | ||||||
Inventories, net | 3,708 | 4,072 | ||||||
Prepaid expenses and deposits | 646 | 1,038 | ||||||
Total current assets | 18,149 | 16,965 | ||||||
Property and equipment, net | 4,681 | 4,735 | ||||||
Goodwill | 635 | 635 | ||||||
Intangible assets, net | 7 | 27 | ||||||
Other assets | 1,205 | 1,082 | ||||||
Total assets | $ | 24,677 | $ | 23,444 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 803 | $ | 1,062 | ||||
Accrued liabilities | 2,200 | 1,031 | ||||||
Billings in excess of costs and estimated earnings on | ||||||||
uncompleted contracts | 5,179 | 3,995 | ||||||
Customer deposits | 2,994 | 3,232 | ||||||
Current portion of retirement obligations | 551 | 480 | ||||||
Current portion of pension settlement obligation | 356 | 356 | ||||||
Current portion of long-term debt | 226 | 199 | ||||||
Total current liabilities | 12,309 | 10,355 | ||||||
Pension and retirement obligations, net of current portion | 4,657 | 4,839 | ||||||
Pension settlement obligation, net of current portion | 5,268 | 5,268 | ||||||
Long-term debt, net of current portion | 1,800 | 1,975 | ||||||
Deferred rent obligation | 1,336 | 1,653 | ||||||
Total liabilities | 25,370 | 24,090 | ||||||
Commitments and contingencies | ||||||||
Stockholders' deficit: | ||||||||
Preferred stock, no par value: 10,000,000 shares authorized; | ||||||||
no shares outstanding | - | - | ||||||
Common stock, $0.20 par value: 30,000,000 shares authorized; | ||||||||
11,441,866 and 11,441,666 shares issued, respectively | 2,288 | 2,288 | ||||||
Additional paid-in-capital | 53,559 | 53,434 | ||||||
Common stock in treasury, at cost, 264,350 shares | (3,532 | ) | (3,532 | ) | ||||
Accumulated deficit | (50,604 | ) | (50,432 | ) | ||||
Accumulated other comprehensive loss | (2,404 | ) | (2,404 | ) | ||||
Total stockholders' deficit | (693 | ) | (646 | ) | ||||
Total liabilities and stockholders' deficit | $ | 24,677 | $ | 23,444 | ||||
| March 31, |
| December 31, | |
| 2017 |
| 2016 | |
ASSETS | ||||
Current assets: |
|
|
|
|
Cash and cash equivalents |
| $6,208 |
| $6,823 |
Restricted cash |
| 823 |
| 603 |
Accounts receivable, net |
| 3,356 |
| 3,271 |
Current portion of lease receivable |
| 236 |
| 252 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 2,813 |
| 3,038 |
Inventories, net |
| 3,762 |
| 3,751 |
Prepaid expenses and deposits |
| 1,063 |
| 902 |
Total current assets |
| 18,261 |
| 18,640 |
Long-term lease receivable, net of current portion |
| 1,023 |
| 1,083 |
Property and equipment, net |
| 4,629 |
| 4,638 |
Goodwill |
| 635 |
| 635 |
Intangible assets, net |
| - |
| - |
Other assets |
| 1,336 |
| 1,222 |
Total assets |
| $25,884 |
| $26,218 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current liabilities: |
|
|
|
|
Accounts payable |
| $1,167 |
| $1,158 |
Accrued liabilities |
| 1,539 |
| 1,400 |
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 6,209 |
| 6,500 |
Customer deposits |
| 2,038 |
| 2,238 |
Current portion of retirement obligations |
| 507 |
| 507 |
Current portion of pension settlement obligation |
| 382 |
| 382 |
Current portion of long-term debt |
| 214 |
| 211 |
Total current liabilities |
| 12,056 |
| 12,396 |
Pension and retirement obligations, net of current portion |
| 4,287 |
| 4,344 |
Pension settlement obligation, net of current portion |
| 4,886 |
| 4,886 |
Long-term debt, net of current portion |
| 1,709 |
| 1,764 |
Deferred rent obligation |
| 1,125 |
| 1,231 |
Total liabilities |
| 24,063 |
| 24,621 |
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 and 11,616,866 shares issued, respectively |
| 2,323 |
| 2,323 |
Additional paid-in-capital |
| 53,680 |
| 53,641 |
Common stock in treasury, at cost, 264,350 shares |
| (3,532) |
| (3,532) |
Accumulated deficit |
| (48,504) |
| (48,689) |
Accumulated other comprehensive loss |
| (2,146) |
| (2,146) |
Total stockholders’ equity |
| 1,821 |
| 1,597 |
Total liabilities and stockholders’ equity |
| $25,884 |
| $26,218 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
(Unaudited) (In thousands, except per share data)data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 2, | September 30, | October 2, | |||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Sales | $ | 10,306 | $ | 9,375 | $ | 23,474 | $ | 27,666 | ||||||||
Cost of sales | (6,627 | ) | (6,049 | ) | (15,523 | ) | (17,956 | ) | ||||||||
Gross profit | 3,679 | 3,326 | 7,951 | 9,710 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | (2,273 | ) | (1,535 | ) | (5,710 | ) | (5,132 | ) | ||||||||
Research and development | (606 | ) | (563 | ) | (1,762 | ) | (1,702 | ) | ||||||||
Pension | (66 | ) | (49 | ) | (197 | ) | (473 | ) | ||||||||
Pension settlement | - | - | - | (3,620 | ) | |||||||||||
Total operating expenses | (2,945 | ) | (2,147 | ) | (7,669 | ) | (10,927 | ) | ||||||||
Operating income (loss) | 734 | 1,179 | 282 | (1,217 | ) | |||||||||||
Other expense, net | (157 | ) | (231 | ) | (417 | ) | (404 | ) | ||||||||
Income (loss) before income tax provision | 577 | 948 | (135 | ) | (1,621 | ) | ||||||||||
Income tax benefit | (16 | ) | (27 | ) | (37 | ) | (55 | ) | ||||||||
Net income (loss) | $ | 561 | $ | 921 | $ | (172 | ) | $ | (1,676 | ) | ||||||
Net income (loss) per common share – basic and diluted | $ | 0.05 | $ | 0.08 | $ | (0.02 | ) | $ | (0.15 | ) | ||||||
Weighted average common shares outstanding – basic | 11,177 | 11,177 | 11,177 | 11,141 | ||||||||||||
Weighted average common shares outstanding – diluted | 11,790 | 11,705 | 11,177 | 11,141 | ||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||
Net income (loss) | $ | 561 | $ | 921 | $ | (172 | ) | $ | (1,676 | ) | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Reclassification of pension expense to net income | - | - | - | 195 | ||||||||||||
Pension settlement | - | - | - | 31,776 | ||||||||||||
Other comprehensive income | - | - | - | 31,971 | ||||||||||||
Total comprehensive income (loss) | $ | 561 | $ | 921 | $ | (172 | ) | $ | 30,295 |
|
| Three Months Ended | ||
| March 31, |
| April 1, | |
|
| 2017 |
| 2016 |
|
|
|
|
|
Sales |
| $8,043 |
| $7,900 |
Cost of sales |
| (5,369) |
| (5,197) |
Gross profit |
| 2,674 |
| 2,703 |
Operating expenses: |
|
|
|
|
Selling, general and administrative |
| (1,606) |
| (1,671) |
Research and development |
| (701) |
| (587) |
Pension |
| (58) |
| (66) |
Total operating expenses |
| (2,365) |
| (2,324) |
|
|
|
|
|
Operating income |
| 309 |
| 379 |
|
|
|
|
|
Other expense, net |
| (109) |
| (128) |
Income before income tax provision |
| 200 |
| 251 |
Income tax provision |
| (15) |
| (15) |
Net income |
| $185 |
| $236 |
|
|
|
|
|
Net income per common share – basic and diluted |
| $0.02 |
| $0.02 |
|
|
|
|
|
Weighted average common shares outstanding – basic |
| 11,353 |
| 11,177 |
Weighted average common shares outstanding – diluted |
| 12,052 |
| 11,801 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
(Unaudited) (In thousands)
Nine Months Ended | ||||||||
September 30, | October 2, | |||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (172 | ) | $ | (1,676 | ) | ||
Adjustments to reconcile net loss to net cash provided by | ||||||||
(used in) operating activities: | ||||||||
Depreciation and amortization | 219 | 216 | ||||||
Amortization of deferred pension costs | - | 195 | ||||||
Pension settlement charge | - | 3,620 | ||||||
Provision for excess and obsolete inventory | 236 | 76 | ||||||
Other | 143 | 72 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in restricted cash | (1 | ) | 111 | |||||
Increase in accounts receivable | (1,318 | ) | (2,054 | ) | ||||
Decrease (increase) in inventories | 128 | (936 | ) | |||||
Decrease (increase) in costs and estimated earnings in | ||||||||
excess of billings on uncompleted contracts, net | 2,368 | (1,542 | ) | |||||
Decrease (increase) in prepaid expenses and other assets | 269 | (76 | ) | |||||
Increase (decrease) in accounts payable | (259 | ) | 315 | |||||
Increase in accrued liabilities | 1,169 | 510 | ||||||
Decrease in pension and retirement obligations | (111 | ) | (100 | ) | ||||
Decrease in pension settlement obligation | - | (1,485 | ) | |||||
Decrease in customer deposits | (238 | ) | (79 | ) | ||||
Decrease in deferred rent obligation | (317 | ) | (318 | ) | ||||
Net cash provided by (used in) operating activities | 2,116 | (3,151 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (145 | ) | (71 | ) | ||||
Net cash used in investing activities | (145 | ) | (71 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments on long-term debt | (148 | ) | (156 | ) | ||||
Net cash used in financing activities | (148 | ) | (156 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 1,823 | (3,378 | ) | |||||
Cash and cash equivalents as of beginning of the period | 3,734 | 7,038 | ||||||
Cash and cash equivalents as of end of the period | $ | 5,557 | $ | 3,660 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 93 | $ | 126 | ||||
Income taxes | 11 | 12 | ||||||
Supplemental disclosures of non-cash investing and financing | ||||||||
activities: | ||||||||
Settlement of pension liability | $ | - | $ | 35,870 |
|
| Three Months Ended | ||
| March 31, |
| April 1, | |
|
| 2017 |
| 2016 |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
Net income |
| $185 |
| $236 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
Depreciation and amortization |
| 64 |
| 73 |
Provision for excess and obsolete inventory |
| 51 |
| 60 |
Other |
| 82 |
| 46 |
Changes in assets and liabilities: |
|
|
|
|
Increase in restricted cash |
| (220) |
| - |
Decrease (increase) in accounts receivable |
| (128) |
| 1,641 |
Decrease in lease receivable |
| 76 |
| - |
Decrease (increase) in inventories |
| (62) |
| 346 |
Increase in costs and estimated earnings in excess of billings on uncompleted contracts, net |
| (66) |
| (53) |
Decrease (increase) in prepaid expenses and other assets |
| (275) |
| 62 |
Increase in accounts payable |
| 9 |
| 158 |
Increase in accrued liabilities |
| 139 |
| 291 |
Decrease in pension and retirement obligations |
| (57) |
| (38) |
Decrease in customer deposits |
| (200) |
| (1,072) |
Decrease in deferred rent obligation |
| (106) |
| (105) |
Net cash provided by (used in) operating activities |
| (508) |
| 1,645 |
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
Purchases of property and equipment |
| (55) |
| (22) |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
Principal payments on long-term debt |
| (52) |
| (65) |
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
| (615) |
| 1,558 |
Cash and cash equivalents as of beginning of the period |
| 6,823 |
| 3,734 |
Cash and cash equivalents as of end of the period |
| $6,208 |
| $5,292 |
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest |
| $28 |
| $42 |
Income taxes |
| 30 |
| 11 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
5EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the "Company"“Company” or "E&S"“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"GAAP”). This report on Form 10-Q should be read in conjunction with the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2015.
The accompanying unaudited condensed consolidated balance sheets, statements of comprehensive income (loss),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'sCompany’s financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 30, 2016March 31, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.2017. 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
Sales include revenues from system hardware and the related integrated software, database products and service contracts. The following methods are used to determine revenue recognition:
Percentage of Completion.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'sCompany’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 incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying condensed consolidated balance sheets.
In those arrangements where software is a significant component of the contract, the Company uses the percentage-of-completion method as described above.
Completed Contract.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 arrangement exists, title and risk of loss have transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.
Multiple Element Arrangements.Arrangements. Some contracts include multiple elements. Significant deliverables in such arrangements commonly include various hardware components of the Company'sCompany’s visual display systems, domes, show content and various service and maintenance elements. Revenue earned on elements such as products, services and maintenance contracts are allocated to each element based on the relative fair values of the elements. Relative fair values of elements are generally determined based on actual and estimated selling price. Delivery times of such contracts typically occur within a three to six-month time period.
Other.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.
6
6EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Anticipated Losses.Losses. For contracts with anticipated losses at completion, a provision is recorded when the loss is probable. After an anticipated loss is recorded, subsequent revenues and cost of sales are recognized in equal and offsetting amounts as contract costs are incurred.
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'sCompany’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 in computing diluted net income per share, when applicable.equivalents. When the Company incurs a loss, potentially dilutive common stock equivalents are excluded as their effect would be anti-dilutive, thereby decreasingincreasing the net lossincome per common share.
Inventories, net
Inventories consisted of the following:
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Raw materials | $ | 5,959 | $ | 5,958 | ||||
Work in process | 953 | 1,265 | ||||||
Finished goods | 403 | 220 | ||||||
Reserve for obsolete inventory | (3,607 | ) | (3,371 | ) | ||||
Inventories, net | $ | 3,708 | $ | 4,072 | ||||
March 31, |
| December 31, | |
| 2017 |
| 2016 |
|
|
|
|
Raw materials | $5,862 |
| $5,427 |
Work in process | 840 |
| 1,120 |
Finished goods | 233 |
| 326 |
Reserve for obsolete inventory | (3,173) |
| (3,122) |
Inventories, net | $3,762 |
| $3,751 |
|
|
|
|
72.
As of September 30, 2016,March 31, 2017, options to purchase 1,034,081989,381 shares of common stock under the Company'sCompany’s stock option plan were authorized and reserved for future grant. A summary of activity in the stock option plan for the ninethree months ended September 30, 2016March 31, 2017 follows (shares in thousands):
Weighted- | ||||||||
Average | ||||||||
Number | Exercise | |||||||
of Shares | Price | |||||||
Outstanding as of beginning of the period | 1,470 | $ | 1.53 | |||||
Granted | 452 | 0.85 | ||||||
Exercised | - | - | ||||||
Forfeited or expired | (182 | ) | 6.59 | |||||
Outstanding as of end of the period | 1,740 | 0.82 | ||||||
Exercisable as of end of the period | 1,215 | $ | 0.87 |
Weighted- | |||
Average | |||
Number | Exercise | ||
of Shares | Price | ||
Outstanding as of beginning of the period | 1,625 | $0.88 | |
Granted | 140 | 1.39 | |
Exercised | - | ||
Forfeited or expired | (156) | 3.62 | |
Outstanding as of end of the period | 1,609 | 0.66 | |
Exercisable as of end of the period | 1,145 | $0.51 |
7
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2016,March 31, 2017, options exercisable and options outstanding had a weighted average remaining contractual term of 4.595.14 and 5.996.50 years, respectively, and had an aggregate intrinsic value of $936$1,145 and $1,273,1,441, respectively.
The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company'sCompany’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 ninethree months of 2016,2017, were based on estimates as of the date of grant as follows:
Risk-free interest rate | 1.47% | |
Dividend yield | 0.00% | |
Volatility | 176% | |
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 30, 2016,March 31, 2017, there was approximately $189$277 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 3.873.07 years.
Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss) for each of the nine-month periods ended September 30, 2016 and October 2, 2015 was $125 and $30, respectively. Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss)operations for each of the three-month periods ended September 30,March 31, 2017 and April 1, 2016 was $39 and October 2, 2015 was $52$25, respectively.
8
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3.EMPLOYEE RETIREMENT BENEFIT PLANS
Pension and $10, respectively.
In 2015, the Company entered intoterminated a series of agreements to terminate its defined pension plan (the "Pension Plan") and settlesettled the resulting liabilities. Pursuant toliabilities in exchange for a fixed obligation secured by the agreements, asCompany’s assets which requires payment of September 30, 2016, the Company is obligated to pay remainingten annual installments of $750 to the Pension Benefit Guaranty Corporation (the "PBGC") due annually on October 31 of each year from 2016 through 2026 (the "Pension Settlement Obligation"). As security for the Pension Settlement Obligation, the Company granted to the PBGC a security interest on all of the Company's assets, subordinate to certain senior liens held by the Company's two senior lenders.31. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as a liability on the balance sheet.
The Company recorded pension expense of $326 attributable to the Pension Plan for the first quarter of 2015, which was prior to the April 2015 plan termination. As a result of the termination Pension Plan, the Company'sCompany’s only remaining pension obligation is the Supplemental Executive Retirement Plan ("SERP"(“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 $551$500 in the next 12 months.
Components of Net Periodic Benefit Expense
Supplemental Executive | ||||||||||||||||
Pension Plan | Retirement Plan | |||||||||||||||
September 30, | October 2, | September 30, | October 2, | |||||||||||||
For the three months ended: | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest cost | - | - | 48 | 44 | ||||||||||||
Expected return on assets | - | - | - | - | ||||||||||||
Amortization of actuarial loss | - | - | 21 | 17 | ||||||||||||
Amortization of prior year service cost | - | - | (3 | ) | (12 | ) | ||||||||||
Net periodic benefit expense | - | - | 66 | 49 | ||||||||||||
Insurance premium due PBGC | - | - | - | - | ||||||||||||
$ | - | $ | - | $ | 66 | $ | 49 |
Supplemental Executive | ||||||||||||||||
Pension Plan | Retirement Plan | |||||||||||||||
September 30, | October 2, | September 30, | October 2, | |||||||||||||
For the nine months ended: | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest cost | - | 617 | 143 | 132 | ||||||||||||
Expected return on assets | - | (585 | ) | - | - | |||||||||||
Amortization of actuarial loss | - | 195 | 62 | 51 | ||||||||||||
Amortization of prior year service cost | - | - | (8 | ) | (36 | ) | ||||||||||
Net periodic benefit expense | - | 227 | 197 | 147 | ||||||||||||
Insurance premium due PBGC | - | 99 | - | - | ||||||||||||
$ | - | $ | 326 | $ | 197 | $ | 147 |
Supplemental Executive | |||
| Retirement Plan | ||
| March 31, |
| April 1, |
For the three months ended: | 2017 |
| 2016 |
|
|
|
|
Interest cost | $39 |
| $48 |
Amortization of actuarial loss | 19 |
| 21 |
Amortization of prior year service cost | - |
| (3) |
Net periodic benefit expense | $58 |
| $66 |
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the Company reclassified $195 of actuarial loss from accumulated other comprehensive loss that was included in pension expense in the statements of comprehensive loss for the same period.
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“Company,” “E&S," "we," "us"” “we,” “us” and "our"“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""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"“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'sCompany’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 first three months of 2016 improved compared2017 produced profitable results comparable to the third quartersame period of 2015, while2016. Variations in the sales for the first nine months of 2016 were lower than the comparable period of 2015. The lower sales for the nine month period in 2016 were due to unusually low sales in the second quarter of 2016. The variation in sales volume in the periods presented was attributable to the timing of customer deliveries of planetarium systems and work completed on a theme park attraction. Operating expenses in the third quarter of 2016 increased due to accrued severance costs related to changes in our management team. As a result we reported $561 of net income in the third quarter of 2016 compared to $921 of net income in the third quarter of 2015. The 2016 third quarter net income reduced the net loss reported in the first half of the year to a net loss of $172 for the first nine months of 2016. The loss for the nine months ended 2016 is an improvement to the net loss of $1,676 for the comparable period of 2015. The 2016 third quarter included $600 of expense related to accrued severance costs and related legal fees resulting from changes in our management team, while 2015 included a second quarter non-recurring charge of $3,620 for the pension settlement. We do not expect any additional severance-related expenses in the foreseeable future. The variable results, other than the severance costs and pension settlement described above,discussed below are within the range normally expected forfrom period to period. The high volume of new orders in the nature of our business. Thequarter increased the revenue backlog which combined with healthy sales backlog decreased but remained healthy at the end of the third quarter of 2016 which supports an encouragingprospects provides a positive outlook for the remainder of 20162017 and into 2017. With the healthy backlog and sales prospects, we anticipate sales at levels that should continue to produce profitable results for the remainder of 2016.
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, 2015.2016. 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 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | |||||||||||||
Sales | $ | 10,306 | $ | 9,375 | $ | 23,474 | $ | 27,666 |
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Three Months Ended | |||
March 31, 2017 | April 1, 2016 | ||
Sales | $8,043 | $7,900 |
Sales for the thirdfirst quarter of 2017 were slightly higher than the same period in 2015 while the2016. The higher 2017 sales for the first nine months of 2016 were lower than the same periods in 2015. The variations in sales between the periods presented were attributable to timinghigher sales of deliveries on customer contracts.
Revenue backlog was $23,288increased to $26,810 as of September 30, 2016,March 31, 2017, compared to $26,298$24,444 as of December 31, 2015.2016. The declineincrease in the revenue backlog is attributed to a lowhigh volume of new orders booked in the first quarterthree months of 2016, which was partially offset by a higher volume of new orders booked in the second and third quarters.2017. Sales prospects support the outlook for a strongan adequate volume of new orders through the remainder of 2016 and into 2017.
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 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | |||||||||||||
Gross profit | $ | 3,679 | $ | 3,326 | $ | 7,951 | $ | 9,710 | ||||||||
Gross profit percentage | 36 | % | 35 | % | 34 | % | 35 | % |
Three Months Ended | |||
March 31, 2017 | April 1, 2016 | ||
Gross profit | $2,674 | $2,703 | |
Gross profit percentage | 33% | 34% |
The variability in the gross profit percentage was due to volume related efficiencies, the mix of products delivered and the types of customer contracts that contributed to the revenue recognized for the periods presented.
The following table summarizes our operating expenses:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | |||||||||||||
Selling, general and | ||||||||||||||||
administrative | $ | 2,273 | $ | 1,535 | $ | 5,710 | $ | 5,132 | ||||||||
Research and development | 606 | 563 | 1,762 | 1,702 | ||||||||||||
Pension | 66 | 49 | 197 | 473 | ||||||||||||
Pension settlement | - | - | - | 3,620 | ||||||||||||
Total operating expenses | $ | 2,945 | $ | 2,147 | $ | 7,669 | $ | 10,927 |
Three Months Ended | |||
March 31, 2017 | April 1, 2016 | ||
Selling, general and | |||
administrative | $1,606 | $1,671 | |
Research and development | 701 | 587 | |
Pension | 58 | 66 | |
Total operating expenses | $2,365 | $2,324 |
Selling, general and administrative expenses were higher for the three and nine months ended September 30, 2016lower in 2017 compared to the same periods in 2015,2016. This was primarily due to the severance costs associated with changes in our management team. In the third quarter of 2016, we incurred approximately $600 in severance compensationreduced trade show activity and legal costs related to executive employment contracts. Share based compensation also increased $42 and $95 for the three and nine month periods, respectively, mostly as a result of accelerated vesting of a retired executive's stock options.
Research and development expenses for the three and nine months ended September 30, 2016 were slightly higher in 2017 compared to the same periods in 20152016. This was due primarily to increased labor costs and expenditures onan increase in the use of engineering resources for product improvement projects.
Pension expense declined slightly in 2017 compared to 2016 due to a decrease in the nine month period of 2016 compared to 2015 due tointerest cost on the 2015 termination of the Pension Plan. The 2016 pension expenses are attributable to the SERP. The pension expense was higher in the third quarter of 2016 compared to 2015 due to changes in actuarial assumptions in measuring the SERP obligation.
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Other Expense, net
The following table summarizes our other expense:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | |||||||||||||
Total other expense, net | $ | 157 | $ | 231 | $ | 417 | $ | 404 |
Three Months Ended | |||
March 31, 2017 | April 1, 2016 | ||
Total other expense, net | $109 | $128 |
Other expense decreased in 2017 compared to 2016 other expense, net, was less than the same period in 2015mainly due to lower losses from foreign currency transactions. For the nine months ended September 30, 2016, other expense, net, was more than the same period in 2015 due to nine months ofdeclining interest expense on the pension settlement obligation in 2016 compared to five months in 2015 beginning in April 2015. The higher 2016 interest expense was partially offset by the lower losses from foreign currency transactions.
Outlook
As discussed above in the executive summary, above, we have made significant progress in our effort to reverse our long history of operating losses. We believe that the termination of the Pension Plan together with the settlement of the underlying pension liabilities achieved our goal of reducing our obligations to levels that allow the business to be viable. As a result, 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 ninefirst three months of 2017, $508 of cash used in operating activities was attributable to $382 of cash provided by the net income for the period, after the effect of $197 of non-cash items plus an unfavorable change to working capital of $890. The change to working capital was driven by increases in inventory and receivables attributable to the timing of billings and new customer orders, an increase in prepaid expenses and restricted cash for performance guarantees on several large contracts, and an increase in accrued liabilities attributable to payroll schedules.
In the first three months of 2016, the $2,116$1,645 of cash provided by operating activities was attributable to $426$415 of cash absorbedprovided by the net lossincome for the period, after the effect of $598$179 of non-cash items and an increase in cash from changesplus a favorable change to working capital of $1,690.$1,230. The change to working capital changes contributingwas driven by the timing of progress payments from customer contracts, a decrease in inventory attributable to customer deliveries, an increase in accounts payable attributable to the increase in cash consisted primarilytiming of purchases, and an increase in accrued expenses attributable to severance compensation and payroll schedules plus increased progress payments from customer contracts.
Cash used in investing activities was $145$55 for the first ninethree months ended September 30, 2016March 31, 2017 compared to $71$22 for the same period of 2015.2016. Investing activities for both periods presented consisted entirely of property and equipment purchases.
For the ninethree months ended September 30, 2016,March 31, 2017, financing activities used $148$52 of cash compared to $156 during the same period$65 in 20152016 for principal payments on mortgage notes.
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 our subsidiary Spitz, Inc. ("Spitz").Spitz. Under the line of credit agreement, interest is charged on amounts borrowed at the lender'slender’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 30, 2016.
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Letters of Credit
Underthe 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 30, 2016March 31, 2017 there were outstanding letters of credit and bank guarantees of $600,$820, which are scheduled to expire during the year ending December 31, 2017.
Mortgage Notes
As of September 30, 2016,March 31, 2017, Spitz had obligations totaling $2,026$1,923 under its two mortgage notes payable.
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"“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
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 quarter ended September 30, 2016,March 31, 2017, 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.
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.
31.1Certification | |
31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.
32.1Certification 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.
101The following materials from this Quarterly Report on Form 10-Q for the period ended March 31, 2017, 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: | May 4, 2017 | |
By: /s/ Paul Dailey | ||
Paul Dailey, Chief Financial Officer | ||
and Corporate Secretary | ||
(Authorized Officer) | ||
(Principal Financial and Accounting Officer) |
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