Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Policies

Basis of Presentation

Basis of Presentation

The consolidated financial statements include the accounts of Evans & Sutherland and its wholly owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.  Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of-completion method, inventory reserves, allowance for doubtful accounts receivable, allowance for deferred income tax assets, impairment of long-lived assets, pension and retirement obligations and useful lives of depreciable assets.  Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three or fewer months to be cash equivalents.  The Company maintains cash balances in bank accounts that, at times, exceed federally insured limits.  The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk with respect to cash.  As of December 31, 2017, cash deposits as reported by the banks, including restricted cash, exceeded the federally insured limits by approximately $5,230.

Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.

	2017	2016
Cash and cash equivalents	$ 5,276	$ 6,823
Restricted cash	312	603
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$ 5,588	$ 7,426

Amounts included in restricted cash represent those required to be set aside by a contractual agreement.  Restricted cash that guarantees letters of credit that mature or expire within one year is reported as a current asset.  Restricted cash that guarantees letters of credit that mature or expire after more than one year is reported as a long-term asset.

Trade Accounts Receivable

Trade Accounts Receivable

In the normal course of business, E&S provides unsecured credit terms to its customers.  Accordingly, the Company maintains an allowance for doubtful accounts for possible losses on uncollectible accounts receivable.  The Company routinely analyzes accounts receivable and costs and estimated earnings in excess of billings, and considers history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and changes in payment terms when evaluating the adequacy of the allowance for doubtful accounts receivable.  Changes in these factors could result in material differences to bad debt expense.  Past due balances are determined based on contractual terms and are reviewed individually for collectability. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when management determines the probability of collection is remote.  

The table below represents changes in E&S’s allowance for doubtful accounts receivable for the years ended December 31:

	2017	2016
Beginning balance	$ 259	$ 286
Write-off of accounts receivable	(7)	(47)
Increase (decrease) in estimated losses on accounts receivable	(143)	20
Ending balance	$ 109	$ 259

Inventories

Inventories

Inventories include materials at standard costs, which approximate actual costs, as well as inventoried costs on programs and long-term contracts.  Inventoried costs include material, direct engineering and production costs, and applicable overhead, not in excess of estimated realizable value.  Spare parts and general stock materials are stated at cost not in excess of realizable value.  E&S periodically reviews inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provides a reserve sufficient to reduce inventories to net realizable values.  Revisions of these estimates could impact net loss.

During the years ended December 31, 2017 and 2016, E&S recognized impairment losses on inventory of $105 and $344, respectively.  

Inventories as of December 31, were as follows:

	2017	2016
Raw materials	$ 5,458	$ 5,427
Work in process	1,011	1,120
Finished goods	423	326
Reserve for obsolete inventory	(2,919)	(3,122)
Inventories, net	$ 3,973	$ 3,751

Property and Equipment

Property and Equipment

Property and equipment are stated at cost.  Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets.  Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized.  Leasehold improvements are assigned useful lives based on the shorter of their useful lives or the term of the related leases, including renewal options likely to be exercised.  Routine maintenance, repairs and renewal costs are expensed as incurred.  When property is retired or otherwise disposed of, the carrying values are removed from the property and equipment and related accumulated depreciation and amortization accounts.  Depreciation and amortization are included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset.  

Depreciation expense was $259 and $267 for the years ended December 31, 2017 and 2016, respectively.  The cost and estimated useful lives of property and equipment and the total accumulated depreciation and amortization were as follows as of December 31:

	Estimated
	Useful Lives	2017	2016
Land	n/a	$ 2,250	$ 2,250
Buildings and improvements	5 - 40 years	3,065	3,065
Manufacturing machinery and equipment	3 - 8 years	5,582	5,434
Office furniture and equipment	3 - 8 years	779	779
Total		11,676	11,528
Less accumulated depreciation and amortization		(7,149)	(6,890)
Net property and equipment		$ 4,527	$ 4,638

Goodwill

Goodwill

The Company tests its recorded goodwill for impairment on an annual basis during the fourth quarter, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Intangible Assets

Intangible Assets

E&S amortizes the cost of intangible assets over their estimated useful lives. Amortizable intangible assets are reviewed at least annually to determine whether events and circumstances warrant a revision to the remaining period of amortization. Amortization expense was $27 for the year ended December 31, 2016, which completed the amortization of intangible assets, so there was no amortization expense in 2017.

Software Development Costs

Software Development Costs

Software development costs, if material, are capitalized from the date technological feasibility is achieved until the product is available for general release to customers.  Such costs were not material for the years presented.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying values of the assets may not be fully recoverable. When this occurs, the Company reviews the values assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate.  When the expected future undiscounted cash flows from these assets do not exceed their carrying values, the Company estimates the fair values of such assets. Impairment is recognized to the extent the carrying values of the assets exceed their estimated fair values.  Assets held for sale are reported at the lower of their carrying values or fair values less costs to sell.

Warranty Reserve

Warranty Reserve

E&S provides a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year.  Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded at the time of sale or over the period revenues are recognized for long-term contracts.  Warranty reserves are classified as accrued liabilities in the accompanying consolidated balance sheets.

The table below represents changes in E&S’s warranty reserve for the years ended December 31:

	2017	2016
Beginning balance	$ 123	$ 127
Additions to warranty reserve	249	227
Warranty costs	(233)	(231)
Ending balance	$ 139	$ 123

Revenue Recognition

Sales include revenues from system hardware, software, database products and service contracts.   The following table provides information on revenues by recognition method applied during the years:

	2017	2016
Percentage of completion	$ 17,653	$ 18,248
Completed contract	11,041	12,845
Other	1,814	1,851
Total sales	$ 30,508	$ 32,944

The following methods are used to record revenue:

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 the 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) to its estimate of total anticipated costs.   This ratio is then utilized to determine the amount of gross profit earned based on its estimate of total gross profit at completion.  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 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 arrangement exists, title and risk of loss have transferred, the fee is fixed or determinable, and collection is reasonably assured.

Multiple Element Arrangements.  Some contracts include multiple elements.  Significant deliverables in such arrangements commonly include various hardware components of 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 revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element to customers.  Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.

Anticipated Losses.  For contracts with anticipated losses at completion, a provision is recorded when the loss is probable.  After an anticipated loss is recorded, subsequent revenue and cost of sales are recognized in equal, offsetting amounts as contract costs are incurred.

Stock-Based Compensation

Stock-Based Compensation

The Company records compensation expense in the financial statements for stock-based awards based on the grant date fair value of those awards that are ultimately expected to vest. As such, the value of the award is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model.  Stock-based compensation expense is recognized over the requisite service periods of the awards on a ratable basis, which recognizes expense for each vesting tranche of each grant starting on the grant date and finishing on the vest date for that tranche.

Net Income Per Common Share

Basic net income per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares include shares that may be issued by the Company for outstanding stock options determined using the treasury stock method. In periods resulting in a net loss, potential common shares are anti-dilutive and therefore are not included.

Net income per common share has been computed based on the following:

	2017	2016
Numerator
Net Income	$ 1,481	$ 1,743
Denominator
Weighted-average number of common shares outstanding - basic	11,353	11,214
Incremental shares assumed for stock options	661	622
Weighted-average number of common shares outstanding - dilutive	12,014	11,836
Basic net income per common share	$ 0.13	$ 0.16
Diluted net income per common share	$ 0.12	$ 0.15

Income Taxes

Income Taxes

The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and income tax credit carry-forwards.  Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in the period that includes the enactment date.

Other Comprehensive Income

Other Comprehensive Income

On a net basis for 2017 and 2016, there were deferred income tax assets resulting from items reflected in comprehensive income.  However, E&S has determined that it is more likely than not that it will not realize such net deferred income tax assets and has therefore established a valuation allowance against the full amount of the net deferred income tax assets.  Accordingly, the net income tax effect of the items included in other comprehensive income is zero.  Therefore, the Company has included no income tax expense or benefit in relation to items reflected in other comprehensive income.  The accumulated other comprehensive loss at the end of 2016 and 2017 consists of minimum pension liability attributable to the Supplemental Executive Retirement Plan (“SERP”) (see Note 6).

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

In February 2016, the 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.  ASU 2016-02 is not effective until 2019. The Company is currently assessing the impact on its financial reporting of implementing this guidance.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 provides for a single, principles-based model for revenue recognition that replaces existing revenue recognition guidance. ASU 2014-09 was effective for the Company on January 1, 2018. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company will use the cumulative effect transition method.  Because revenue will be recognized under the new standards as costs are incurred for most of our contracts, certain revenues and associated operating earnings will be accelerated into the year ended December 31, 2017.  The adjustment will result in a cumulative adjustment to increase retained earnings as of January 1, 2018; however, based on our initial assessment we do not believe the cumulative adjustment will exceed $600.