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 June 30, 2020

 

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)
     

4201 Congress Street, Suite 175

Charlotte, North Carolina

  28209
(Address of Principal Executive Offices)   (Zip Code)

 

(704) 994-8279

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange  on Which Registered
Common Shares, $.01 par value   BTN   NYSE American

 

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, a 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.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
    Emerging growth company [  ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

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 August 5, 2020
Common Stock, $.01 par value   14,790,374 shares

 

 

 

   

 

 

TABLE OF CONTENTS

 

    Page No.
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets, June 30, 2020 (Unaudited) and December 31, 2019 3
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) 6
   
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited) 7
     
  Notes to the Condensed Consolidated Financial Statements (Unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
     
Item 4. Controls and Procedures 45
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 45
     
Item 1A. Risk Factors 45
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

     
Item 5. Other Information 48
     
Item 6. Exhibits 48
     
  Signatures 49

 

 2 

 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $6,470   $4,951 
Restricted cash   352    351 
Accounts receivable (net of allowance for doubtful accounts of $1,084 and $1,291, respectively)   7,248    12,898 
Inventories, net   3,010    2,879 
Recoverable income taxes   267    190 
Other current assets   3,243    1,754 
Total current assets   20,590    23,023 
Property, plant and equipment (net of accumulated depreciation of $11,089 and $10,238, respectively)   9,956    10,560 
Operating lease right-of-use assets   5,206    5,581 
Finance lease right-of-use assets   2,138    2,563 
Investments   13,249    13,311 
Intangible assets, net   1,329    1,534 
Goodwill   876    919 
Other assets   99    142 
Total assets  $53,443   $57,633 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $4,470   $3,273 
Accrued expenses   3,602    4,416 
Short-term debt   3,888    3,080 
Current portion of long-term debt   853    998 
Current portion of operating lease obligations   951    971 
Current portion of finance lease obligations   1,732    1,586 
Deferred revenue and customer deposits   2,820    2,981 
Total current liabilities   18,316    17,305 
Long-term debt, net of current portion and debt issuance costs   2,832    3,019 
Operating lease obligations, net of current portion   4,414    4,809 
Finance lease obligations, net of current portion   3,387    3,988 
Deferred revenue and customer deposits, net of current portion   27    38 
Deferred income taxes   2,933    2,649 
Other long-term liabilities   110    116 
Total liabilities   32,019    31,924 
Commitments, contingencies and concentrations (Note 13)          
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 17,552 and 17,410 shares at June 30, 2020 and December 31, 2019, respectively; outstanding 14,758 and 14,616 shares at June 30, 2020 and December 31, 2019, respectively   176    174 
Additional paid-in capital   43,072    42,589 
Retained earnings   1,826    6,001 
Less 2,794 of common shares in treasury, at cost   (18,586)   (18,586)
Accumulated other comprehensive loss   (5,064)   (4,469)
Total stockholders’ equity   21,424    25,709 
Total liabilities and stockholders’ equity  $53,443   $57,633 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 3 

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2020 and 2019

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Net product sales  $2,232   $6,082   $8,635   $11,648 
Net service revenues   4,214    8,187    11,385    16,927 
Total net revenues   6,446    14,269    20,020    28,575 
Cost of products sold   1,864    3,747    6,569    9,781 
Cost of services   3,119    7,288    7,737    12,915 
Total cost of revenues   4,983    11,035    14,306    22,696 
Gross profit   1,463    3,234    5,714    5,879 
Selling and administrative expenses:                    
Selling   614    1,222    1,958    2,450 
Administrative   2,956    4,297    7,786    8,226 
Total selling and administrative expenses   3,570    5,519    9,744    10,676 
Loss on disposal of assets   -    (38)   -    (102)
Loss from operations   (2,107)   (2,323)   (4,030)   (4,899)
Other (expense) income:                    
Interest expense   (268)   (186)   (540)   (305)
Fair value adjustment to notes receivable   -    (797)   -    (1,307)
Foreign currency transaction (loss) gain   (303)   (77)   185    (220)
Other income, net   535    418    825    453 
Total other (expense) income   (36)   (642)   470    (1,379)
Loss before income taxes and equity method investment loss   (2,143)   (2,965)   (3,560)   (6,278)
Income tax expense   (96)   (423)   (496)   (564)
Equity method investment loss   (1,489)   (30)   (120)   (727)
Net loss  $(3,728)  $(3,418)  $(4,176)  $(7,569)
                     
Basic loss per share  $(0.25)  $(0.24)  $(0.28)  $(0.52)
Diluted loss per share  $(0.25)  $(0.24)  $(0.28)  $(0.52)
                     
Weighted-average shares used in computing net loss per share:                    
Basic   14,680    14,494    14,653    14,467 
Diluted   14,680    14,494    14,653    14,467 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 4 

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

Three and Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Net loss  $(3,728)  $(3,418)  $(4,176)  $(7,569)
Adjustment to postretirement benefit obligation   -    -    (4)   2 
Unrealized gain (loss) on available-for-sale securities of equity method investments, net of tax   -    332    (76)   241 
Currency translation adjustment:                    
Unrealized net change arising during period   690    93    (515)   350 
Total other comprehensive income (loss)   690    425    (595)   593 
Comprehensive loss  $(3,038)  $(2,993)  $(4,771)  $(6,976)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 5 

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

Three and Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

 

The following summarizes the changes in stockholders’ equity for the three and six months ended June 30, 2020:

 

   Common Stock (Shares)  

Common Stock

($)

   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Loss  

Total

Stockholders’ Equity

 
Balance at December 31, 2019   17,410   $174   $42,589   $6,001   $(18,586)  $(4,469)  $         25,709 
Net loss   -    -    -    (447)   -    -    (447)
Net other comprehensive loss   -    -    -    -    -    (1,285)   (1,285)
Vesting of restricted stock   35    -    -    -    -    -    - 
Stock-based compensation expense   -    -    273    -    -    -    273 
Balance at March 31, 2020   17,445    174    42,862    5,554    (18,586)   (5,754)   24,250 
Net loss   -    -    -    (3,728)   -    -    (3,728)
Net other comprehensive income   -    -    -    -    -    690    690 
Vesting of restricted stock   107    2    (2)   -    -    -    - 
Stock-based compensation expense   -    -    212    -    -    -    212 
Balance at June 30, 2020   17,552   $176   $43,072   $1,826   $(18,586)  $(5,064)  $21,424 

 

The following summarizes the changes in stockholders’ equity for the three and six months ended June 30, 2019:

 

   Common Stock (Shares)   Common Stock  ($)   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Loss   Total Stockholders’ Equity 
Balance at December 31, 2018   17,237   $172   $41,471   $13,319   $(18,586)  $(5,378)  $30,998 
Net loss   -    -    -    (4,150)   -    -    (4,150)
Net other comprehensive income   -    -    -    -    -    168    168 
Cumulative effect of adoption of ASC 842   -    -    -    2,785    -    -    2,785 
Vesting of restricted stock   76    1    (1)   -    -    -    - 
Stock-based compensation expense   -    -    243    -    -                  -           243 
Balance at March 31, 2019   17,313    173    41,713    11,954    (18,586)   (5,210)   30,044 
Net loss   -    -    -    (3,418)   -    -    (3,418)
Net other comprehensive income   -    -    -    -    -    425    425 
Stock-based compensation expense   -    -    221    -    -    -    221 
Balance at June 30, 2019   17,313   $173   $41,934   $8,536   $(18,586)  $(4,785)  $27,272 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 6 

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

 

   Six Months Ended June 30, 
   2020   2019 
Cash flows from operating activities:          
Net loss  $(4,176)  $(7,569)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Provision for (recovery of) doubtful accounts   699    (404)
Provision for obsolete inventory   37    96 
Provision for warranty   39    25 
Depreciation and amortization   1,969    1,644 
Amortization and accretion of operating leases   616    1,132 
Fair value adjustment to notes receivable   -    1,307 
Equity method investment loss   120    727 
Loss on disposal of assets   -    102 
Gain on Firefly transaction (Note 6)   (702)   (220)
Deferred income taxes   72    (198)
Stock-based compensation expense   485    464 
Changes in operating assets and liabilities:          
Accounts receivable   4,789    2,691 
Inventories   (254)   (19)
Current income taxes   (83)   (144)
Other assets   (376)   120 
Accounts payable and accrued expenses   234    (316)
Deferred revenue and customer deposits   (260)   (438)
Operating lease obligations   (657)   (1,234)
Net cash provided by (used in) operating activities   2,552    (2,234)

 

(Continued on following page)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 7 

 

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows - Continued

Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

 

   Six Months Ended June 30, 
   2020   2019 
Cash flows from investing activities:          
Proceeds from sale of property, plant and equipment  $-   $86 
Capital expenditures   (572)   (1,136)
Net cash used in investing activities   (572)   (1,050)
           
Cash flows from financing activities:          
Proceeds from issuance of long-term debt   -    237 
Principal payments on short-term debt   (299)   (200)
Principal payments on long-term debt   (330)   (491)
Proceeds from borrowing under credit facility   3,411    - 
Repayments of borrowings under credit facility   (2,562)   - 
Proceeds from Paycheck Protection Program Loan   3,174    - 
Repayment of Paycheck Protection Program Loan   (3,174)   - 
Payments on capital lease obligations   (776)   (137)
Net cash used in financing activities   (556)   (591)
Effect of exchange rate changes on cash and cash equivalents   96    46 
Net increase (decrease) in cash and cash equivalents and restricted cash   1,520    (3,829)
Cash and cash equivalents and restricted cash at beginning of period   5,302    7,048 
Cash and cash equivalents and restricted cash at end of period  $6,822   $3,219 
           
Components of cash and cash equivalents and restricted cash:          
Cash and cash equivalents  $6,470   $2,869 
Restricted cash   352    350 
Total cash and cash equivalents and restricted cash  $6,822   $3,219 
           
Supplemental disclosure of non-cash investing and financing activities:          
Term loan borrowings to finance equipment purchases  $-   $364 
Finance lease obligations for property and equipment  $320   $710 
Short-term borrowings to finance insurance  $235   $114 
Investment in Firefly Systems, Inc. (Note 6)  $-   $3,614 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 8 

 

 

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 entertainment, retail and advertising 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 (“SDM”) 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. 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, 2019.

 

The condensed consolidated balance sheet as of December 31, 2019 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. Certain prior period balances have been reclassified to conform to current period presentation. The results for interim periods are not necessarily indicative of trends or results expected for a full year.

 

Unless otherwise indicated, all references to “dollars” and “$” in this Quarterly Report on Form 10-Q are to, and amounts are presented in, U.S. dollars.

 

Use of Management Estimates

 

The preparation of consolidated financial statements in conformity with GAAP 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.

 

There is significant ongoing uncertainty surrounding the COVID-19 global pandemic and the extent and duration of the impacts that it may have on the Company, as well as its customers, suppliers, and employees. There is heightened potential for future reserves against trade receivables, inventory write downs and impairments of long-lived assets, goodwill, intangible assets and investments. In the current environment, assumptions about future financial and operational performance, supply chain pricing and availability and customer creditworthiness have greater variability than normal, which could in the future significantly affect the valuation of the Company’s assets, both financial and non-financial. As an understanding of the longer-term impacts of COVID-19 on the Company’s customers and business develops, there is heightened potential for changes in these views over the remainder of 2020, and potentially beyond.

 

 9 

 

 

Restricted Cash

 

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

 

Accounts 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. Since many of Strong Entertainment’s customers have been negatively impacted by COVID-19, the Company recorded $0.5 million of bad debt expense during the first half of 2020 as a result of the increased uncertainty related to collection of trade accounts receivable from these customers.

 

Investments

 

The Company applies the equity method of accounting to investments when it has 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 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 applies the cost method of accounting to investments when it does not have significant influence or a controlling interest in the investee and the fair value of the investment is not readily determinable. Dividends on cost method investments received are recorded as income.

 

The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Management reviewed the underlying net assets of the investees as of June 30, 2020 and determined that the Company’s proportionate economic interest in the investees indicate that the investments were not other than temporarily impaired. The carrying value of our equity method and cost method investments is reported as “investments” on the condensed consolidated balance sheets. Note 6 contains additional information on our equity method and cost 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:

 

  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

 

 10 

 

 

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 June 30, 2020 and December 31, 2019.

 

Fair values measured on a recurring basis at June 30, 2020 (in thousands):

 

   Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $6,470   $-   $-   $6,470 
Restricted cash   352    -    -    352 
Notes receivable   -           -           -    - 
Total  $6,822   $-   $-   $6,822 

 

Fair values measured on a recurring basis at December 31, 2019 (in thousands):

 

   Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $4,951   $-   $-   $4,951 
Restricted cash   351    -   -    351 
Notes receivable   -          -          -    - 
Total  $5,302   $-   $-   $5,302 

 

The following table reconciles the beginning and ending balance of the Company’s notes receivable at fair value (in thousands):

 

   Six Months Ended June 30, 
   2020   2019 
Notes receivable balance, beginning of period  $-   $3,965 
Fair value adjustment   -    (1,307)
Notes receivable balance, end of period  $-   $2,658 

 

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%. In connection with this transaction, the Company also entered into an agreement with one of its customers, pursuant to which the Company is obligated to provide up to $1.1 million of credits against any amounts due to the Company from the customer based on cash collected on the notes receivable. In the event the Company does not have any outstanding balances due from the customer, the Company would be obligated to remit up to the first $1.1 million collected on the notes receivable directly to the customer.

 

The notes receivable are recorded at estimated fair value. The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are the discount rate and percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. Adjustments to the fair value of the notes receivable are included in other (expense) income on the Company’s condensed consolidated statements of operations.

 

In order to estimate the fair value, the Company reviews the financial position and estimated cash flows of the debtor of the notes receivable. During the year ended December 31, 2019, the Company adjusted the carrying value of the notes receivable to $0 based on management’s review of the debtor’s financial statements and changes in the underlying trend of historical and projected cash flows available to service the notes. The related $1.1 million contingent liability was also adjusted during the year ended December 31, 2019, based on the Company’s expectation that cash flow from the notes receivable will not be available. As of June 30, 2020, management estimated the fair value of the notes receivable to be $0.

 

 11 

 

 

The Company’s short-term and long-term debt is recorded at historical cost. As of June 30, 2020, the Company’s long-term debt, including current maturities, had a carrying value of $3.7 million. Based on discounted cash flows using current quoted interest rates (Level 2 of the fair value hierarchy), the estimated fair value at June 30, 2020 was $3.4 million.

 

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 and cost 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). The Company did not have any significant non-recurring measurements of non-financial assets or liabilities during the three and six months ended June 30, 2020 or 2019.

 

Recently Adopted Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles- Goodwill and Other- Internal Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU requires customers in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize or expense. The standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of the new standard on January 1, 2020 did not have an impact on the Company’s consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU improves the effectiveness of fair value measurement disclosures by eliminating, adding and modifying certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of the new standard on January 1, 2020 did not have an impact on the Company’s consolidated financial statements and related disclosures.

 

Recently Issued Accounting Pronouncements

 

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 was initially effective for the Company for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company believes the adoption of this ASU will not significantly impact its results of operations and financial position.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. The effective date of the standard will be for annual periods beginning after December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

 

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In January 2020, the FASB issued ASU 2020-01, “Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815.” This ASU clarifies the interaction between accounting standards related to equity securities, equity method investments and certain derivatives. The effective date of the standard will be for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the new standard on its condensed consolidated financial statements and related disclosures.

 

In April 2020, the FASB issued a question-and-answer document to address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. The guidance will allow concessions related to the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications. Instead, any such concessions can be accounted for as if no change was made to the contract or as variable lease payments. As a result of the COVID-19 pandemic, the Company received certain lease concessions in the form of rent deferrals during the three months ended June 30, 2020. The Company chose to implement the policy election provided by the FASB to record rent concessions as if no modifications to leases contracts were made, and thus no changes to the lease obligations were recorded in respect to these concessions. As of June 30, 2020, the Company had outstanding deferred rent of $0.1 million, the majority of which will be paid over the remaining term of the leases.

 

3. Revenue

 

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; and
  Recognize revenue when, or as, the Company satisfies the performance obligations.

 

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 or 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.

 

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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.

 

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. The Company did not have any deferred contract costs as of June 30, 2020 or December 31, 2019.

 

The following tables disaggregate the Company’s revenue by major source and by operating segment for the three and six months ended June 30, 2020 (in thousands):

 

   Three Months Ended June 30, 2020 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Screen system sales  $980   $-   $-   $-   $980 
Digital equipment sales   688    231    -    -    919 
Extended warranty sales   149    -    -    -    149 
Other product sales               184                    -             -               -    184 
Total product sales   2,001    231    -    -    2,232 
Field maintenance and monitoring services   350    3,295    4    -    3,649 
Installation services   74    121    -    -    195 
Advertising   -    -    238    -    238 
Other service revenues   42    -    -    90    132 
Total service revenues   466    3,416    242    90    4,214 
Total  $2,467   $3,647   $242   $90   $6,446 

 

   Six Months Ended June 30, 2020 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Screen system sales  $3,936   $-   $-   $-   $3,936 
Digital equipment sales   2,336    1,403    -    -    3,739 
Extended warranty sales   308    -    -    -    308 
Other product sales               652                 -                  -    -    652 
Total product sales   7,232    1,403    -    -    8,635 
Field maintenance and monitoring services   2,155    6,709    32    -    8,896 
Installation services   332    478    -    -    810 
Advertising   -    -    1,407    -    1,407 
Other service revenues   62    19    -    191    272 
Total service revenues   2,549    7,206    1,439    191    11,385 
Total  $9,781   $8,609   $1,439   $191   $20,020 

 

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The following tables disaggregate the Company’s revenue by major source and by operating segment for the three and six months ended June 30, 2019 (in thousands):

 

   Three Months Ended June 30, 2019 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Screen system sales  $3,110   $-   $-   $-   $3,110 
Digital equipment sales   1,631    866    -    -    2,497 
Extended warranty sales   151    -    -    -    151 
Other product sales              324                  -    -    -    324 
Total product sales   5,216    866    -    -    6,082 
Field maintenance and monitoring services   2,122    2,786    175    -    5,083 
Installation services   397    1,464    -    -    1,861 
Advertising   -    -    914    -    914 
Other service revenues   144    19    46    120    329 
Total service revenues   2,663    4,269    1,135    120    8,187 
Total  $7,879   $5,135   $1,135   $120   $14,269 

 

   Six Months Ended June 30, 2019 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Screen system sales  $5,930   $-   $-   $-   $5,930 
Digital equipment sales   3,115    1,491    -    -    4,606 
Extended warranty sales   385    -    -    -    385 
Other product sales              721           6    -    -    727 
Total product sales   10,151    1,497    -    -    11,648 
Field maintenance and monitoring services   4,088    5,559    228    -    9,875 
Installation services   1,067    3,582    -    -    4,649 
Advertising   -    -    1,955    -    1,955 
Other service revenues   173    32    46    197    448 
Total service revenues   5,328    9,173    2,229    197    16,927 
Total  $15,479   $10,670   $2,229   $197   $28,575 

 

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. 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.

 

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 Strong Entertainment and Convergent customers. In the Strong Entertainment segment, these contracts are generally 12 months in length, while the term for service contracts in the Convergent segment can be for multiple years. Revenue related to service contracts is recognized ratably over the term of the agreement.

 

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The Company also performs discrete time and materials-based maintenance and repair work for customers in the Strong Entertainment and Convergent segments. Revenue related to time and materials-based maintenance and repair work is recognized at the point in time when the performance obligation has been fully satisfied.

 

Installation services

 

The Company performs installation services for both its Strong Entertainment and Convergent customers and recognizes revenue upon completion of the installations.

 

Extended warranty sales

 

The Company sells extended warranties to its Strong Entertainment customers. When the Company is the primary obligor, revenue is recognized on a gross basis ratably over the term of 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.

 

Advertising

 

Strong Outdoor sells advertising space on top of taxicabs. Advertising revenue is recognized ratably over the contracted advertising periods.

 

Timing of Revenue Recognition

 

The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and six months ended June 30, 2020 (in thousands):

 

   Three Months Ended June 30, 2020 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Point in time  $2,078   $427   $242   $-   $2,747 
Over time   389    3,220    -    90    3,699 
Total  $2,467   $3,647   $242   $90   $6,446 

 

   Six Months Ended June 30, 2020 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Point in time  $7,794   $2,221   $1,439   $4   $11,458 
Over time   1,987    6,388    -    187    8,562 
Total  $9,781   $8,609   $1,439   $191   $20,020 

 

The following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the three and six months ended June 30, 2019 (in thousands):

 

   Three Months Ended June 30, 2019 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Point in time  $6,340   $2,408   $1,135   $-   $9,883 
Over time   1,539    2,727    -    120    4,386 
Total  $7,879   $5,135   $1,135   $120   $14,269 

 

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   Six Months Ended June 30, 2019 
   Strong Entertainment   Convergent   Strong Outdoor   Other   Total 
Point in time  $12,384   $5,400   $2,229   $-   $20,013 
Over time   3,095    5,270    -    197    8,562 
Total  $15,479   $10,670   $2,229   $197   $28,575 

 

At June 30, 2020, the unearned revenue amount associated with maintenance and monitoring services, extended warranty sales and advertising services in which the Company is the primary obligor was $1.7 million. The Company expects to recognize $1.6 million of unearned revenue amounts throughout the rest of 2020, $0.1 million during 2021 and immaterial amounts during 2022 and 2023.

 

4. 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 would be 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. However, because the Company reported losses in all periods presented, there were no differences between average shares used to compute basic and diluted loss per share for the three and six months ended June 30, 2020 and June 30, 2019. The following table summarizes the weighted average shares used to compute basic and diluted loss per share (in thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Weighted average shares outstanding:                
Basic weighted average shares outstanding   14,680    14,494    14,653    14,467 
Dilutive effect of stock options and certain non-vested restricted stock awards   -    -    -    - 
Diluted weighted average shares outstanding   14,680    14,494    14,653    14,467 

 

Options to purchase 927,000 and 762,500 shares of common stock were outstanding as of June 30, 2020 and June 30, 2019, respectively, but were not included in the computation of diluted loss per share as the options’ exercise prices were greater than the average market price of the common shares for each period. An additional 4,882 common stock equivalents related to restricted stock awards were excluded for the six months ended June 30, 2020 as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. An additional 104,879 and 70,236 common stock equivalents related to restricted stock awards were excluded for the three and six months ended June 30, 2019, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.

 

5. Inventories

 

Inventories consist of the following (in thousands):

 

   June 30, 2020   December 31, 2019 
Raw materials and components  $1,533   $1,584 
Work in process   233    211 
Finished goods   1,244    1,084 
   $3,010   $2,879 

 

The inventory balances are net of reserves of approximately $0.7 million and $0.9 million as of June 30, 2020 and December 31, 2019, respectively.

 

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6. Investments

 

The following summarizes our investments (dollars in thousands):

 

   June 30, 2020   December 31, 2019 
   Carrying Amount   Economic Interest   Carrying Amount   Economic Interest 
Equity Method Investments                    
1347 Property Insurance Holdings, Inc.  $6,819    17.1%  $6,897    17.2%
Itasca Capital Ltd.   2,816    32.3%   2,800    32.3%
Total Equity Method Investments   9,635         9,697      
                     
Cost Method Investment                    
Firefly Systems, Inc.   3,614         3,614      
Total Investments  $13,249        $13,311      

 

Equity Method Investments

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Entity                
1347 Property Insurance Holdings, Inc.  $(1,420)  $17   $(3)  $161 
Itasca Capital Ltd.   (69)   (47)   (117)   (888)
Total  $(1,489)  $(30)  $(120)  $(727)

 

1347 Property Insurance Holdings, Inc. (“PIH”) is a publicly traded company that is implementing business plans to operate as a diversified holding company of insurance, reinsurance and investment management businesses. The Company’s Chairman and former Chief Executive Officer is the chairman of the board of directors of PIH, and the Company’s Co-Chairman is co-chairman of the board of directors of PIH. As of June 30, 2020, they controlled entities that, when combined with the Company’s ownership in PIH, own greater than 50% of PIH. Since PIH does not depend on the Company for continuing financial support to maintain operations, the Company has determined that PIH is not a variable interest entity, and therefore, the Company is not required to consolidate PIH. The equity method loss from PIH during the three months ended June 30, 2020 was primarily the result of PIH’s non-cash losses associated with the change in fair value of its investment in the common stock of FedNat Holding Company (Nasdaq: FNHC). The Company did not receive dividends from PIH during the three and six months ended June 30, 2020 or 2019. Based on quoted market prices, the market value of the Company’s ownership in PIH was $4.6 million at June 30, 2020.

 

Itasca Capital Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative strategic investments. The Company’s Chairman and former Chief Executive Officer is chairman of the board of directors of Itasca, and the Company’s Co-Chairman is also a member of the board of directors of Itasca. These board seats, combined with the Company’s 32.3% ownership of Itasca, provide the Company with significant influence over Itasca, but not controlling interest. The Company did not receive dividends from Itasca during the three and six months ended June 30, 2020 or 2019. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $2.5 million at June 30, 2020.

 

As of June 30, 2020, the Company’s retained earnings included an accumulated deficit from its equity method investees of approximately $1.5 million.

 

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The summarized financial information presented below reflects the financial information of the Company’s equity method investees for the six months ended March 31, 2020 and 2019, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag (in thousands):

 

For the six months ended March 31,  2020   2019 
         
Revenue (1)  $(4,337)  $808 
Operating loss  $(4,534)  $(387)
Net loss  $(393)  $(1,835)

 

(1) PIH records realized and unrealized gains and losses on investments in net investment income (loss), which is included in the revenue line above.

 

Cost Method Investment

 

On May 21, 2019, SDM entered into a Taxicab Advertising Collaboration Agreement (the “Commercial Agreement”) and a Unit Purchase Agreement (the “Unit Purchase Agreement”) with Firefly Systems, Inc. (“Firefly”), pursuant to which SDM has agreed to make available to Firefly 300 digital taxi tops and the parties have agreed to coordinate the fulfilling of SDM’s agreements with the Metropolitan Taxicab Board of Trade, Inc. (“MTBOT”) and Creative Mobile Media, LLC (“CMM”), each dated February 8, 2018. Firefly has agreed to fulfill the digital taxi top advertising obligations under the MTBOT agreement and CMM agreement, and SDM has agreed to fulfill the non-digital taxi top advertising obligations under the MTBOT agreement and CMM agreement. The Company is a party to the Unit Purchase Agreement and has agreed to guarantee the payment obligations of SDM under the Commercial Agreement. As consideration for entering into these agreements, the Company received $4.8 million of Firefly’s Series A-2 preferred shares (“Firefly Shares”). As of June 30, 2020, the Firefly Shares, including those subsequently issued pursuant to an earn-out provision, were subject to a repurchase option for a period of three years to cover SDM’s indemnity obligations and other post-closing covenants under the Commercial Agreement and the Unit Purchase Agreement. As of June 30, 2020, the Firefly Shares were held in an investment fund managed by Fundamental Global Investors, LLC, the controlling stockholder of the Company, that is wholly owned by SDM.

 

The 300 digital tops the Company has made available to Firefly are subject to a master equipment lease agreement the Company entered into during 2017. Pursuant to the master lease agreement and the Unit Purchase Agreement, the Company will remain the primary obligor until such time as the lease expires. In addition, of the $4.8 million of Firefly Shares received, $1.2 million are eligible for repurchase by Firefly if the Company does not exercise the purchase option contained within the master lease agreement. Accordingly, the Company has deferred recognizing an investment related to these Firefly Shares eligible for repurchase until such time it is reasonably certain the Company will exercise the purchase option. The transaction, in effect, transferred control of the underlying asset to Firefly. As additional consideration for the right to use the digital taxi tops, Firefly has agreed to pay for certain of Company’s operating expenses associated with the non-digital taxi tops. The Company concluded the payments that Firefly will make on its behalf are considered variable payments and were not included in the calculation of the selling profit. Therefore, the Company will record the benefit and the related operating expenses in the period when the changes in facts and circumstances on which the variable lease payments are based occur.

 

The Unit Purchase Agreement contains an earnout provision pursuant to which SDM could obtain additional Firefly Shares. The earnout period was from May 22, 2019 through June 30, 2020. SDM was eligible to earn additional Firefly Shares equivalent to the cash collections under certain digital top contracts that were in place at the closing of the transaction. In connection with the additional Firefly Shares that were expected to be received, the Company recorded an additional $0.4 million and $0.7 million gain on the Firefly transaction during the three and six months ended June 30, 2020, respectively.

 

Subsequent to June 30, 2020, SDM entered into an Asset Purchase Agreement with Firefly, pursuant to which SDM agreed to sell substantially all of the assets primarily related to its Strong Outdoor operating business to Firefly and continue to make available 300 digital taxi tops to Firefly. As a result of the transaction, among other things, the Firefly Shares pursuant to the earnout provision were delivered to SDM in August 2020 and the Taxicab Advertising Collaboration Agreement dated May 21, 2019 was terminated, which relieved the Company of its obligation to exercise the purchase option contained within the master lease agreement. The Company will recognize an additional $1.2 million investment related to the Firefly Shares that were previously eligible for repurchase by Firefly during the third quarter of 2020. See Note 15 for additional details.

 

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7. Intangible Assets

 

Intangible assets consisted of the following as of June 30, 2020 (dollars in thousands):

 

   Useful life   Gross   Accumulated Amortization   Net 
   (Years)             
Intangible assets not yet subject to amortization:                    
Software in development       $229   $-   $229 
Intangible assets subject to amortization:                    
Software in service   5    2,413    (1,355)   1,058 
Product formulation   10    448    (406)  42 
Total       $3,090   $(1,761)  $1,329 

 

Intangible assets consisted of the following as of December 31, 2019 (dollars in thousands):

 

   Useful life   Gross   Accumulated Amortization   Net 
   (Years)             
Intangible assets not yet subject to amortization:                    
Software in development       $203   $-   $203 
Intangible assets subject to amortization:                    
Software in service   5    2,362    (1,087)   1,275 
Product formulation   10    471    (415)   56 
Total       $3,036   $(1,502)  $1,534 

 

Amortization expense relating to intangible assets was $0.2 million during each of the three months ended June 30, 2020 and 2019 and $0.4 million during each of the six months ended June 30, 2020 and 2019.

 

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 of 2020  $280 
2021   519 
2022   244 
2023   57 
2024   - 
Thereafter   - 
Total  $1,100 

 

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8. Goodwill

 

The following represents a summary of changes in the Company’s carrying amount of goodwill for the six months ended June 30, 2020 (in thousands):

 

Balance as of December 31, 2019  $919 
Foreign currency translation adjustment   (43)
Balance as of June 30, 2020  $876 

 

9. Debt

 

The Company’s debt consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):

 

   June 30, 2020   December 31, 2019 
Short-term debt:          
Strong/MDI installment loan  $2,825   $3,080 
Strong/MDI revolving credit facility   828    - 
Insurance note payable   235    - 
Current portion of long-term debt   853    998 
Total short-term debt   4,741    4,078 
Long-term debt:          
Equipment term loans   3,699    4,031 
Total principal balance of long-term debt   3,699    4,031 
Less: current portion   (853)   (998)
Less: unamortized debt issuance costs   (14)   (14)
Total long-term debt   2,832    3,019 
Total short-term and long-term debt  $7,573   $7,097 

 

Equipment Term Loans

 

On May 22, 2018, 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. In each of December 2018 and June 2019, Convergent entered into additional installment payment agreements with other financing companies in order to purchase additional media players and related equipment, with each round of financing totaling approximately $0.6 million and $0.2 million, respectively. Installment payments under each contract are due monthly for a period of 60 months. The financing under each of the agreements is secured by the respective equipment. The borrowings under the agreements are recorded as long-term debt on the Company’s consolidated balance sheet. Collectively, the Company had $3.7 million of outstanding borrowings under equipment term loan agreements at June 30, 2020, which bore interest at a weighted-average fixed rate of 7.6%.

 

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Strong/MDI Installment Loan and Revolving Credit Facility

 

On September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and restated May 15, 2018, 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 bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans 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$3.9 million, or approximately $2.8 million, of principal outstanding on the 20-year installment loan as of June 30, 2020, which bears variable interest at 2.95%. There was CDN$1.1 million, or approximately $0.8 million, of principal outstanding on Strong/MDI’s revolving credit facility as of June 30, 2020, which bears variable interest at 2.45%. Strong/MDI was in compliance with its debt covenants as of June 30, 2020.

 

Scheduled repayments are as follows for the Company’s long-term debt outstanding as of June 30, 2020 (in thousands):

 

Remainder of 2020  $344 
2021   1,054 
2022   1,122 
2023   1,149 
2024   30 
Thereafter   - 
Total  $3,699 

 

Paycheck Protection Program

 

On April 14, 2020, the Company entered into a promissory note evidencing a loan of $3.2 million (the “Loan”) under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) of the CARES Act. The Company intended to use the Loan for qualifying payroll, rent and utility expenses in accordance with the terms of the CARES Act. At the time the Company applied for the Loan, the Company believed it qualified to receive the funds pursuant to the PPP.

 

On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created additional uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company has less than 300 employees and continues to be severely impacted by the disruption to the cinema, theme park and advertising industries as a result of COVID-19. However, out of an abundance of caution and in light of the new guidance, the Company repaid the full amount of the Loan plus accrued interest to the lender on May 5, 2020.

 

10. Leases

 

The Company and its subsidiaries lease plant and office facilities and equipment under operating and finance leases expiring through 2028. The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.

 

Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use assets and lease liabilities because it does not expect to extend the leases. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company’s estimated incremental borrowing rate for loans with similar collateral and duration.

 

The Company elected to not apply the recognition requirements of Topic 842 to leases of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases are recognized in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

 

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The Company elected, as a lessee, for all classes of underlying assets, to not separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component.

 

The following tables present the Company’s lease costs and other lease information (dollars in thousands):

 

Lease cost                
   Three Months Ended
June 30, 2020
   Three Months Ended
June 30, 2019
   Six Months Ended
June 30, 2020
   Six Months Ended
June 30, 2019
 
Finance lease cost:                    
Amortization of right-of-use assets  $395   $88   $776   $137 
Interest on lease liabilities   153    23    317    42 
Operating lease cost   390    746    792    1,432 
Short-term lease cost   15    3    29    9 
Sublease income   (89)   (106)   (205)   (192)
Net lease cost  $864   $754   $1,709   $1,428 

 

Other information                
  

Three Months Ended

June 30, 2020

  

Three Months Ended

June 30, 2019

   Six Months Ended June 30, 2020   Six Months Ended June 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities:                    
Operating cash flows from finance leases  $153   $23   $317   $42 
Operating cash flows from operating leases  $350   $644   $691   $1,234 
Financing cash flows from finance leases  $395   $88   $776   $137 
Right-of-use assets obtained in exchange for new finance lease liabilities  $320   $478   $320   $710 
Right-of-use assets obtained in exchange for new operating lease liabilities  $-   $-   $109   $644 
Derecognition of right-of-use asset in connection with Firefly transaction  $-   $3,394   $-   $3,394 

 

  

As of

June 30, 2020

 
Weighted-average remaining lease term - finance leases (years)   2.8 
Weighted-average remaining lease term - operating leases (years)   6.9 
Weighted-average discount rate - finance leases   12.1%
Weighted-average discount rate - operating leases   4.9%

 

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The following table presents a maturity analysis of the Company’s finance and operating lease liabilities as of June 30, 2020 (in thousands):

 

   Operating Leases   Finance Leases 
Remainder of 2020  $606   $1,129 
2021   1,172    2,258 
2022   823    2,052 
2023   660    437 
2024   669    172 
Thereafter   2,446    36 
Total lease payments   6,376    6,084 
Less: Amount representing interest   (1,011)   (965)
Present value of lease payments   5,365    5,119 
Less: Current maturities   (951)   (1,732)
Lease obligations, net of current portion  $4,414   $3,387 

 

The Company subleases certain office and warehouse space and equipment to third parties. Sublease income is included in net service revenues in the condensed consolidated statements of operations. The following table presents a maturity analysis of the Company’s long-term subleases (in thousands):

 

     
Remainder of 2020  $94 
2021   189 
2022