10-Q 1 form10-q.htm

 

 

 

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, 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: 1-13906

 

BALLANTYNE STRONG, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   47-0587703
(State or Other Jurisdiction of   (IRS Employer
Incorporation or Organization)   Identification Number)
     
11422 Miracle Hills Drive, Suite 300, Omaha, Nebraska   68154
(Address of Principal Executive Offices)   (Zip Code)

 

(402) 453-4444

(Registrant’s telephone number, including area code)

 

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 twelve 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer [  ] Accelerated filer [X]
Non-accelerated filer [  ] 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]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

 

Class   Outstanding as of October 31, 2018
Common Stock, $.01, par value   14,442,924 shares

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page No.
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets, September 30, 2018 and December 31, 2017 3
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 4
     
  Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 5
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 6
     
  Notes to the Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
     
Item 4. Controls and Procedures 38
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 38
     
Item 1A. Risk Factors 38
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

     
Item 5. Other Information 38
     
Item 6. Exhibits 39
     
  Signatures 40

 

2 
 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

 

   September 30, 2018   December 31, 2017 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $5,659   $4,870 
Restricted cash   350    - 
Accounts receivable (net of allowance for doubtful accounts of $2,215 and $1,877, respectively)   14,523    10,766 
Inventories:          
Raw materials and components, net   1,330    1,376 
Work in process   419    362 
Finished goods, net   2,194    3,083 
Total inventories, net   3,943    4,821 
Income tax receivable   330    495 
Other current assets   1,852    1,290 
Total current assets   26,657    22,242 
Property, plant and equipment (net of accumulated depreciation of $9,379 and $8,780 respectively)   14,244    10,826 
Equity method investments   12,017    18,053 
Intangible assets, net   1,818    3,972 
Goodwill   922    952 
Notes receivable   3,768    2,815 
Other assets   405    154 
Total assets  $59,831   $59,014 
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $3,558   $3,425 
Accrued expenses   3,562    3,071 
Short-term debt   2,607    500 
Current portion of long-term debt   983    65 
Deferred revenue and customer deposits   2,993    1,619 
Income tax payable   22    - 
Total current liabilities   13,725    8,680 
Long-term debt, net of current portion and debt issuance costs   9,721    1,870 
Deferred revenue and customer deposits, net of current portion   1,182    1,207 
Deferred income taxes   2,636    2,816 
Other accrued expenses, net of current portion   184    319 
Total liabilities   27,448    14,892 
Stockholders’ equity:          
Preferred stock, par value $.01 per share; authorized 1,000 shares; none outstanding   -    - 
Common stock, par value $.01 per share; authorized 25,000 shares; issued 17,237 and 17,216 shares at September 30, 2018 and December 31, 2017, respectively; outstanding 14,443 and 14,422 shares at September 30, 2018 and December 31, 2017, respectively   169    169 
Additional paid-in capital   41,285    40,565 
Accumulated other comprehensive loss:          
Foreign currency translation   (4,633)   (4,048)
Postretirement benefit obligations   114    99 
Unrealized gain on available-for-sale securities of equity method investments   150    353 
Retained earnings   13,884    25,570 
    50,969    62,708 
Less 2,794 of common shares in treasury, at cost   (18,586)   (18,586)
Total stockholders’ equity   32,383    44,122 
Total liabilities and stockholders’ equity  $59,831   $59,014 

 

See accompanying notes to condensed consolidated financial statements.

 

3 
 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2018 and 2017

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Net product sales  $8,401   $12,808   $24,490   $38,302 
Net service revenues   8,052    6,751    21,968    18,583 
Total net revenues   16,453    19,559    46,458    56,885 
Cost of products sold   5,076    10,112    16,308    30,929 
Cost of services   7,847    4,128    22,480    10,923 
Total cost of revenues   12,923    14,240    38,788    41,852 
Gross profit   3,530    5,319    7,670    15,033 
Selling and administrative expenses:                    
Selling   1,139    1,298    3,638    4,207 
Administrative   3,384    3,473    12,301    11,706 
Total selling and administrative expenses   4,523    4,771    15,939    15,913 
Loss on disposal of assets   (799)   -    (2,130)   - 
(Loss) income from operations   (1,792)   548    (10,399)   (880)
Other income (expense):                    
Interest income   -    -    -    18 
Interest expense   (180)   (51)   (267)   (84)
Foreign currency transaction (loss) gain   (67)   (306)   41    (410)
Fair value adjustment to notes receivable   802    -    953    - 
Other income (expense), net   6    (35)   (9)   (24)
Total other income (expense)   561    (392)   718    (500)
(Loss) income before income taxes and equity method investment income (loss)   (1,231)   156    (9,681)   (1,380)
Income tax expense   497    440    1,837    2,709 
Equity method investment income (loss)   507    (753)   (244)   1,516 
Net loss from continuing operations   (1,221)   (1,037)   (11,762)   (2,573)
Net loss from discontinued operations, net of tax   -    -    -    (49)
Net loss  $(1,221)  $(1,037)  $(11,762)  $(2,622)
Net loss per share - basic                    
Net loss from continuing operations  $(0.08)  $(0.07)  $(0.82)  $(0.18)
Net loss from discontinued operations   -    -    -    (0.00)
Net loss   (0.08)   (0.07)   (0.82)   (0.18)
Net loss per share - diluted                    
Net loss from continuing operations  $(0.08)  $(0.07)  $(0.82)  $(0.18)
Net loss from discontinued operations   -    -    -    (0.00)
Net loss   (0.08)   (0.07)   (0.82)   (0.18)

 

See accompanying notes to condensed consolidated financial statements.

 

4 
 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

Three and Nine Months Ended September 30, 2018 and 2017

(In thousands)

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Net loss  $(1,221)  $(1,037)  $(11,762)  $(2,622)
Adjustment to postretirement benefits   6    -    15    - 
Currency translation adjustment:                    
Unrealized net change arising during period   245    689    (585)   1,507 
Unrealized (loss) gain on available-for-sale securities of equity method investments, net of tax   (33)   34    (203)   215 
Total other comprehensive income (loss)   218    723    (773)   1,722 
Comprehensive loss  $(1,003)  $(314)  $(12,535)  $(900)

 

See accompanying notes to condensed consolidated financial statements.

 

5 
 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2018 and 2017

(In thousands)

(Unaudited)

 

   Nine Months Ended September 30, 
   2018   2017 
Cash flows from operating activities:          
Net loss  $(11,762)  $(2,622)
Net loss from discontinued operations, net of tax   -    (49)
Net loss from continuing operations   (11,762)   (2,573)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:          
Provision for doubtful accounts   381    712 
Provision for obsolete inventory   412    (160)
Provision for warranty   83    319 
Depreciation and amortization   1,953    1,563 
Equity method investment loss (income)   244    (1,516)
Fair value adjustment to notes receivable   (953)   - 
Deferred income taxes   (146)   715 
Amortization of contract acquisition costs   29    - 
Impairment of contract acquisition costs   59    - 
Stock-based compensation expense   648    498 
Impairment of operating lease   209    - 
Loss on disposal of assets   2,130    - 
Dividends received from investee   817    - 
Changes in operating assets and liabilities:          
Accounts receivable   (4,244)   385 
Inventories   413    (134)
Other current assets   (629)   (41)
Other assets   (392)   (85)
Accounts payable   171    1,197 
Accrued expenses   244    (763)
Deferred revenue and customer deposits   1,359    (1,204)
Current income taxes   178    174 
Net cash flows used in operating activities - continuing operations   (8,796)   (913)
Net cash flows used in operating activities - discontinued operations   -    (147)
Net cash used in operating activities   (8,796)   (1,060)

 

(Continued on following page)

 

See accompanying notes to condensed consolidated financial statements.

 

6 
 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows - Continued

Nine Months Ended September 30, 2018 and 2017

(In thousands)

(Unaudited)

 

   Nine Months Ended September 30, 
   2018   2017 
Cash flows from investing activities:          
Proceeds from sale of equity securities  $4,531   $- 
Purchase of equity securities   -    (2,525)
Dividends received from investee in excess of cumulative earnings   69    230 
Capital expenditures   (1,220)   (2,949)
Proceeds from sale of business   -    60 
Net cash provided by (used in) investing activities   3,380    (5,184)
           
Cash flows from financing activities:          
Proceeds from sale-leaseback financing   7,000    - 
Proceeds from issuance of short-term debt   3,205    500 
Proceeds from issuance of long-term debt   -    2,000 
Principal payments on long-term debt   (2,278)   (17)
Principal payments on short-term debt   (1,097)   - 
Payment of debt issuance costs   (22)   (46)
Payments on capital lease obligations   (147)   (188)
Purchase of treasury stock   -    (102)
Proceeds from exercise of stock options   -    71 
Other   (8)   - 
Net cash provided by financing activities   6,653    2,218 
Effect of exchange rate changes on cash and cash equivalents   (98)   304 
Net increase (decrease) in cash and cash equivalents and restricted cash   1,139    (3,722)
Discontinued operations activity included above:          
Add: Cash balance included in assets held for sale at beginning of period   -    175 
Less: Cash balance included in assets held for sale at end of period   -    - 
Cash and cash equivalents and restricted cash at beginning of period   4,870    7,596 
Cash and cash equivalents and restricted cash at end of period  $6,009   $4,049 
Components of cash and cash equivalents and restricted cash:          
Cash and cash equivalents  $5,659   $4,049 
Restricted cash   350    - 
Total cash and cash equivalents and restricted cash  $6,009   $4,049 
Supplemental disclosure of non-cash investing and financing activities:          
Term loan borrowings to finance equipment purchases  $4,121   $- 

 

See accompanying notes to condensed consolidated financial statements.

 

7 
 

 

Ballantyne Strong, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

 

Ballantyne Strong, Inc. (“Ballantyne” or the “Company”), a Delaware corporation, is a holding company with diverse business activities focused on serving the cinema, retail, financial, advertising and government markets. The Company, and its wholly owned subsidiaries Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc. (“Strong/MDI”), Convergent Media Systems Corporation (“Convergent”) and Strong Digital Media, LLC design, integrate and install technology solutions for a broad range of applications; develop and deliver out-of-home messaging, advertising and communications; manufacture projection screens; and provide managed services including monitoring of networked equipment to our customers.

 

2. Discontinued Operations

 

In May 2017, the Company sold the operational assets of Strong Westrex, Inc. for total proceeds of $60 thousand. The summary financial results of discontinued operations for the three and nine months ended September 30, 2017 were as follows (in thousands):

 

  

Three Months Ended
September 30, 2017

  

Nine Months Ended
September 30, 2017

 
Total net revenues  $    -   $24 
Total cost of revenues   -    48 
Total selling and administrative expenses   -    53 
Loss from operations of discontinued operations   -    (77)
Loss before income taxes   -    (49)
Income tax expense   -    - 
Net loss from discontinued operations, net of tax  $-   $(49)

 

There was no depreciation and amortization related to discontinued operations recorded for the three and nine month periods ended September 30, 2017. There were no capital expenditures related to discontinued operations during the three and nine month periods ended September 30, 2017.

 

3. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and all majority owned and controlled domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America (also referred to as “GAAP”) for annual reporting purposes or those made in the Company’s Annual Report on Form 10-K. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

The condensed consolidated balance sheet as of December 31, 2017 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods. The results for interim periods are not necessarily indicative of trends or results expected for a full year.

 

8 
 

 

Use of Management Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.

 

Restricted Cash

 

Restricted cash represents amounts held in a collateral account for the Company’s corporate travel and purchasing credit card program.

 

Accounts and Notes Receivable

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for doubtful accounts based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis that projects the ultimate collectability of the account. As such, these factors may change over time causing the allowance level and bad debt expense to be adjusted accordingly.

 

Equity Method Investments

 

We apply the equity method of accounting to investments when we have significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under the line item captioned “equity method investment income (loss)” in our condensed consolidated statements of operations. The carrying value of our equity method investments is reported in “equity method investments” in the condensed consolidated balance sheets. The Company’s equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income or loss is recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from equity method investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. The Company recorded an other-than-temporary impairment charge related to its equity method investments of $0.7 million in equity method investment loss on its condensed consolidated statements of operations during the nine month period ended September 30, 2018. The Company did not record any impairments related to its equity method investments during the three month period ended September 30, 2018 or three and nine month periods ended September 30, 2017. Note 6 contains additional information on our equity method investments.

 

Fair Value of Financial Instruments

 

Assets and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

9 
 

 

    Level 1 – inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities
    Level 2 – inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
    Level 3 – inputs to the valuation techniques are unobservable for the assets or liabilities

 

The following tables present the Company’s financial assets measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements are classified, as of September 30, 2018 and December 31, 2017.

 

Fair values measured on a recurring basis at September 30, 2018 (in thousands):

 

   Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $5,659   $-   $-   $5,659 
Restricted cash   350    -    -    350 
Notes receivable   -    -    3,768    3,768 
Total  $6,009   $-   $3,768   $9,777 

 

Fair values measured on a recurring basis at December 31, 2017 (in thousands):

 

   Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $4,870   $-   $-   $4,870 
Notes receivable   -    -    2,815    2,815 
Total  $4,870   $-   $2,815   $7,685 
                     

 

Quantitative information about the Company’s level 3 fair value measurements at September 30, 2018 is set forth below:

 

  

Fair value at

9/30/18
(in thousands)

   Valuation technique  Unobservable input  Range 
Notes receivable  $3,768   Discounted cash flow  Default percentage   15%
           Discount rate   18%

 

During 2011, the Company entered into certain unsecured notes receivable arrangements with CDF2 Holdings, LLC pertaining to the sale and installation of digital projection equipment. The notes receivable accrue interest at a rate of 15% per annum. Interest not paid in any particular year is added to the principal and also accrues interest at 15%. The notes receivable are recorded at estimated fair value. In order to estimate the fair value, the Company reviews the financial position and estimated cash flows of the debtor of the notes receivable on a quarterly basis. During 2018, the Company updated its estimated future cash flow assumptions. This resulted in an increase to the fair value of the notes receivable of approximately $1.0 million recorded in other income in the Company’s condensed consolidated statement of operations during the nine months ended September 30, 2018. There was no adjustment to the estimated fair value of the notes receivable during the nine months ended September 30, 2017.

 

The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are discount rate and percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.

 

The Company’s short-term and long-term debt is recorded at historical cost. As of September 30, 2018, the Company’s long-term debt, including current maturities, had a carrying value of $10.7 million. Based on discounted cash flows using current quoted interest rates (Level 2 of the fair value hierarchy), the estimated fair value at September 30, 2018 was $10.7 million.

 

10 
 

 

The carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, accrued expenses and short-term debt, reported in the condensed consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments. Note 6 includes fair value information related to our equity method investments. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which include non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). During the three and nine months ended September 30, 2018, the Company recorded impairment charges of $0.8 million and $2.1 million, respectively, related to the abandonment of internally developed software intangible assets as a loss on disposal of assets in the condensed consolidated statement of operations. Other than the intangible asset impairment, the Company did not have any significant non-recurring measurements of non-financial assets or liabilities during the three and nine months ended September 30, 2018 and 2017.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” “(ASC 606)”. The ASU replaced most existing revenue recognition guidance in U.S. GAAP. The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method. The Company recorded a transition adjustment of approximately $76 thousand increasing the opening balance of retained earnings, primarily related to the deferral and amortization of direct and incremental costs of obtaining contracts. See Note 4 for further information about the nature and pattern of revenue recognition for the different types of contracts with customers.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments that do not result in consolidation and are not accounted under the equity method to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets; and modifies certain fair value disclosure requirements. The Company adopted ASU 2016-01 prospectively on January 1, 2018. The adoption of this ASU did not significantly impact the Company’s results of operations and financial position.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The new guidance describes the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not significantly impact the Company’s results of operations and financial position.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which was further clarified by ASU 2018-11, “Leases – Targeted Improvements,” issued in July 2018. ASU 2016-02 requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months, on its balance sheet. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption permitted, and initially required a modified retrospective transition method under which entities would initially apply Topic 842 at the beginning of the earliest period presented in the financial statements. ASU 2018-11 added an additional optional transition method allowing entities to apply Topic 842 as of the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt ASU 2016-02 using the optional transition method from ASU 2018-11 on January 1, 2019. The Company is evaluating the requirements of Topic 842 and its potential impact on its financial statements. The Company has leases primarily for property and equipment and is in the process of identifying and evaluating these leases for purposes of adopting ASU 2016-02. For each of these leases, the term will be evaluated, including extension and renewal options as well as the lease payments. While the Company has not yet quantified the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements, the Company expects to record assets and liabilities on its balance sheet upon adoption of this standard, which may be material. In addition, the Company expects that the sale-leaseback of Convergent’s Alpharetta, Georgia office facility described in Note 10, which did not qualify for sale-leaseback accounting under the current lease accounting standard, will qualify for sale-leaseback accounting under Topic 842, as Topic 842 eliminates the concept of continuing involvement by the seller-lessee precluding sale-leaseback accounting. The Company will continue to provide enhanced disclosures as it continues its assessment.

 

11 
 

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes its adoption will not significantly impact the Company’s results of operations and financial position.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates Step 2 of the goodwill impairment testing which requires the fair value of individual assets and liabilities of a reporting unit to be determined when measuring goodwill impairment. The new guidance may result in different amounts of impairment that could be recognized compared to existing guidance. In addition, failing step 1 of the impairment test may not result in impairment under existing guidance. However, under the revised guidance, failing step 1 will always result in a goodwill impairment. ASU 2017-04 is to be applied prospectively for goodwill impairment testing performed in years beginning after December 15, 2019. The Company does not believe its adoption will significantly impact the Company’s results of operations or financial position.

 

In August 2018, the Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective for all filings made on and after November 5, 2018. Given the effective date and proximity to most filers’ quarterly reports, the SEC is not objecting to filers deferring the presentation of changes in stockholders’ equity in their quarterly reports on Forms 10-Q until the quarter that begins after November 5, 2018. The Company anticipates its first presentation of changes in stockholders’ equity will be included in its quarterly report on Form 10-Q for the quarter ended March 31, 2019.

 

4. Revenue

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

 

Under ASC 606, the Company accounts for revenue using the following steps:

 

  Identify the contract, or contracts, with a customer
  Identify the performance obligations in the contract
  Determine the transaction price
  Allocate the transaction price to the identified performance obligations
  Recognize revenue when, or as, the Company satisfies the performance obligations

 

12 
 

 

The Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.

 

As discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale. Observable prices are used to determine the standalone selling price of separate performance obligations, or a cost plus margin approach is used when observable prices are not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.

 

The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.

 

Deferred contract acquisition costs are included in other assets. Beginning January 1, 2018, with the adoption of ASC 606, the Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. Prior to 2018, all contract acquisition costs were expensed as incurred. The Company recorded a transition adjustment of approximately $76 thousand increasing the opening balance of retained earnings, primarily related to the deferral and amortization of direct and incremental costs of obtaining contracts. The following table summarizes the changes in the Company’s contract asset balance during the nine months ended September 30, 2018 (in thousands):

 

 

Deferred contract acquisition costs as of January 1, 2018  $76 
Costs capitalized   12 
Amortization   (29)
Impairment   (59)
Deferred contract acquisition costs as of September 30, 2018  $- 

 

During the three months ended September 30, 2018, the Company recorded an impairment charge of $59 thousand for the remaining deferred contract acquisition costs, as they are no longer considered recoverable based on the customer’s recent credit history.

 

13 
 

 

The following tables summarize the impact the adoption of ASC 606 had on the Company’s consolidated financial statements (in thousands, except per share data):

 

Condensed Consolidated Balance Sheet:

 

   As reported
September 30, 2018
   Adjustments   Balances without adoption of ASC 606 
Total current assets  $26,657   $68   $26,725 
Total noncurrent assets   33,174    -    33,174 
Total assets  $59,831   $68   $59,899 
                
Total current liabilities  $13,725   $83   $13,808 
Total noncurrent liabilities   13,723    -    13,723 
Total liabilities   27,448    83    27,531 
                
Retained earnings   13,884    (15)   13,869 
Other stockholders’ equity   18,499    -    18,499 
Total stockholders’ equity   32,383    (15)   32,368 
Total liabilities and stockholders’ equity  $59,831   $68   $59,899 

 

Condensed Consolidated Statements of Operations:

 

   As reported for the three months ended
September 30, 2018
   Adjustments   Balances without adoption of ASC 606 
Total net revenues  $16,453   $102   $16,555 
Total cost of revenues   12,923    81    13,004 
Gross profit   3,530    21    3,551 
Total selling and administrative expenses   4,523    (60)   4,463 
Loss on disposal of assets   (799)   -    (799)
Loss from operations   (1,792)   81    (1,711)
Other income   561    -    561 
Loss before income taxes and equity method investment income   (1,231)   81    (1,150)
Income tax expense   497    -    497 
Equity method investment income   507    -    507 
Net loss  $(1,221)  $81   $(1,140)
Net loss per share of common stock:               
Basic  $(0.08)       $(0.08)
Diluted  $(0.08)       $(0.08)

 

14 
 

 

   As reported for the
nine months ended
September 30, 2018
   Adjustments   Balances without adoption of ASC 606 
Total net revenues  $46,458   $187   $46,645 
Total cost of revenues   38,788    204    38,992 
Gross profit   7,670    (17)   7,653 
Total selling and administrative expenses   15,939    (78)   15,861 
Loss on disposal of assets   (2,130)   -    (2,130)
Loss from operations   (10,399)   61    (10,338)
Other income   718    -    718 
Loss before income taxes and equity method investment loss   (9,681)   61    (9,620)
Income tax expense   1,837    -    1,837 
Equity method investment loss   (244)   -    (244)
Net loss  $(11,762)  $61   $(11,701)
Net loss per share of common stock:               
Basic  $(0.82)       $(0.81)
Diluted  $(0.82)       $(0.81)

 

The adoption of ASC 606 did not have any net impact on other comprehensive loss or cash flows.

 

The following table disaggregates the Company’s revenue by major source for the three months ended September 30, 2018 (in thousands):

 

   Cinema   Digital Media   Other   Eliminations   Total 
Screen system sales  $5,005   $-   $-   $-   $5,005 
Digital equipment sales   2,134    630    -    (44)   2,720 
Field maintenance and monitoring services   2,966    1,372    -    (129)   4,209 
Installation services   712    1,069    -    -    1,781 
Extended warranty sales   213    -    -    -    213 
Advertising   -    1,480    -    -    1,480 
Other   530    499    16    -    1,045 
Total  $11,560   $5,050   $16   $(173)  $16,453 

 

The following table disaggregates the Company’s revenue by major source for the nine months ended September 30, 2018 (in thousands):

 

   Cinema   Digital Media   Other   Eliminations   Total 
Screen system sales  $13,240   $-   $-   $-   $13,240 
Digital equipment sales   7,228    2,020    -    (278)   8,970 
Field maintenance and monitoring services   9,011    5,193    -    (344)   13,860 
Installation services   1,420    3,057    -    -    4,477 
Extended warranty sales   804    -    -    -    804 
Advertising   -    1,948    -    -    1,948 
Other   1,735    1,375    49    -    3,159 
Total  $33,438   $13,593   $49   $(622)  $46,458 

 

15 
 

 

Screen system sales

 

The Company recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit time because control does not transfer to the customer until delivery.

 

Digital equipment sales

 

The Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which occurs at the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer.

 

Field maintenance and monitoring services

 

The Company sells service contracts that provide maintenance and monitoring services to Cinema and Digital Media customers. In the Cinema segment, these contracts are generally 12 months in length, while the term for service contracts in the Digital Media segment can be for multiple years. Revenue is recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the contract.

 

The Company also performs time and materials-based maintenance and repair work for customers in the Cinema and Digital Media segments. Revenue is recognized at a point in time when the performance obligation has been fully satisfied.

 

Installation services

 

The Company performs installation services for both its Cinema and Digital Media customers and recognizes revenue upon completion of the installations.

 

Extended warranty sales

 

The Company sells extended warranties to its Cinema customers. When the Company is the primary obligor, revenue is recognized on a gross basis over the term of the extended warranty in proportion to the costs incurred in fulfilling performance obligations under the extended warranty. In third party extended warranty sales, the Company is not the primary obligor, and revenue is recognized on a net basis at the time of the sale.

 

At January 1, 2018, $0.8 million of unearned revenue associated with maintenance and monitoring services and extended warranty sales in which the Company is the primary obligor was reported in deferred revenue and customer deposits. During the nine months ended September 30, 2018, substantially all of this balance was earned and recognized as revenue. At September 30, 2018, the unearned revenue amount was $0.6 million. The Company expects to recognize $0.3 million of unearned revenue amounts throughout the rest of 2018, $0.3 million in 2019 and immaterial amounts each year from 2020 through 2023.

 

The following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the three months ended September 30, 2018 (in thousands):

 

   Cinema   Digital Media   Other   Eliminations   Total 
Point in time  $9,872   $3,399   $-   $(173)  $13,098 
Over time   1,688    1,651    16    -    3,355 
Total  $11,560   $5,050   $16   $(173)  $16,453 

 

16 
 

 

The following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the nine months ended September 30, 2018 (in thousands):

 

   Cinema   Digital Media   Other   Eliminations   Total 
Point in time  $28,159   $7,935   $-   $(622)  $35,472 
Over time   5,279    5,658    49    -    10,986 
Total  $33,438   $13,593   $49   $(622)  $46,458 

 

5. Loss Per Common Share

 

Basic loss per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted loss per share has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options and certain non-vested shares of restricted stock and restricted stock units. The following table summarizes the average shares used to compute basic and diluted loss per share:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Weighted average shares outstanding (in thousands):                
Basic weighted average shares outstanding   14,392    14,310    14,366    14,279 
Dilutive effect of stock options and certain non-vested shares of restricted stock   -    -    -    - 
Diluted weighted average shares outstanding   14,392    14,310    14,366    14,279 

 

For the three and nine month periods ended September 30, 2018, options to purchase 330,000 shares of common stock were outstanding but were not included in the computation of diluted loss per share as the option’s exercise price was greater than the average market price of the common shares for each period. An additional 63,398 and 166,391 common stock equivalents related to options and restricted stock awards were excluded for the three and nine months ended September 30, 2018, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. For the three and nine month periods ended September 30, 2017, options to purchase 470,000 shares of common stock were outstanding but were not included in the computation of diluted earnings per share as the option’s exercise price was greater than the average market price of the common shares for the respective periods. An additional 115,754 and 154,161 common stock equivalents related to options and restricted stock awards were excluded for the three and nine months ended September 30, 2017, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.

 

6. Equity Method Investments

 

The following summarizes our equity method investments (dollars in thousands):

 

   September 30, 2018   December 31, 2017 
Entity  Carrying Amount   Economic Interest   Carrying Amount   Economic Interest 
BK Technologies, Inc.  $-    0.0%  $4,473    8.3%
Itasca Capital, Ltd.   3,890    32.3%   5,870    32.3%
1347 Property Insurance Holdings, Inc.   8,127    17.4%   7,710    17.4%
Total  $12,017        $18,053      

 

17 
 

 

The following summarizes the income (loss) of equity method investees reflected in the condensed consolidated statements of operations (in thousands):

 

   Three months ended September 30,   Nine months ended September 30, 
Entity  2018   2017   2018   2017 
BK Technologies, Inc.  $512   $109   $120   $12 
Itasca Capital, Ltd.   (28)   (1,023)   (967)   1,289 
1347 Property Insurance Holdings, Inc.   23    161    603    215 
Total  $507   $(753)  $(244)  $1,516 

 

BK Technologies, Inc. (formerly known as RELM Wireless Corporation) (“BKTI”) is a publicly traded company that designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components and subsystems. Due to the Company’s significant influence, but not controlling interest, in BKTI, the Company’s investment in BKTI was accounted for using the equity method. On September 9, 2018, the Company entered into an agreement with Fundamental Global Investors, LLC (“FGI”), a related party, where the Company sold 1,147,087 shares of common stock of BKTI to FGI for a price of $3.95 per share and total proceeds of approximately $4.5 million. The per share transaction price of $3.95 represented the immediately preceding closing price on the NYSE American stock exchange, and the transaction was approved by the Company’s Audit Committee, comprised of only independent directors. The Company recorded a gain on the sale of the equity method investment of $0.4 million within equity method investment income on the condensed consolidated statement of operations for the three and nine month periods ended September 30, 2018. Prior to the sale of the BKTI common stock, the Company received dividends of $23 thousand and $0.1 million during the three month periods ended September 30, 2018 and 2017, respectively, and received dividends of $0.1 million and $0.2 million during the nine month periods ended September 30, 2018 and 2017, respectively.

 

Itasca Capital, Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative strategic investments. The Company’s Chief Executive Officer is chairman of the board of directors of Itasca. This board seat, combined with the Company’s 32.3% ownership of Itasca, provide the Company with significant influence over Itasca, but not controlling interest. The Company received a dividend of $0.8 million from Itasca during the three and nine month periods ended September 30, 2018. The Company did not receive any dividends from Itasca during the three and nine month periods ended September 30, 2017. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $2.4 million at September 30, 2018. A $0.7 million other-than-temporary impairment charge for Itasca is included in equity method investment loss on the condensed consolidated statements of operations for the nine month period ended September 30, 2018.

 

1347 Property Insurance Holdings, Inc. (“PIH”) is a publicly traded company that provides property and casualty insurance in the States of Louisiana, Texas and Florida. The Company’s Chief Executive Officer is chairman of the board of directors of PIH, and controls entities that, when combined with the Company’s ownership in PIH, own greater than 20% of PIH, providing the Company with significant influence over PIH, but not controlling interest. The Company did not receive dividends from PIH during the three or nine month periods ended September 30, 2018 and 2017. Based on quoted market prices, the market value of the Company’s ownership in PIH was $7.0 million at September 30, 2018.

 

As of September 30, 2018, the Company’s retained earnings included undistributed earnings from its equity method investees of $1.3 million.

 

18 
 

 

The summarized financial information presented below reflects the financial information of the Company’s equity method investees as of September 30, 2018 for the nine months ended June 30, 2018 and 2017, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag.

 

 

For the nine months ended June 30,  2018   2017 
   (in thousands) 
Revenue  $38,977   $25,227 
Operating income from continuing operations  $5,489   $4,074 
Net income  $2,500   $7,012 

 

7. Intangible Assets

 

Intangible assets consisted of the following at September 30, 2018 (dollars in thousands):

 

  

Useful

life

   Gross   Accumulated Amortization   Net 
    (Years)                
Intangible assets not yet subject to amortization:                    
Software in development       $79   $-   $79 
Intangible assets subject to amortization:                    
Software in service   5    2,123    (482)   1,641 
Product formulation   10    472    (374)   98 
Total       $2,674   $(856)  $1,818 

 

Intangible assets consisted of the following at December 31, 2017 (dollars in thousands):

 

  

Useful

life

   Gross   Accumulated Amortization   Net 
    (Years)                
Intangible assets not yet subject to amortization:                    
Software in development       $1,243   $-   $1,243 
Intangible assets subject to amortization:                    
Software in service   5    3,191    (597)   2,594 
Product formulation   10    486    (351)   135 
Total       $4,920   $(948)  $3,972 

 

Amortization expense relating to intangible assets was $0.5 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively. During the three and nine months ended September 30, 2018, the Company also recorded impairment charges of $0.8 million and $2.1 million, respectively, related to abandoned software in service as a loss on disposal of assets in the condensed consolidated statement of operations.

 

19 
 

 

The following table shows the Company’s estimated future amortization expense related to intangible assets currently subject to amortization for the next five years (in thousands):

 

Remainder 2018  $120 
2019   468 
2020   459 
2021   420 
2022   215 
Thereafter   57 
Total  $1,739 

 

8. Goodwill

 

The following represents a summary of changes in the Company’s carrying amount of goodwill for the nine months ended September 30, 2018 (in thousands):

 

Balance as of December 31, 2017  $952 
Foreign currency translation   (30)
Balance as of September 30, 2018  $922 
      

 

9. Warranty Reserves

 

In most instances, the Company’s digital projection products are covered by the manufacturing firm’s original warranty; however, for certain customers the Company may grant warranties in excess of the manufacturer’s warranty. In addition, the Company provides warranty coverage on screens it manufactures. The Company accrues for these costs at the time of sale. The following table summarizes warranty activity for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

   Three Months Ended September 30,  

Nine Months Ended

September 30,

 
   2018   2017   2018   2017 
Warranty accrual at beginning of period  $449   $457   $521   $645 
Charged to expense   18    144    83    319 
Claims paid, net of recoveries   (26)   (20)   (142)   (392)
Foreign currency adjustment   8    3    (13)   12 
Warranty accrual at end of period  $449   $584   $449   $584 

 

20 
 

 

10. Debt

 

The Company’s debt consists of the following (in thousands):

 

   September 30, 2018   December 31, 2017 
Short-term debt:          
Strong/MDI installment loan  $2,607   $- 
Revolving line of credit   -    500 
Current portion of long-term debt   983    65 
Total short-term debt   3,590    565 
Long-term debt:          
Sale-leaseback financing   6,827    - 
Equipment term loans   3,897    - 
$2 million term loan   -    1,968 
Total principal balance of long-term debt   10,724    1,968 
Less: current portion   (983)   (65)
Less: unamortized debt issuance costs   (20)   (33)
Total long-term debt   9,721    1,870 
Total short-term and long-term debt  $13,311   $2,435 

 

On May 22, 2018, the Company’s subsidiary, Convergent, entered into an installment payment agreement with an equipment financing company in order to purchase media players and related equipment in an aggregate amount of up to approximately $4.4 million. Installment payments under each contract for purchase of the equipment are due monthly for a period of 60 months. The financing provided in the agreement is secured by the equipment. The borrowings under the agreement are recorded as long-term debt on the Company’s condensed consolidated balance sheet and bear interest at a fixed rate based on the three-year U.S. Treasury Note yield plus a spread at the time of funding. The obligations under the agreement are guaranteed by the Company. At September 30, 2018, the Company had $3.9 million of outstanding borrowings under the agreement, which bear interest at a weighted-average fixed rate of 5.8%.

 

On June 29, 2018, the Company and Convergent completed a sale-leaseback of Convergent’s Alpharetta, Georgia office facility. Convergent sold the Alpharetta facility for $7.0 million in cash and the Company simultaneously entered into a 10-year leaseback of the facility for rent in the amount of $600,000 per year, escalating at the rate of 2% per year. Due to the Company’s continuing involvement in the building, the transaction was accounted for as a financing rather than a normal leaseback. The net proceeds from the transaction were recorded as a financing liability in long-term debt on the Company’s condensed consolidated balance sheet. Upon closing, the Company’s term loan and revolving line of credit that previously were secured by the Alpharetta facility were repaid, and the related debt agreement was terminated. In addition, the Company issued warrants to the buyer to purchase up to 100,000 shares of Company stock, consisting of warrants to purchase 25,000 shares at each of $10, $12, $14, and $16 purchase prices per share. The warrants have a 10-year maturity. The Company recorded the aggregate $81 thousand fair value of the warrants as additional paid-in capital. The warrants are recorded at grant date fair value, which was calculated based on a Black-Scholes valuation model using the following assumptions:

 

Expected dividend yield at date of grant   0.00%
Risk-free interest rate   2.81%
Expected stock price volatility   37.01%
Expected life of warrants (in years)   7.0 

 

21 
 

 

The risk-free interest rate assumption was based on the U.S. Treasury yield curve in effect at the warrant issuance date. The expected volatility was based on historical daily price changes of the Company’s stock for the seven years prior to the warrant issuance date. The expected life of the warrants is the Company’s estimate of the number of years the warrants will be outstanding.

 

On September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement with a bank consisting of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. Amounts outstanding under the line of credit are payable on demand and will bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans will bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The credit agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments) not exceeding 2 to 1, a current ratio (excluding amounts due from related parties) of at least 1.5 to 1 and minimum “effective equity” of CDN$8.0 million. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$3.38 million of principal outstanding on the 20-year installment loan as of September 30, 2018, which bears variable interest at 4.28%. Strong/MDI was in compliance with its debt covenants as of September 30, 2018.

 

Scheduled repayments are as follows for the Company’s long-term debt outstanding as of September 30, 2018 (in thousands):

 

Remainder of 2018  $172 
2019   996 
2020   1,066 
2021   1,141 
2022   1,221 
Thereafter   6,128 
Total  $10,724 

 

11. Income Taxes

 

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of September 30, 2018 and December 31, 2017.

 

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction and the transition of the United States from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the 2017 Tax Act requires taxpayers to calculate a one-time transition tax based on the deemed repatriation of undistributed earnings of foreign subsidiaries. The Company is currently analyzing the 2017 Tax Act, and in certain areas, has made provisional estimates of the effects on our consolidated financial statements and tax disclosures, including the amount of the repatriation tax and changes to existing deferred tax balances.

 

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The Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 2015 through 2017. In most cases, the Company is subject to possible examinations by state or local jurisdictions based on the particular jurisdiction’s statute of limitations.

 

12. Stock Compensation

 

The Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated grant date fair values. Stock-based compensation expense included in selling and administrative expenses approximated $0.2 million for each of the three month periods ended September 30, 2018 and 2017, and $0.6 million and $0.5 million for the nine month periods ended September 30, 2018 and 2017, respectively.

 

The Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s stockholders and provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other stock-based awards and cash-based awards. Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. The total number of shares authorized for issuance under the 2017 Plan is 1,371,189 shares, with 1,121,654 shares remaining available for grant at September 30, 2018.

 

Options

 

The Company granted a total of 387,500 and 435,000 options during the nine month periods ended September 30, 2018 and 2017, respectively. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant.

 

The weighted average grant date fair value of stock options granted during the nine month periods ended September 30, 2018 and 2017 was $1.82 and $2.42, respectively. The fair value of each stock option granted was estimated on the date of grant using a Black-Scholes valuation model with the following weighted average assumptions:

 

   2018   2017 
Expected dividend yield at date of grant   0.00%   0.00%
Risk-free interest rate   2.49%   1.99%
Expected stock price volatility   35.65%   34.85%
Expected life of options (in years)   6.0    6.0 

 

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on historical daily price changes of the Company’s stock for six years prior to the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding.

 

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The following table summarizes stock option activity for the nine months ended September 30, 2018:

 

   Number of Options   Weighted Average Exercise Price Per Share   Weighted Average Remaining Contractual Term   Aggregate Intrinsic Value (in thousands) 
Outstanding at December 31, 2017   930,300   $5.63    8.7   $150 
Granted   387,500    4.70           
Exercised   -    -           
Forfeited   (249,000)   5.72           
Expired   (144,300)   4.84           
Outstanding at September 30, 2018   924,500   $5.26    8.5   $- 
Exercisable at September 30, 2018   163,000   $5.23    7.7   $- 

 

The aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money options had been exercised and sold on the date indicated.

 

As of September 30, 2018, 761,500 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards was approximately $1.3 million, which is expected to be recognized over a weighted average period of 3.7 years.

 

Restricted Stock

 

The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant. As of September 30, 2018, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $0.8 million, which is expected to be recognized over a weighted average period of 2.1 years.

 

The following table summarizes restricted stock share activity for the nine months ended September 30, 2018:

 

   Number of Restricted Stock Shares   Weighted Average Grant Date Fair Value 
Non-vested at December 31, 2017   85,000   $6.50 
Granted   -    - 
Shares vested   (28,333)   6.50 
Shares forfeited   (10,000)   6.50 
Non-vested at September 30, 2018   46,667   $6.50 

 

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The following table summarizes restricted stock unit activity for the nine months ended September 30, 2018:

 

   Number of Restricted Stock Units   Weighted Average Grant Date Fair Value 
Non-vested at December 31, 2017   35,835   $6.45 
Granted   147,500    4.70 
Shares vested   (35,835)   6.45 
Shares forfeited   -    - 
Non-vested at September 30, 2018   147,500   $4.70 

 

13. Commitments, Contingencies and Concentrations

 

Litigation

 

The Company is involved, from time to time, in certain legal disputes in the ordinary course of business operations. No such disputes, individually or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.

 

Concentrations

 

The Company’s top ten customers accounted for approximately 53% and 45% of total consolidated net revenues for the three and nine months ended September 30, 2018, respectively. Trade accounts receivable from these customers represented approximately 45% of net consolidated receivables at September 30, 2018. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which the Company sells its products.

 

Financial instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company sells product to a large number of customers in many different geographic regions. To minimize credit risk, the Company performs ongoing credit evaluations of its customers’ financial condition.

 

Leases

 

The Company and its subsidiaries lease plant and office facilities, furniture, autos and equipment under operating leases expiring through 2022. These leases generally contain renewal options and the Company expects to renew or replace certain of these leases in the ordinary course of business.

 

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The Company’s future minimum lease payments for leases at September 30, 2018 are as follows:

 

   Capital Leases   Operating Leases 
   (in thousands) 
Remainder 2018  $62   $450 
2019   116    1,770 
2020   -    1,545 
2021   -    1,416 
2022   -    1,081 
Thereafter   -    - 
Total minimum lease payments  $178   $6,262 
Less: Amount representing interest   (4)     
Present value of minimum lease payments   174      
Less: Current maturities   (174)     
Capital lease obligations, net of current portion  $-      

 

14. Business Segment Information

 

As of September 30, 2018, the Company’s operations were conducted principally through two business segments: Cinema and Digital Media. The Cinema segment provides a full range of product and service solutions primarily for the theater exhibition industry, including a wide spectrum of premier audio-visual products and accessories such as digital projectors, state of the art projection screens, servers, library management systems, menu boards, flat panel displays, and sound systems, as well as network monitoring and on-site service for cinema equipment. The Digital Media segment develops and delivers solutions for out-of-home messaging, advertising and communication and provides managed services including monitoring of networked equipment. While there is digital signage equipment sold within this segment, the primary focus of this segment is providing solutions and services to our customers.

 

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Summary by Business Segments

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(In thousands)  2018   2017   2018   2017 
Net revenues                    
Cinema  $11,560   $12,290   $33,438   $38,153 
Digital Media   5,050    7,595    13,593    19,277 
Other   16    13    49    22 
Total segment net revenues   16,626    19,898    47,080    57,452 
Eliminations   (173)   (339)   (622)   (567)
Total net revenues   16,453    19,559    46,458    56,885 
                     
Gross profit (loss)                    
Cinema   4,415    3,934    11,015    11,565 
Digital Media   (901)   1,372    (3,394)   3,445 
Other   16    13    49    23 
Total gross profit   3,530    5,319    7,670    15,033 
                     
Operating (loss) income                    
Cinema   3,383    3,028    7,681    8,593 
Digital Media   (2,563)   (84)   (10,042)   (2,094)
Other   (82)   (98)   (281)   (289)
Total segment operating (loss) income   738    2,846    (2,642)   6,210 
Unallocated general and administrative expenses   (1,712)   (2,298)   (6,939)   (7,090)
Unallocated loss on disposal of assets   (818)   -    (818)   - 
(Loss) income from operations   (1,792)   548    (10,399)   (880)
Other income (expense)   561    (392)   718    (500)
(Loss) income before income taxes and equity method investment (loss) income  $(1,231)  $156   $(9,681)  $(1,380)

 

(In thousands)   September 30, 2018     December 31, 2017  
Identifiable assets