NOTE 3. REVENUE

Revenue recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for the twelve months ended December 31, 2018. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.

Contract Assets

Contract assets, recorded as such in the consolidated balance sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the year ended December 31, 2018 was as follows:


Year Ended December 31, 2018
Outstanding at January 1, 2018	$	6,459
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(5,932)
Product transferred over time		5,904
Outstanding at December 31, 2018	$	6,431

We expect substantially all of the remaining performance obligations for the contract assets recorded as of December 31, 2018, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the year ended December 31, 2018:


	Year Ending December 31, 2018
	Product/ Service		Product
	Transferred Over		Transferred at		Noncash		Total Net Sales
(in thousands)	Time		Point in Time		Consideration		by Market
Aerospace and Defense	$	17,263	$	232	$	819	$	18,314
Medical		39,071		4,157		1,854		45,082
Industrial		46,950		821		2,203		49,974
Total net sales	$	103,284	$	5,210	$	4,876	$	113,370

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the reported consolidated statement of operations and comprehensive loss, balance sheet and cash flows, as of and for the year ended December 31, 2018, to the pro-forma amounts had the previous guidance been in effect:


	Year Ending December 31, 2018
			Pro forma as if the
			previous accounting
			guidance was in
Consolidated Statement of Operations	As Reported		effect
Net Sales	$	113,370	$	108,522
Cost of Goods Sold		100,059		95,249
Gross Profit		13,311		13,273

Income from Operations		1,249		1,211

Income Before Income Taxes		492		454

Income Tax Expense		326		326

Net Income	$	166	$	128

Net Income Per Common Share - Diluted	$	0.06	$	0.05


	As of December 31, 2018
			Pro forma as if the
			previous accounting
			guidance was in
Consolidated Balance Sheet	As Reported		effect
Assets
Inventories	$	17,004	$	22,015
Contract Assets	$	6,431	$	—

Shareholders' Equity
Retained Earnings	$	21,090	$	19,671


	Year Ending December 31, 2018
			Pro forma as if the
			previous accounting
			guidance was in
Consolidated Statement of Cash Flows		As Reported	effect
Net Income	$	166	$	128
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities
Change in Current Operating Items
Inventories		(3,875)		(3,809)
Contract Asset		28		—

Net Cash Provided by Operating Activities	$	2,444	$	2,444