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 Technical Services, Inc., Strong/MDI Screen Systems, Inc. (“Strong/MDI”), Convergent Corporation,
and Convergent Media Systems Corporation (“Convergent” or “CMS”), 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. On November 4,
2016, Strong Westrex (Beijing) Technology Inc. (“SWBTI”), a subsidiary of Strong Westrex, Inc. (“SWI”),
was sold, and on May 17, 2017, SWI was sold (see Note 2).
The
Company’s products are distributed to the retail, financial, government and cinema markets throughout the world.
2.
Discontinued Operations
On
June 23, 2016, the Company’s Board of Directors approved a plan to pursue a sale of the operations conducted by its subsidiaries
SWBTI and SWI (the “China Operations”) which have historically been included in the Cinema segment. The purpose of
the plan was to focus the efforts of the Company on the business units that have opportunities for higher return on invested capital.
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. On May 17, 2017, SWI was sold
for total proceeds of $0.1 million. The Company recorded an insignificant gain on the sale of SWI.
The
summary comparative financial results of discontinued operations were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total net revenues
|
|
$
|
—
|
|
|
$
|
583
|
|
|
$
|
24
|
|
|
$
|
6,440
|
|
Total cost of revenues
|
|
|
—
|
|
|
|
436
|
|
|
|
48
|
|
|
|
6,227
|
|
Total selling and administrative expenses
|
|
|
—
|
|
|
|
157
|
|
|
|
53
|
|
|
|
863
|
|
Loss from operations of discontinued operations
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(77
|
)
|
|
|
(650
|
)
|
Loss before income taxes
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(49
|
)
|
|
|
(628
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(114
|
)
|
Net loss from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
(49
|
)
|
|
$
|
(742
|
)
|
Depreciation
and amortization related to discontinued operations was immaterial for the three and nine month periods ended September 30, 2017
and 2016. There were no capital expenditures related to discontinued operations for the nine months ended September 30, 2017 and
2016.
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/A. 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/A for the fiscal year ended December 31, 2016.
The
condensed consolidated balance sheet as of December 31, 2016 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.
During
the second quarter of 2017, the Company began classifying software in development as an intangible asset rather than property,
plant and equipment, to be consistent with its classification of software assets in service. Accordingly, approximately $0.5 million
of software in development at December 31, 2016 was reclassified to intangible assets from property, plant and equipment on the
condensed consolidated balance sheet to conform to the current period presentation. This reclassification had no effect on the
Company’s reported results of operations, comprehensive income, or cash flows.
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
For
the nine months ended September 30, 2016, the Company’s marketable securities were 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, were recognized
in other income in the condensed consolidated statement of operations. The Company used the fair value option to account for the
investment to more appropriately recognize the value of this investment in our condensed consolidated financial statements since
the Company did not exert significant influence over the investment, in which case the equity method of accounting would have
been applied. None of the Company’s investments were classified as marketable securities or accounted for using the fair
value option during the nine months ended September 30, 2017.
Equity
Method Investments
We
apply the equity method of accounting to investments when we have significant influence, but not controlling interest in the investee.
Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership
interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
The Company’s proportionate share of the net (loss) income resulting from these investments is reported under the line item
captioned “equity method investment (loss) income” in our condensed consolidated statements of operations. The carrying
value of our equity method investments is reported in equity method investments in the condensed consolidated balance sheets.
The Company’s equity method investments are reported initially at cost and adjusted each period for the Company’s
share of the investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income
or loss is recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from
equity method investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. The Company
assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment
may not be recoverable. The Company did not record any impairments related to its investments during the three and nine month
periods ended September 30, 2017 or 2016. Note 5 contains additional information on our equity method investments, which are held
by the Company’s Cinema segment.
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
|
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, as of September 30, 2017 and December 31, 2016.
Fair
values measured on a recurring basis at September 30, 2017 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
4,049
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,049
|
|
Notes receivable
|
|
|
-
|
|
|
|
—
|
|
|
|
1,669
|
|
|
$
|
1,669
|
|
Total
|
|
$
|
4,049
|
|
|
$
|
—
|
|
|
$
|
1,669
|
|
|
$
|
5,718
|
|
Fair
values measured on a recurring basis at December 31, 2016 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
7,596
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,596
|
|
Notes receivable
|
|
|
-
|
|
|
|
—
|
|
|
|
1,669
|
|
|
$
|
1,669
|
|
Total
|
|
$
|
7,596
|
|
|
$
|
—
|
|
|
$
|
1,669
|
|
|
$
|
9,265
|
|
Quantitative
information about the Company’s level 3 fair value measurements at September 30, 2017 is set forth below:
|
|
Fair
value at 9/30/17
(in thousands)
|
|
|
Valuation technique
|
|
Unobservable input
|
|
Range
|
|
Notes receivable
|
|
$
|
1,669
|
|
|
Discounted cash flow
|
|
Probability of default
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
18
|
%
|
The
notes receivable are recorded at estimated fair value at September 30, 2017.
The
significant unobservable inputs used in the fair value measurement of the Company’s notes 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. There were no changes in the fair value of the Company’s notes receivable recorded
during the three and nine months ended September 30, 2017 or 2016.
The
Company’s short-term and long-term debt is recorded at historical cost. As of September 30, 2017, the Company’s long-term
debt, including current maturities, had a carrying value of $1.95 million. Based on discounted cash flows using current quoted
interest rates (Level 2 of the fair value hierarchy), the estimated fair value at September 30, 2017 was $1.96 million.
The
carrying values of 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 5 includes fair value information related to our equity method investments. All non-financial
assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which 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, 2017, 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”)
2014-09, “Revenue from Contracts with Customers (Topic 606)”. 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 (modified retrospective
method) as of the start of the first period for which it applies the ASU. The Company has obtained an understanding of ASU 2014-09
and has been analyzing the impact of the new standard on its financial results. The Company has completed a high-level assessment
of the performance obligations within its contracts for its major products and services and is assessing potential impacts to
its internal processes, control environment and disclosures. The Company expects to adopt this ASU using the modified retrospective
method as of January 1, 2018. While the Company has not yet quantified the impact that the adoption of ASU 2014-09 will have on
the consolidated financial statements, the Company is continuing to evaluate the impact of the new standard on our financial results
and other possible impacts. The Company will continue to provide enhanced disclosures as we complete our assessment.
In
July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. 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 or net realizable value. The Company prospectively adopted the guidance effective January 1, 2017.
The adoption of ASU 2015-11 did not 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 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 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 is evaluating the requirements of ASU 2016-02 and its potential impact on
the Company’s financial statements. The Company has leases primarily for property and equipment and is in the process of
identifying and evaluating these leases for purposes of ASU 2016-02. For each of these leases, the term will be evaluated, including
extension and renewal options as well as the lease payments. While the Company has not yet quantified the impact that the adoption
of ASU 2016-02 will have on its consolidated financial statements, the Company expects to record assets and liabilities on its
balance sheet upon adoption of this standard, which may be material. The Company will continue to provide enhanced disclosures
as it continues its assessment.
In
March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting”. 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, and certain classifications on the statement of cash flows. The Company adopted
the guidance effective January 1, 2017 on a prospective basis. Additionally, as required by ASU 2016-09, when calculating diluted
earnings per share, excess tax benefits were excluded from the calculation of assumed proceeds since such amounts are recognized
in the income statement. The Company applied the cash flow presentation requirements prospectively, and the 2016 statement of
cash flows was not adjusted. ASU 2016-09 also allows an entity to elect as an accounting policy either to estimate the total number
of awards for which the requisite service period will not be rendered or to account for forfeitures for service-based awards as
they occur. The Company has elected to account for forfeitures as they occur.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments”. This ASU will require the measurement of all expected credit losses for financial assets,
including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and
supportable forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods
within those fiscal years. The Company believes its adoption will not significantly impact the Company’s results of operations
and financial position.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments,” which eliminates the diversity in practice related to eight cash flow classification issues. The Company
adopted this ASU in the first quarter of 2017 on a prospective basis. Adoption affected the classification of dividends received
from equity method investees on the statement of cash flows, but did not have any other impact.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment”. The new guidance eliminates Step 2 of the goodwill impairment testing which requires the fair value of individual
assets and liabilities of a reporting unit to be determined when measuring goodwill impairment. The new guidance may result in
different amounts of impairment that could be recognized compared to existing guidance. In addition, failing step 1 of the impairment
test, where the carrying value of a reporting unit is compared to its fair value, may not result in impairment under existing
guidance. However, under the revised guidance, failing step 1 will always result in a goodwill impairment. ASU 2017-04 is to be
applied prospectively for goodwill impairment testing performed in years beginning after December 15, 2019. The Company does not
believe the adoption will significantly impact the Company’s results of operations or financial position.
In
May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.”
The new guidance describes the types of changes to the terms or conditions of share-based payment awards to which an entity would
be required to apply modification accounting. The guidance is effective for annual reporting periods beginning after December
15, 2017, including interim periods within those fiscal years. The Company believes its adoption will not significantly impact
the Company’s results of operations and financial position.
4.
(Loss) Earnings Per Common Share
Basic
(loss) earnings per share has been computed on the basis of the weighted average number of shares of common stock outstanding.
Diluted (loss) earnings 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 basic and diluted (loss) earnings per share:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
14,310
|
|
|
|
14,249
|
|
|
|
14,279
|
|
|
|
14,225
|
|
Dilutive effect of stock options and certain non-vested shares of restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
86
|
|
Diluted weighted average shares outstanding
|
|
|
14,310
|
|
|
|
14,249
|
|
|
|
14,279
|
|
|
|
14,311
|
|
For
each of the three and nine month periods ended September 30, 2017, options to purchase 470,000 shares of common stock were outstanding
but were not included in the computation of diluted loss per share as the option’s exercise price was greater than the average
market price of the common shares for each period. An additional 115,754 and 154,161 common stock equivalents related to options
and restricted stock awards were excluded for the three and nine months ended September 30, 2017, respectively, as their inclusion
would be anti-dilutive, thereby decreasing the net losses per share. For the three and nine month periods ended September 30,
2016, 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. An additional 65,937 and 85,618 common stock equivalents related to options and
restricted stock awards were excluded from the calculation of diluted net loss per share for the three and nine months ended September
30, 2016, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.
5.
Equity Method Investments
The
following summarizes our equity method investments:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(dollars in thousands)
|
|
Entity
|
|
Carrying Amount
|
|
|
Economic Interest
|
|
|
Carrying Amount
|
|
|
Economic Interest
|
|
RELM Wireless Corporation
|
|
$
|
4,448
|
|
|
|
8.3
|
%
|
|
$
|
4,382
|
|
|
|
8.3
|
%
|
Itasca Capital, Ltd.
|
|
|
5,097
|
|
|
|
32.3
|
%
|
|
|
3,368
|
|
|
|
32.3
|
%
|
1347 Property Insurance Holdings, Inc.
|
|
|
8,099
|
|
|
|
17.4
|
%
|
|
|
5,348
|
|
|
|
12.1
|
%
|
Total
|
|
$
|
17,644
|
|
|
|
|
|
|
$
|
13,098
|
|
|
|
|
|
The
following summarizes the (loss) income of equity method investees reflected in the Statement of Operations (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Entity
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
RELM Wireless Corporation
|
|
$
|
109
|
|
|
$
|
114
|
|
|
$
|
12
|
|
|
$
|
155
|
|
Itasca Capital, Ltd.
|
|
|
(1,023
|
)
|
|
|
(85
|
)
|
|
|
1,289
|
|
|
|
(85
|
)
|
1347 Property Insurance Holdings, Inc.
|
|
|
161
|
|
|
|
—
|
|
|
|
215
|
|
|
|
—
|
|
Total
|
|
$
|
(753
|
)
|
|
$
|
29
|
|
|
$
|
1,516
|
|
|
$
|
70
|
|
RELM
Wireless Corporation (“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 chairman
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. The Company received
dividends of $0.2 million and $0 for the nine month periods ended September 30, 2017 and 2016, respectively. Based on quoted market
prices, the market value of the Company’s ownership in RELM was $4.1 million at September 30, 2017.
Itasca
Capital, Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative
strategic investments. The Company’s Chief Executive Officer is 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. The Company did not receive dividends from Itasca during the nine month periods ended September
30, 2017 or 2016. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $3.9 million
at September 30, 2017.
As
of December 31, 2016, the Company owned 12.1% of 1347 Property Insurance Holdings, Inc. (“PIH”) and purchased shares
increasing its ownership to 17.4% during the nine months ended September 30, 2017 for an additional $2.5 million. PIH is a publicly
traded company that provides property and casualty insurance in the States of Louisiana, Texas and Florida. The Company’s
Chief Executive Officer was named to the board of directors of PIH in December 2016. This board seat and the Chief Executive Officer’s
control of other entities that own shares of PIH, combined with the Company’s 17.4% ownership of PIH, provide the Company
with significant influence over PIH, but not controlling interest. The Company did not receive dividends from PIH during the nine
month periods ended September 30, 2017 or 2016. Based on quoted market prices, the market value of the Company’s ownership
in PIH was $8.0 million at September 30, 2017.
As
of September 30, 2017, our retained earnings included undistributed earnings from our equity method investees of $1.2 million.
The
summarized financial information presented below reflects the financial information of the Company’s significant equity
method investee, Itasca, for the nine months ended June 30, 2017, consistent with the Company’s recognition of the results
of its equity method investments on a one-quarter lag. The summarized financial information is presented only for the periods
when the Company owned its investment.
For the nine months ended June 30,
|
|
2017
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
—
|
|
Gross profit
|
|
$
|
—
|
|
Operating loss from continuing operations
|
|
$
|
(172
|
)
|
Net income
|
|
$
|
4,253
|
(1)
|
(1)
Net income primarily related to unrealized gains on investments.
6.
Intangible Assets
Intangible
assets consisted of the following at September 30, 2017:
|
|
Useful life
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Intangible assets not yet subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in development
|
|
|
|
|
|
$
|
1,633
|
|
|
$
|
—
|
|
|
$
|
1,633
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in service
|
|
|
5
|
|
|
|
2,621
|
|
|
|
(430
|
)
|
|
|
2,191
|
|
Product formulation
|
|
|
10
|
|
|
|
489
|
|
|
|
(340
|
)
|
|
|
149
|
|
Total
|
|
|
|
|
|
$
|
4,743
|
|
|
$
|
(770
|
)
|
|
$
|
3,973
|
|
Intangible
assets consisted of the following at December 31, 2016:
|
|
Useful life
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Intangible assets not yet subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in development
|
|
|
|
|
|
$
|
508
|
|
|
$
|
—
|
|
|
$
|
508
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in service
|
|
|
5
|
|
|
|
1,764
|
|
|
|
(93
|
)
|
|
|
1,671
|
|
Product formulation
|
|
|
10
|
|
|
|
454
|
|
|
|
(276
|
)
|
|
|
178
|
|
Total
|
|
|
|
|
|
$
|
2,726
|
|
|
$
|
(369
|
)
|
|
$
|
2,357
|
|
Amortization
expense relating to intangible assets was $0.4 million and insignificant, respectively, for the nine months ended September 30,
2017 and 2016.
The
following table shows the Company’s estimated future amortization expense related to intangible assets currently subject
to amortization for the next five years.
|
|
Amount
|
|
|
|
(in thousands)
|
|
Remainder 2017
|
|
$
|
150
|
|
2018
|
|
|
589
|
|
2019
|
|
|
577
|
|
2020
|
|
|
568
|
|
2021
|
|
|
431
|
|
Thereafter
|
|
|
25
|
|
Total
|
|
$
|
2,340
|
|
7.
Goodwill
The
following represents a summary of changes in the Company’s carrying amount of goodwill for the nine months ended September
30, 2017 (in thousands):
Balance as of December 31, 2016
|
|
$
|
889
|
|
Foreign currency translation
|
|
|
68
|
|
Balance as of September 30, 2017
|
|
$
|
957
|
|
8.
Warranty Reserves
In
most instances, the Company’s digital projection products are covered by the manufacturing firm’s original warranty;
however, for certain customers the Company may grant warranties in excess of the manufacturer’s warranty for digital products.
In addition, the Company provides warranty coverage on screens it manufactures. The Company accrues for these costs at the time
of sale. The following table summarizes warranty activity for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Warranty accrual at beginning of period
|
|
$
|
457
|
|
|
$
|
380
|
|
|
$
|
645
|
|
|
$
|
310
|
|
Charged to expense
|
|
|
162
|
|
|
|
430
|
|
|
|
337
|
|
|
|
778
|
|
Claims paid, net of recoveries
|
|
|
(38
|
)
|
|
|
(194
|
)
|
|
|
(410
|
)
|
|
|
(475
|
)
|
Foreign currency adjustment
|
|
|
3
|
|
|
|
1
|
|
|
|
12
|
|
|
|
4
|
|
Warranty accrual at end of period
|
|
$
|
584
|
|
|
$
|
617
|
|
|
$
|
584
|
|
|
$
|
617
|
|
9.
Debt
The
Company’s long-term debt consists of the following (in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
$2 million term loan
|
|
$
|
1,983
|
|
|
$
|
—
|
|
Less: current portion
|
|
|
(64
|
)
|
|
|
—
|
|
Less: unamortized debt issuance costs
|
|
|
(35
|
)
|
|
|
—
|
|
Long-term debt
|
|
$
|
1,884
|
|
|
$
|
—
|
|
On
April 27, 2017, the Company entered into a debt agreement with a bank consisting of 1) a $2 million five-year term loan secured
by a first lien deed of trust on the Company’s Alpharetta, GA facility, bearing interest at a fixed rate of 4.5% and payable
in equal monthly installments of principal and interest calculated based on a 20-year amortization schedule with a final balloon
payment of approximately $1.7 million due on May 10, 2022 and 2) a line of credit of up to $1 million secured by a second lien
deed of trust on the Company’s Alpharetta, GA facility, bearing interest at the Prime Rate published in the Wall Street
Journal plus 0.25% and with a term ending May 10, 2018. The debt agreement requires the Company to maintain a ratio of total liabilities
to tangible net worth not in excess of 3:1 and maintain minimum liquidity of $2 million. The Company was in compliance with its
debt covenants as of September 30, 2017. The Company had outstanding borrowings on the line of credit as of September 30, 2017
of $0.5 million, which is classified as short-term debt on the condensed consolidated balance sheet. The Company’s Chairman
and Chief Executive Officer is also a member of the bank’s board of directors.
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement with a bank consisting
of a revolving line of credit for up to CDN$3.5 million (approximately USD$2.8 million) subject to a borrowing base requirement,
a 20-year installment loan for up to CDN$6.0 million (approximately USD$4.8 million) and a 5-year installment loan for up to CDN$500,000
(approximately USD$400,000). Amounts outstanding under the line of credit are payable on demand and will bear interest at the
prime rate established by the lender. Amounts outstanding under the installment loans will bear interest at the 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 (approximately USD$6.4 million). There were no borrowings
outstanding at September 30, 2017 on any of the Strong/MDI credit facilities, as Strong/MDI had not yet drawn on the facilities.
Strong/MDI was in compliance with its debt covenants as of September 30, 2017.
Scheduled
repayments are as follows for the Company’s long-term debt outstanding as of September 30, 2017 (in thousands):
Remainder of 2017
|
|
$
|
16
|
|
2018
|
|
|
65
|
|
2019
|
|
|
68
|
|
2020
|
|
|
70
|
|
2021
|
|
|
74
|
|
Thereafter
|
|
|
1,690
|
|
Total
|
|
$
|
1,983
|
|
10.
Income Taxes
In
assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected
future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction
in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the
available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that
a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of September
30, 2017 and December 31, 2016.
The
Company is subject to examination for Federal purposes for fiscal years 2014, 2015 and 2016. In most cases, the Company is subject
to examinations by state or local jurisdictions based on the particular jurisdiction’s statute of limitations.
11.
Stock Compensation
The
Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on their estimated
grant date fair values. Stock-based compensation expense included in selling and administrative expenses approximated $0.2 million
and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.5 million and $0.4 million, respectively,
for the nine months ended September 30, 2017 and 2016, respectively.
Equity
Compensation Plans
The
Company’s 2010 Long-Term Incentive Plan (“2010 Plan”) provided 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 varied with each grant and could be subject to vesting upon a “change in control”
of the Company.
The
Ballantyne Strong, Inc. 2014 Non-Employee Directors’ Restricted Stock Plan (the “2014 Non-Employee Plan”) provided
for the award of restricted shares to outside directors. Shares issued under the 2014 Non-Employee Plan vested the day preceding
the Company’s Annual Meeting of Stockholders in the year following issuance. The 2010 Plan and the 2014 Non-Employee Plan
were replaced during the second quarter of 2017 by the 2017 Omnibus Equity Compensation Plan (“2017 Plan”), and therefore,
no additional awards will be granted under the 2010 Plan or the 2014 Non-Employee Plan.
The
2017 Plan was approved by the Company’s shareholders at the annual meeting on June 15, 2017, and provides the Compensation
Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights, restricted shares,
restricted stock units, performance shares, performance units and other share-based awards and cash-based awards. Vesting terms
vary with each grant and may be subject to vesting upon a “change in control” of the Company. The total number of
shares reserved for issuance under the 2017 Plan is 1,371,189 shares.
Options
The
Company granted a total of 435,000 and 100,000 options during the nine month periods ended September 30, 2017 and 2016, respectively.
Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the
date of grant.
The
weighted average grant date fair value of stock options granted during the nine month periods ended September 30, 2017 and 2016
was $2.42 and $1.42, respectively. The fair value of each stock option granted was estimated on the date of grant using a Black-Scholes
valuation model with the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
Expected dividend yield at date of grant
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
1.99
|
%
|
|
|
1.35
|
%
|
Expected stock price volatility
|
|
|
34.85
|
%
|
|
|
32.26
|
%
|
Expected life of options (in years)
|
|
|
6.0
|
|
|
|
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. During 2017,
the expected volatility was based on historical daily price changes of the Company’s stock for six years prior to the date
of grant. During 2016, the Company used a one year period to calculate volatility, but updated this assumption in the current
year to align the expected volatility with the expected life of the options. The expected life of options is the average number
of years the Company estimates that options will be outstanding.
The
following table summarizes stock option activity for the nine months ended September 30, 2017:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Remaining Contractual Term
|
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Outstanding at December 31, 2016
|
|
|
545,300
|
|
|
$
|
4.78
|
|
|
|
9.68
|
|
|
$
|
1,757
|
|
Granted
|
|
|
435,000
|
|
|
|
6.53
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15,000
|
)
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(33,000
|
)
|
|
|
6.09
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,000
|
)
|
|
|
4.33
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
930,300
|
|
|
$
|
5.63
|
|
|
|
8.99
|
|
|
$
|
759
|
|
Exercisable at September 30, 2017
|
|
|
145,300
|
|
|
$
|
4.31
|
|
|
|
8.08
|
|
|
$
|
260
|
|
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, 2017.
As
of September 30, 2017, 785,000 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards
was approximately $1.5 million, which is expected to be recognized over a weighted average period of 4.1 years.
Restricted
Stock
The
Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the
date of grant. As of September 30, 2017, the total unrecognized compensation cost related to non-vested restricted stock awards
was approximately $0.6 million, which is expected to be recognized over a weighted average period of 1.9 years.
The
following table summarizes restricted share activity for the nine months ended September 30, 2017:
|
|
Number of Restricted Stock Shares
|
|
|
Weighted Average Grant Price Fair Value
|
|
Non-vested at December 31, 2016
|
|
|
58,295
|
|
|
$
|
4.77
|
|
Granted
|
|
|
85,000
|
|
|
|
6.50
|
|
Shares vested
|
|
|
(43,295
|
)
|
|
|
4.92
|
|
Shares forfeited
|
|
|
-
|
|
|
|
4.21
|
|
Non-vested at September 30, 2017
|
|
|
100,000
|
|
|
$
|
6.17
|
|
The
following table summarizes restricted stock unit activity for the nine months ended September 30, 2017:
|
|
Number of Restricted Stock Units
|
|
|
Weighted Average Grant Price Fair Value
|
|
Non-vested at December 31, 2016
|
|
|
13,750
|
|
|
$
|
4.24
|
|
Granted
|
|
|
30,835
|
|
|
|
6.81
|
|
Shares vested
|
|
|
(6,875
|
)
|
|
|
4.24
|
|
Shares forfeited
|
|
|
(1,875
|
)
|
|
|
4.21
|
|
Non-vested at September 30, 2017
|
|
|
35,835
|
|
|
$
|
6.45
|
|
12.
Commitments, Contingencies and Concentrations
Litigation
In
the ordinary course of business operations, we are involved, from time to time, in certain legal disputes. No such disputes, individually
or in the aggregate, are expected to have a material effect on our business or financial condition.
Concentrations
The
Company’s top ten customers accounted for approximately 53.7% and 50.1% of total consolidated net revenues for the three
and nine months ended September 30, 2017, respectively. Trade accounts receivable from these customers represented approximately
41.2% of net consolidated receivables at September 30, 2017. 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 2022. These leases generally contain renewal options and the Company expects to renew or replace certain of these leases
in the ordinary course of business.
The
Company’s future minimum lease payments for leases at September 30, 2017 are as follows:
|
|
Capital Leases
|
|
|
Operating Leases
|
|
|
|
(in thousands)
|
|
Remainder 2017
|
|
$
|
66
|
|
|
$
|
301
|
|
2018
|
|
|
251
|
|
|
|
1,759
|
|
2019
|
|
|
116
|
|
|
|
1,735
|
|
2020
|
|
|
-
|
|
|
|
1,507
|
|
2021
|
|
|
-
|
|
|
|
1,378
|
|
Thereafter
|
|
|
-
|
|
|
|
1,066
|
|
Total minimum lease payments
|
|
$
|
433
|
|
|
$
|
7,746
|
|
Less: Amount representing interest
|
|
|
(19
|
)
|
|
|
|
|
Present value of minimum lease payments
|
|
|
414
|
|
|
|
|
|
Less: Current maturities
|
|
|
(240
|
)
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
$
|
174
|
|
|
|
|
|
13.
Business Segment Information
As
of September 30, 2017, 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 intersegment sales at cost and
has eliminated all significant intersegment 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)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema
|
|
$
|
8,681
|
|
|
$
|
11,070
|
|
|
$
|
27,606
|
|
|
$
|
32,085
|
|
Digital Media
|
|
|
11,087
|
|
|
|
7,911
|
|
|
|
29,518
|
|
|
|
25,411
|
|
Other
|
|
|
13
|
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
Total segment net revenue
|
|
|
19,781
|
|
|
|
18,981
|
|
|
|
57,146
|
|
|
|
57,496
|
|
Eliminations
|
|
|
(222
|
)
|
|
|
(313
|
)
|
|
|
(261
|
)
|
|
|
(1,156
|
)
|
Total net revenue
|
|
$
|
19,559
|
|
|
$
|
18,668
|
|
|
$
|
56,885
|
|
|
$
|
56,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema
|
|
$
|
2,438
|
|
|
$
|
2,205
|
|
|
$
|
6,704
|
|
|
$
|
8,318
|
|
Digital Media
|
|
|
505
|
|
|
|
(61
|
)
|
|
|
(205
|
)
|
|
|
884
|
|
Other
|
|
|
(98
|
)
|
|
|
—
|
|
|
|
(289
|
)
|
|
|
—
|
|
Total segment operating income
|
|
|
2,845
|
|
|
|
2,144
|
|
|
|
6,210
|
|
|
|
9,202
|
|
Unallocated general and administrative expenses
|
|
|
(2,297
|
)
|
|
|
(1,887
|
)
|
|
|
(7,090
|
)
|
|
|
(5,869
|
)
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(51
|
)
|
|
|
18
|
|
|
|
(66
|
)
|
|
|
18
|
|
Cinema - foreign currency transaction (loss) gain
|
|
|
(216
|
)
|
|
|
82
|
|
|
|
(438
|
)
|
|
|
(958
|
)
|
Digital Media - foreign currency transaction (loss) gain
|
|
|
(90
|
)
|
|
|
(59
|
)
|
|
|
28
|
|
|
|
(24
|
)
|
Cinema - excess distribution from joint venture
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
502
|
|
Cinema - other
|
|
|
(35
|
)
|
|
|
(5
|
)
|
|
|
(24
|
)
|
|
|
45
|
|
Digital Media - other
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
Change in value of marketable securities - Corporate asset
|
|
|
—
|
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(400
|
)
|
Total other expense
|
|
|
(392
|
)
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
(826
|
)
|
Earnings (loss) before income taxes and equity method investment (loss) income
|
|
$
|
156
|
|
|
$
|
257
|
|
|
$
|
(1,380
|
)
|
|
$
|
2,507
|
|
(In thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Identifiable assets, excluding assets held for sale
|
|
|
|
|
|
|
|
|
Cinema
|
|
$
|
26,117
|
|
|
$
|
29,881
|
|
Digital Media
|
|
|
20,535
|
|
|
|
19,272
|
|
Corporate Assets
|
|
|
17,746
|
|
|
|
13,098
|
|
Total
|
|
$
|
64,398
|
|
|
$
|
62,251
|
|
Summary
by Geographical Area
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
15,349
|
|
|
$
|
14,643
|
|
|
$
|
44,648
|
|
|
$
|
44,184
|
|
China
|
|
|
1,646
|
|
|
|
1,518
|
|
|
|
4,543
|
|
|
|
4,316
|
|
Latin America
|
|
|
461
|
|
|
|
377
|
|
|
|
1,263
|
|
|
|
1,352
|
|
Canada
|
|
|
1,365
|
|
|
|
1,399
|
|
|
|
4,372
|
|
|
|
3,676
|
|
Mexico
|
|
|
425
|
|
|
|
472
|
|
|
|
1,164
|
|
|
|
1,816
|
|
Europe
|
|
|
250
|
|
|
|
196
|
|
|
|
427
|
|
|
|
788
|
|
Asia (excluding China)
|
|
|
-
|
|
|
|
45
|
|
|
|
216
|
|
|
|
70
|
|
Other
|
|
|
63
|
|
|
|
18
|
|
|
|
252
|
|
|
|
138
|
|
Total
|
|
$
|
19,559
|
|
|
$
|
18,668
|
|
|
$
|
56,885
|
|
|
$
|
56,340
|
|
(In thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Identifiable assets, excluding assets held for sale
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
42,815
|
|
|
$
|
40,255
|
|
Canada
|
|
|
21,583
|
|
|
|
21,996
|
|
Total
|
|
$
|
64,398
|
|
|
$
|
62,251
|
|
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.