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, and government markets. The Company and its wholly owned
subsidiaries Strong Westrex, Inc. (“SWI”), Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc., Strong
Westrex (Beijing) Technology Inc. (“SWBTI”), Convergent Corporation and Convergent Media Systems Corporation (“Convergent”)
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.
The
Company’s products are distributed to the cinema, retail, financial, and government markets throughout the world.
2.
Discontinued Operations
On
June 21, 2016, the Company’s Board of Directors approved a plan under which the Company will pursue a sale of the operations
conducted by its subsidiaries SWBTI and SWI (the “China Operations”) which has historically been included in the Cinema
segment. We expect to complete the sale within the next twelve months. The purpose of the plan is to focus the efforts of the
Company on the business units that have opportunities for higher return on invested capital. As part of this plan, the Company
incurred charges of $0.9 million in the second quarter of 2016 and zero in the third quarter of 2016, which are included in loss
from discontinued operations in the condensed consolidated statements of operations. We reflected the results of the China Operations
as discontinued operations for all periods presented. The assets and liabilities of the China Operations have been reclassified
as assets and liabilities held for sale in the condensed consolidated balance sheets for all periods presented.
On
November 4, 2016, the Company sold SWBTI to GABO Filter, Inc. for total proceeds of $0.4 million. As part of this sale
the Company expects to record a loss on discontinued operations of approximately $0.3 million in the fourth quarter of 2016. The
final loss from discontinued operations related to this sale may differ from this estimate depending on the actual proceeds received
and the actual disposition costs incurred. In addition, the Company expects to incur charges of $0.3 million in the fourth quarter
related to severance for discontinued operations in conjunction with the sale of SWBTI.
The
summary comparative financial results of discontinued operations were as follows (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total net revenues
|
|
|
583
|
|
|
|
3,766
|
|
|
|
6,440
|
|
|
|
8,973
|
|
Total cost of revenues
|
|
|
436
|
|
|
|
3,578
|
|
|
|
6,227
|
|
|
|
8,605
|
|
Total selling and administrative expenses
|
|
|
157
|
|
|
|
465
|
|
|
|
863
|
|
|
|
1,058
|
|
Loss from operations
of discontinued operations
|
|
|
(10
|
)
|
|
|
(277
|
)
|
|
|
(650
|
)
|
|
|
(690
|
)
|
Loss before income taxes
|
|
|
(8
|
)
|
|
|
(273
|
)
|
|
|
(628
|
)
|
|
|
(677
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(448
|
)
|
|
|
(114
|
)
|
|
|
(388
|
)
|
Net loss from
discontinued operations, net of tax
|
|
$
|
(8
|
)
|
|
$
|
(721
|
)
|
|
$
|
(742
|
)
|
|
$
|
(1,065
|
)
|
The
assets and liabilities classified as held for sale reflected in the condensed consolidated balance sheets were as follows (in
thousands):
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,439
|
|
|
$
|
4,208
|
|
Accounts receivable,
net
|
|
|
—
|
|
|
|
327
|
|
Total inventories,
net
|
|
|
—
|
|
|
|
2,500
|
|
Other
current assets
|
|
|
245
|
|
|
|
184
|
|
Total
current assets held for sale
|
|
$
|
1,684
|
|
|
$
|
7,219
|
|
Property, plant
and equipment, net
|
|
$
|
—
|
|
|
$
|
65
|
|
Total
noncurrent assets held for sale
|
|
$
|
—
|
|
|
$
|
65
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
78
|
|
|
$
|
2,421
|
|
Accrued expenses
|
|
|
256
|
|
|
|
516
|
|
Customer
deposits/deferred revenue
|
|
|
272
|
|
|
|
1,458
|
|
Total
current liabilities
|
|
$
|
606
|
|
|
$
|
4,395
|
|
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 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, 2015.
The
condensed consolidated balance sheet as of December 31, 2015 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.
Use
of Management Estimates
The
preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S.
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 condensed 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.
Marketable
Securities
The
Company’s marketable securities are comprised of investments in the common stock of a publicly traded company. Changes in
fair value, based on the market price of the investee’s stock are recognized in other income in the consolidated statement
of operations. The Company uses the fair value option to account for the investment to more appropriately recognize the value
of this investment in our consolidated financial statements since the Company does not exert significant influence over the investment,
in which case the equity method of accounting has been applied. Marketable securities at fair value were as follows:
|
|
September
30, 2016
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
(in
thousands)
|
|
Marketable securities
|
|
$
|
2,464
|
|
|
$
|
—
|
|
|
$
|
497
|
|
|
$
|
1,967
|
|
Equity
Method Investments
In
December 2015, the Company acquired 7.8% ownership in RELM Wireless Corporation (“RELM”) for $4.0 million and increased
its ownership to 8.3% during the nine months ended September 30, 2016 for an additional $0.3 million. RELM is a publicly traded
company that designs, manufactures and markets two-way land mobile radios, repeaters, base stations, and related components and
subsystems. The Company’s Chief Executive Officer is a member of the board of directors of RELM, and controls entities that,
when combined with the Company’s ownership in RELM, own greater than 20% of RELM, providing the Company with significant
influence over RELM, but not controlling interest. As a result of this significant influence, the Company accounts for its investment
in RELM under the equity method. The Company’s carrying value for RELM was $4.3 million as of September 30, 2016 and the
Company’s equity method investment income of RELM was $0.2 million during the nine months ended September 30, 2016. Based
on quoted market prices, the market value of the Company’s ownership in RELM was $6.1 million at September 30, 2016.
In
May 2016, the Company acquired 31.2% ownership in Itasca Capital Ltd. (“Itasca”) for $3.5 million and increased its
ownership to 32.3% during the nine months ended September 30, 2016 for an additional $0.2 million. Itasca is a publicly traded
Canadian company that is an investment vehicle seeking transformative strategic investments. The Company’s Chief Executive
Officer is a member 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. As a result of this significant
influence, the Company accounts for its investment in Itasca under the equity method. The Company’s carrying value for Itasca
was $3.5 million as of September 30, 2016 and the Company’s equity method investment loss in Itasca was $0.1 million during
the nine months ended September 30, 2016. Based on quoted market prices, the market value of the Company’s ownership in
Itasca was $4.4 million at September 30, 2016.
Fair
Value of Financial Instruments
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 will be 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
|
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 fall.
Fair
Values Measured on a Recurring Basis at September 30, 2016:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
13,834
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,834
|
|
Marketable securities
|
|
$
|
1,967
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,967
|
|
Notes receivable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,669
|
|
|
$
|
1,669
|
|
Fair
values measured on a recurring basis at December 31, 2015:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash
and cash equivalents
|
|
$
|
17,862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,862
|
|
Marketable securities
|
|
$
|
2,101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,101
|
|
Notes receivable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,669
|
|
|
$
|
1,669
|
|
Quantitative
information about the Company’s level 3 fair value measurements at September 30, 2016 is set forth below:
|
|
Fair
Value at
9/30/2016
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
Valuation
Technique
|
|
Unobservable
input
|
|
Range
|
|
Notes receivable
|
|
$
|
1,669
|
|
|
Discounted cash flow
|
|
Probability of default
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
21
|
%
|
The
notes receivable are recorded at estimated fair value at September 30, 2016.
The
significant unobservable inputs used in the fair value measurement of the Company’s note receivable are discount rate and
probability of default. Significant increases (decreases) in any of these inputs in isolation would result in a significantly
lower (higher) fair value measurement.
The
following table reconciles the beginning and ending balance of the Company’s notes receivable fair value:
|
|
Nine
months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Notes receivable balance,
beginning of period
|
|
$
|
1,669
|
|
|
$
|
2,985
|
|
Interest income
accrued
|
|
|
—
|
|
|
|
279
|
|
Fair value adjustment
|
|
|
—
|
|
|
|
(1,595
|
)
|
Notes receivable
balance, end of period
|
|
$
|
1,669
|
|
|
$
|
1,669
|
|
The
carrying values of all other financial assets and liabilities including accounts receivable, accounts payable and accrued expenses
reported in the consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments.
All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis,
which includes non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is
evidence of impairment). During the nine months ended September 30, 2016, the Company did not have any significant non-recurring
measurements of non-financial assets or liabilities.
Recently
Issued 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)” (“ASU 2014-09”). ASU 2014-09 requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The guidance
is effective for the Company beginning January 1, 2018. An entity may adopt this ASU either retrospectively or through a cumulative
effect adjustment as of the start of the first period for which it applies the ASU. Early adoption is not permitted. While the
Company has not yet completed its analysis of ASU 2014-09, the Company anticipates a more significant impact on its Digital Media
segment, primarily due to the nature of that segment’s contracts with customers. The Company is currently evaluating adoption
methods and the impact of adopting ASU 2014-09 on its consolidated financial statements. The Company anticipates that the adoption
may have a material impact on the consolidated financial statements.
In
July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU
2015-11”). ASU 2015-11 requires an entity utilizing the first in-first out inventory method to change their measurement
principle for inventory changes from the lower of cost or market to lower of cost and net realizable value. The guidance is effective
for the Company beginning January 1, 2017. An entity must adopt this ASU prospectively and early adoption is permitted. The adoption
of ASU 2015-11 is not expected to have a material effect on the Company’s consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities” (“ASU 2016-01”). 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. ASU 2016-01 is effective for financial statements issued for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is not permitted. The adoption
of ASU 2016-01 is not expected to have a material effect on the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “
Leases
(Topic 842)” (“ASU 2016-02”). 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 requires a modified retrospective transition method. The Company has not yet completed its analysis of
ASU 2016-02 and is evaluating the impact and timing of adopting ASU 2014-09 on its consolidated financial statements. The Company
anticipates that the adoption may have a material impact on the consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting,” (“ASU
2016-07”). ASU 2016-07 eliminates the requirement for the Company to retroactively apply the equity method when its increase
in ownership interests (or degree of influence) in an investee triggers equity method accounting. This ASU is effective for the
Company on January 1, 2017 with early adoption permitted. The Company has adopted ASU 2016-07 and there was no impact on its consolidated
financial statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”).
ASU 2016-09 simplifies accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized
as they occur, as well as certain classifications on the statement of cash flows. This ASU is effective for the Company on January
1, 2017 with early adoption permitted. While the Company has not yet completed its analysis, the adoption of ASU 2016-09 is not
expected to have a material effect on the Company’s consolidated financial statements.
4.
Earnings (Loss) Per Common Share
Basic
earnings (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. The following
table provides the reconciliation between average shares used to compute both basic and diluted earnings (loss) per share:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
14,249
|
|
|
|
14,164
|
|
|
|
14,225
|
|
|
|
14,122
|
|
Dilutive effect
of stock options and certain non-vested shares of restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average shares
outstanding
|
|
|
14,249
|
|
|
|
14,164
|
|
|
|
14,225
|
|
|
|
14,122
|
|
For
the three and nine month periods ended September 30, 2016, grants and options to purchase 350,000 and 363,700 shares of common
stock respectively 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. For the three and nine
month periods ended September 30, 2016, options and restricted stock units of 65,937 and 85,618, respectively, were excluded as
their inclusion would be anti-dilutive, thereby decreasing the net loss per share. For the three and nine month periods ended
September 30, 2015, options to purchase 20,625 and 124,125 shares of common stock, respectively, 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. For the three and nine month periods ended September 30, 2015, options
and restricted stock units of 56,873 and 88,877, respectively, were excluded as their inclusion would be anti-dilutive, thereby
decreasing the net loss per share.
5.
Warranty Reserves
In
most instances, the Company’s digital products are covered by the original equipment manufacturing firm’s warranty;
however, there are certain customers where the Company may grant warranties in excess of the manufacturer’s warranty for
digital products which can be for up to three years. 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, 2016 and 2015:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Warranty accrual at beginning
of period
|
|
$
|
380
|
|
|
$
|
271
|
|
|
$
|
310
|
|
|
$
|
355
|
|
Charged to expense
|
|
|
430
|
|
|
|
128
|
|
|
|
778
|
|
|
|
487
|
|
Amounts written off, net of recoveries
|
|
|
(194
|
)
|
|
|
(125
|
)
|
|
|
(475
|
)
|
|
|
(568
|
)
|
Foreign currency
adjustment
|
|
|
1
|
|
|
|
(11
|
)
|
|
|
4
|
|
|
|
(11
|
)
|
Warranty accrual
at end of period
|
|
$
|
617
|
|
|
$
|
263
|
|
|
$
|
617
|
|
|
$
|
263
|
|
6.
Intangible Assets
Intangible
assets consisted of the following at September 30, 2016:
|
|
Useful
life
|
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
( in thousands)
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
3
|
|
|
$
|
648
|
|
|
$
|
—
|
|
|
$
|
648
|
|
Product
Formulation
|
|
|
10
|
|
|
$
|
465
|
|
|
$
|
(266
|
)
|
|
$
|
199
|
|
Total
|
|
|
|
|
|
$
|
1,113
|
|
|
$
|
(266
|
)
|
|
$
|
847
|
|
Intangible
assets consisted of the following at December 31, 2015:
|
|
Useful
life
|
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
(in thousands)
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
formulation
|
|
|
10
|
|
|
$
|
440
|
|
|
$
|
(205
|
)
|
|
$
|
235
|
|
Amortization
expense relating to other identifiable intangible assets was insignificant for the nine months ended September 30, 2016 and $0.3
million for the nine months ended September 30, 2015.
The
following table shows the Company’s estimated future amortization expense related to intangible assets for the next five
years.
|
|
Amount
|
|
|
|
(in thousands)
|
|
Remainder 2016
|
|
$
|
16
|
|
2017
|
|
|
54
|
|
2018
|
|
|
43
|
|
2019
|
|
|
31
|
|
2020
|
|
|
23
|
|
Thereafter
|
|
|
32
|
|
7.
Goodwill
The
following represents a summary of changes in the Company’s carrying amount of goodwill for the quarter ended September 30,
2016 (in thousands):
Balance as of December 31, 2015
|
|
$
|
863
|
|
Foreign currency
translation
|
|
|
47
|
|
Balance as of September 30, 2016
|
|
$
|
910
|
|
8.
Restructuring Activities
In
connection with its strategic planning process, as well as the Company’s ongoing plans to improve efficiency and effectiveness
of its operations, the Company initiated plans in the second quarter of 2015 to reduce headcount and more efficiently utilize
real estate assets. These plans were completed in the first quarter of 2016 and no expense was recorded in 2016.
In
connection with the integration of the 2013 Convergent acquisition, as well as the Company’s ongoing plans to improve efficiency
and effectiveness of its operations, the Company initiated plans in the fourth quarter of 2013 to reduce headcount and move the
Company’s warehouse from Omaha, Nebraska to Georgia. The restructuring initiative was completed in the first quarter of
2015.
The
following table reconciles the beginning and ending restructuring balance for the nine months ended September 30, 2016, which
is included in accrued expenses:
|
|
(in thousands)
|
|
Accrued liability at beginning
of period
|
|
$
|
73
|
|
Severance paid
|
|
|
(73
|
)
|
Accrued liability at end of period
|
|
$
|
—
|
|
The
following table reconciles the beginning and ending restructuring balance for the nine months ended September 30, 2015, which
is included in accrued expenses:
|
|
2015
Strategic
Initiative
|
|
|
2013
Convergent
Related
Severance
|
|
|
Total
Restructuring
|
|
|
|
( in thousands)
|
|
Accrued liability at beginning
of period
|
|
$
|
-
|
|
|
$
|
187
|
|
|
$
|
187
|
|
Lease termination expense
|
|
|
219
|
|
|
|
-
|
|
|
|
219
|
|
Lease termination paid
|
|
|
(41
|
)
|
|
|
-
|
|
|
|
(41
|
)
|
Severance expense
|
|
|
695
|
|
|
|
-
|
|
|
|
695
|
|
Severance paid
|
|
|
(447
|
)
|
|
|
(160
|
)
|
|
|
(607
|
)
|
Accrued liability
at end of period
|
|
$
|
426
|
|
|
$
|
27
|
|
|
$
|
453
|
|
9.
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 of $8.3 million should be recorded against the Company’s U.S. tax jurisdiction deferred tax assets
as of September 30, 2016. During the third quarter the valuation allowance decreased $0.4 million.
The
Company has completed the examination for Federal purposes for the 2011 fiscal year with no changes. The Company has examinations
not yet initiated for Federal purposes for fiscal years 2013, 2014, and 2015. In most cases, the Company has examinations open
for state or local jurisdictions based on the particular jurisdiction’s statute of limitations.
10.
Stock Compensation
The
Company recognizes compensation expense for all share-based payment awards made to employees and directors based on their estimated
fair values. Share-based compensation expense included in selling and administrative expenses approximated $0.1 million for the
three months ended September 30, 2016 and 2015, respectively, and $0.4 million and $0.3 million for the nine months ended September
30, 2016 and 2015, respectively.
Long-Term
Incentive Plan
The
Company’s 2010 Long-Term Incentive Plan (“2010 Plan”) 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, and performance units. 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 reserved for issuance under the 2010 Plan is 1,600,000 shares. During the three months
ended September 30, 2016, the Company granted no restricted stock units or stock options and during the nine months ended September
30, 2016, the Company granted no restricted stock units and 100,000 stock options under the 2010 Plan.
Options
As
noted above, under the 2010 Plan, the Company granted options to purchase 100,000 shares during the nine month period ended September
30, 2016. 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 and vest immediately or over a five-year period.
The
weighted average grant date fair value of stock options granted during the nine month period ended September 30, 2016 was $4.20.
There were no stock options granted during the three month period ended September 30, 2016 or during the three and nine month
period ended September 30, 2015. The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes
valuation model with the following weighted average assumptions:
|
|
2016
|
|
Expected dividend yield
at date of grant
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
1.35
|
%
|
Expected stock price volatility
|
|
|
32.26
|
%
|
Expected life of options (in years)
|
|
|
5.7
|
|
The
risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected
volatility was based on historical daily price changes of the Company’s stock for one year 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. The Company considers
groups of associates that have similar historical exercise behavior separately for valuation purposes.
The
following table summarizes the Company’s activities with respect to its stock options for the nine months ended September
30, 2016 as follows:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at December 31, 2015
|
|
|
450,800
|
|
|
$
|
4.48
|
|
|
|
9.21
|
|
|
$
|
131
|
|
Granted
|
|
|
100,000
|
|
|
|
4.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(25,000
|
)
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,500
|
)
|
|
|
4.71
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
493,300
|
|
|
$
|
4.31
|
|
|
|
8.97
|
|
|
$
|
1,327
|
|
Exercisable at September 30, 2016
|
|
|
73,300
|
|
|
$
|
4.41
|
|
|
|
8.07
|
|
|
$
|
190
|
|
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 September 30, 2016.
As
of September 30, 2016, 420,000 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards
was approximately $0.5 million, which is expected to be recognized over a weighted average period of 4.2 years.
Restricted
Stock Plans
The
Ballantyne Strong, Inc. 2014 Non-Employee Directors’ Restricted Stock Plan (the “2014 Non-Employee Plan”) provides
for the award of restricted shares to outside directors. Shares issued under the 2014 Non-Employee Plan vest the day preceding
the Company’s Annual Meeting of Stockholders in the year following issuance. During the nine months ended September 30,
2016, the Company granted 45,555 restricted shares with a weighted average grant date fair value of $4.89 under the Non-Employee
Plan.
In
connection with the restricted stock granted to certain employees and non-employee directors, the Company accrues compensation
expense based on the estimated number of shares expected to be issued utilizing the most current information available to the
Company at the date of the financial statements. 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, 2016, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately
$0.3 million, which is expected to be recognized over a weighted average period of 1.1 years.
The
following table summarizes restricted stock activity for the nine months ended September 30, 2016:
|
|
Number
of Restricted
Stock Shares
|
|
|
Weighted
Average Grant
Price Fair Value
|
|
Non-vested at December 31, 2015
|
|
|
130,358
|
|
|
$
|
4.30
|
|
Granted
|
|
|
45,555
|
|
|
|
4.89
|
|
Shares vested
|
|
|
(73,243
|
)
|
|
|
4.42
|
|
Shares forfeited
|
|
|
(5,625
|
)
|
|
|
3.75
|
|
Non-vested at September 30, 2016
|
|
|
97,045
|
|
|
$
|
4.52
|
|
11.
Commitments, Contingencies and Concentrations
Concentrations
The
Company’s top ten customers accounted for approximately 53.3% and 49.8% of total consolidated net revenues for the three
and nine months ended September 30, 2016, respectively. Trade accounts receivable from these customers represented approximately
35.5% of net consolidated receivables at September 30, 2016. 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 concentration
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 2021. These leases generally contain renewal options and the Company expects to renew or replace certain of these leases
in the ordinary course of business. The Company’s future minimum lease payments for leases at September 30, 2016 are as
follows:
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
(In thousands)
|
|
Remainder 2016
|
|
$
|
85
|
|
|
$
|
272
|
|
2017
|
|
|
290
|
|
|
|
413
|
|
2018
|
|
|
248
|
|
|
|
329
|
|
2019
|
|
|
131
|
|
|
|
294
|
|
2020
|
|
|
—
|
|
|
|
264
|
|
Thereafter
|
|
|
—
|
|
|
|
152
|
|
Total minimum
lease payments
|
|
|
754
|
|
|
$
|
1,724
|
|
Less: Amount
representing interest
|
|
|
26
|
|
|
|
|
|
Present value
of minimum lease payments
|
|
|
728
|
|
|
|
|
|
Less: Current
maturities
|
|
|
305
|
|
|
|
|
|
Capital lease
obligations, net of current portion
|
|
$
|
423
|
|
|
|
|
|
12.
Business Segment Information
As
of September 30, 2016 the Company’s operations were conducted principally through two business segments: Cinema and Digital
Media. Cinema operations include the sale of digital projection equipment, screens, and sound systems. Digital Media operations
include the delivery of end to end digital signage solutions, video communication solutions, content creation and management and
service of digital signage and digital cinema equipment. The Company allocates resources to business segments and evaluates the
performance of these segments based upon reported segment operating profit. The Company records intercompany sales at cost and
has eliminated all significant intercompany sales in consolidation. The results of discontinued operations are excluded from the
Cinema segment information below.
Summary
by Business Segments
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
(In
thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema
|
|
$
|
11,070
|
|
|
$
|
11,048
|
|
|
$
|
32,085
|
|
|
$
|
33,782
|
|
Digital
Media
|
|
|
7,911
|
|
|
|
8,992
|
|
|
|
25,411
|
|
|
|
23,836
|
|
Total segment net
revenue
|
|
|
18,981
|
|
|
|
20,040
|
|
|
|
57,496
|
|
|
|
57,618
|
|
Eliminations
|
|
|
(313
|
)
|
|
|
(294
|
)
|
|
|
(1,156
|
)
|
|
|
(892
|
)
|
Total
net revenue
|
|
$
|
18,668
|
|
|
$
|
19,746
|
|
|
$
|
56,340
|
|
|
$
|
56,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema
|
|
$
|
2,205
|
|
|
$
|
2,462
|
|
|
$
|
8,318
|
|
|
$
|
5,733
|
|
Digital
Media
|
|
|
(61
|
)
|
|
|
(1,120
|
)
|
|
|
884
|
|
|
|
(1,717
|
)
|
Total segment operating
income
|
|
|
2,144
|
|
|
|
1,342
|
|
|
|
9,202
|
|
|
|
4,016
|
|
Unallocated general and administrative
expenses
|
|
|
(1,887
|
)
|
|
|
(2,316
|
)
|
|
|
(5,870
|
)
|
|
|
(7,628
|
)
|
(Loss) gain on sale of assets
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
|
(392
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
18
|
|
|
|
9
|
|
|
|
18
|
|
|
|
308
|
|
Cinema – foreign
currency transaction gain (loss)
|
|
|
82
|
|
|
|
846
|
|
|
|
(958
|
)
|
|
|
1,521
|
|
Digital Media –
foreign currency transaction loss
|
|
|
(59
|
)
|
|
|
(81
|
)
|
|
|
(24
|
)
|
|
|
(200
|
)
|
Cinema - excess
distribution from joint venture
|
|
|
—
|
|
|
|
—
|
|
|
|
502
|
|
|
|
—
|
|
Cinema – fair
value adjustment to notes receivable
|
|
|
—
|
|
|
|
(1,595
|
)
|
|
|
—
|
|
|
|
(1,595
|
)
|
Cinema - other
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
45
|
|
|
|
22
|
|
Digital Media -
other
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
Change
in value of marketable securities – Corporate asset
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(400
|
)
|
|
|
—
|
|
Total
other income (loss)
|
|
|
—
|
|
|
|
(823
|
)
|
|
|
(826
|
)
|
|
|
56
|
|
Earnings (loss)
before income taxes and equity method investment income
|
|
$
|
257
|
|
|
$
|
(1,811
|
)
|
|
$
|
2,507
|
|
|
$
|
(3,948
|
)
|
(In
thousands)
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Identifiable assets, excluding assets
held for sale
|
|
|
|
|
|
|
|
|
Cinema
|
|
$
|
34,510
|
|
|
$
|
38,159
|
|
Digital Media
|
|
|
17,002
|
|
|
|
15,319
|
|
Corporate
assets
|
|
|
9,778
|
|
|
|
6,102
|
|
Total
|
|
$
|
61,290
|
|
|
$
|
59,580
|
|
Summary
by Geographical Area
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(In
thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
14,643
|
|
|
$
|
15,442
|
|
|
$
|
44,184
|
|
|
$
|
43,435
|
|
China
|
|
|
1,518
|
|
|
|
1,244
|
|
|
|
4,316
|
|
|
|
2,911
|
|
Latin America
|
|
|
377
|
|
|
|
294
|
|
|
|
1,352
|
|
|
|
2,739
|
|
Canada
|
|
|
1,399
|
|
|
|
1,499
|
|
|
|
3,676
|
|
|
|
3,878
|
|
Mexico
|
|
|
472
|
|
|
|
559
|
|
|
|
1,816
|
|
|
|
1,938
|
|
Europe
|
|
|
196
|
|
|
|
448
|
|
|
|
788
|
|
|
|
1,219
|
|
Asia (excluding
China)
|
|
|
45
|
|
|
|
61
|
|
|
|
70
|
|
|
|
106
|
|
Other
|
|
|
18
|
|
|
|
199
|
|
|
|
138
|
|
|
|
500
|
|
Total
|
|
$
|
18,668
|
|
|
$
|
19,746
|
|
|
$
|
56,340
|
|
|
$
|
56,726
|
|
(In
thousands)
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Identifiable assets, excluding assets
held for sale
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
29,916
|
|
|
$
|
33,882
|
|
Canada
|
|
|
31,374
|
|
|
|
25,698
|
|
Total
|
|
$
|
61,290
|
|
|
$
|
59,580
|
|
Net
revenues by business segment are to unaffiliated customers. Identifiable assets by geographical area are based on location of
facilities. Net sales by geographical area are based on destination of sales.