Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
1.
Nature of Operations
Ballantyne
Strong, Inc. (“Ballantyne” or the “Company”), a Delaware corporation, is a holding company with diverse
business activities focused on serving the cinema, retail, financial, advertising and government markets. The Company, and its
wholly owned subsidiaries Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc. (“Strong/MDI”), Convergent
Media Systems Corporation (“Convergent”) and Strong Digital Media, LLC design, integrate and install technology solutions
for a broad range of applications; develop and deliver out-of-home messaging, advertising and communications; manufacture projection
screens; and provide managed services including monitoring of networked equipment to our customers.
2.
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, 2018.
The
condensed consolidated balance sheet as of December 31, 2018 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 consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations
and financial position in future periods.
Restricted
Cash
Restricted
cash represents amounts held in a collateral account for the Company’s corporate travel and purchasing credit card program.
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for doubtful
accounts based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis
that projects the ultimate collectability of the account. As such, these factors may change over time causing the allowance level
and bad debt expense to be adjusted accordingly.
Equity
Method Investments
We
apply the equity method of accounting to investments when we have significant influence, but not controlling interest, in the
investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as
ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany
transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under
the line item captioned “equity method investment income (loss)” in our condensed consolidated statements of operations.
The carrying value of our equity method investments is reported in “equity method investments” in the condensed consolidated
balance sheets. The Company’s equity method investments are reported at cost and adjusted each period for the Company’s
share of the investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income
or loss is recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from
equity method investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. The Company
assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment
may not be recoverable. Management reviewed the underlying net assets of the equity investments during the three month period
ended March 31, 2019 and determined that the Company’s proportionate economic interest in the investments indicate that
the investments were not other than temporarily impaired. Note 6 contains additional information on our equity method
investments.
Fair
Value of Financial Instruments
Assets
and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the
valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants
would use in pricing the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement. Financial assets and liabilities carried
at fair value are classified and disclosed in one of the following three categories:
|
●
|
Level
1 – inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities
|
|
●
|
Level
2 – inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities,
either directly or indirectly
|
|
●
|
Level
3 – inputs to the valuation techniques are unobservable for the assets or liabilities
|
The
following tables present the Company’s financial assets measured at fair value based upon the level within the fair value
hierarchy in which the fair value measurements are classified, as of March 31, 2019 and December 31, 2018.
Fair
values measured on a recurring basis at March 31, 2019 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
4,989
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,989
|
|
Restricted cash
|
|
|
350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
350
|
|
Notes receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
3,455
|
|
|
|
3,455
|
|
Total
|
|
$
|
5,339
|
|
|
$
|
-
|
|
|
$
|
3,455
|
|
|
$
|
8,794
|
|
Fair
values measured on a recurring basis at December 31, 2018 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
6,698
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,698
|
|
Restricted cash
|
|
|
350
|
|
|
|
-
|
|
|
|
|
|
|
|
350
|
|
Notes receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
3,965
|
|
|
|
3,965
|
|
Total
|
|
$
|
7,048
|
|
|
$
|
-
|
|
|
$
|
3,965
|
|
|
$
|
11,013
|
|
The
following table reconciles the beginning and ending balance of the Company’s notes receivable at fair value (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Notes receivable balance, beginning of period
|
|
$
|
3,965
|
|
|
$
|
2,815
|
|
Fair value adjustment
|
|
|
(510
|
)
|
|
|
(42
|
)
|
Notes receivable balance, end of period
|
|
$
|
3,455
|
|
|
$
|
2,773
|
|
Quantitative
information about the Company’s level 3 fair value measurements at March 31, 2019 is set forth below (in thousands):
|
|
Fair value at
March
31, 2019
|
|
|
Valuation technique
|
|
Unobservable input
|
|
Value
|
|
Notes receivable
|
|
$
|
3,455
|
|
|
Discounted cash flow
|
|
Default percentage
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
18
|
%
|
During
2011, the Company entered into certain unsecured notes receivable arrangements with CDF2 Holdings, LLC pertaining to the sale
and installation of digital projection equipment. The notes receivable accrue interest at a rate of 15% per annum. Interest not
paid in any particular year is added to the principal and also accrues interest at 15%. The notes receivable are recorded at estimated
fair value. In order to estimate the fair value, the Company reviews the financial position and estimated cash flows of the debtor
of the notes receivable on a quarterly basis. The Company recorded decreases to the fair value of the notes receivable of approximately
$0.5 million and $42 thousand, respectively, recorded in other expense in the Company’s condensed consolidated statement
of operations during the three months ended March 31, 2019 and 2018, respectively.
The
significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are discount rate and
percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower
(higher) fair value measurement.
The
Company’s short-term and long-term debt is recorded at historical cost. As of March 31, 2019, the Company’s long-term
debt, including current maturities, had a carrying value of $4.6 million. Based on discounted cash flows using current quoted
interest rates (Level 2 of the fair value hierarchy), the estimated fair value at March 31, 2019 was $4.1 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 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 months
ended March 31, 2019 or 2018.
Recently
Adopted Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842),”
which was further clarified by ASU 2018-11, “Leases – Targeted Improvements,” issued in July 2018. ASU 2016-02
requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term
greater than twelve months, on its balance sheet. This ASU is effective in fiscal years beginning after December 15, 2018 and
initially required a modified retrospective transition method under which entities would initially apply Topic 842 at the beginning
of the earliest period presented in the financial statements. ASU 2018-11 added an additional optional transition method allowing
entities to apply Topic 842 as of the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company adopted Topic 842 using the optional transition method from ASU 2018-11 as of
January 1, 2019. Upon adoption, the Company recorded a balance sheet gross-up of approximately $4.7 million to record operating
lease liabilities and related right-of-use assets. In addition, the sale-leaseback of the Company’s Alpharetta, Georgia
office facility in June 2018, which did not qualify for sale-leaseback accounting under the previous lease accounting standard,
qualified for sale-leaseback accounting under Topic 842, as Topic 842 eliminated the concept of continuing involvement by the
seller-lessee precluding sale-leaseback accounting. Upon adoption, the Company recorded a cumulative effect adjustment increasing
retained earnings by approximately $2.8 million, which represents the gain on the sale of the facility. The Company also derecognized
approximately $4.0 million of net land and building assets and approximately $6.8 million of debt associated with the previous
accounting as a failed sale-leaseback, and recorded approximately $5.0 million of operating lease right-of-use assets and liabilities
for the leaseback under Topic 842. See Note 11 for more information about the Company’s leases.
In
August 2018, the Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10532,
“Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative,
overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’
equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity
presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation
of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be
filed. The final rule is effective for all filings made on and after November 5, 2018. Given the effective date and proximity
to most filers’ quarterly reports, the SEC did not object to filers deferring the presentation of changes in stockholders’
equity in their quarterly reports on Forms 10-Q until the quarter beginning after November 5, 2018. The Company elected to provide
the required disclosure in a separate statement of stockholders’ equity beginning with this Form 10-Q.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”
The new guidance eliminates Step 2 of the goodwill impairment testing which requires the fair value of individual assets and liabilities
of a reporting unit to be determined when measuring goodwill impairment. The new guidance may result in different amounts of impairment
that could be recognized compared to existing guidance. In addition, failing step 1 of the impairment test may not result in impairment
under existing guidance. However, under the revised guidance, failing step 1 will always result in a goodwill impairment. ASU
2017-04 is to be applied prospectively for goodwill impairment testing performed in years beginning after December 15, 2019 with
early adoption permitted. The Company adopted ASU 2017-04 in the first quarter of 2019. Adoption of ASU 2017-04 did not significantly impact the Company’s results of operations or financial position.
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 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.
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
|
●
|
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 when the uncertainty associated with the variable consideration
is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client
and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to
the overall arrangement.
As
discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the
terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring
goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after
the time of the sale. Observable prices are used to determine the standalone selling price of separate performance obligations,
or a cost plus margin approach is used when observable prices are not available. Sales, value-added and other taxes collected
concurrently with revenue producing activities are excluded from revenue.
The
Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced
to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract
consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing
the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the
related performance obligation.
Deferred
contract acquisition costs are included in other assets. 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 March
31, 2019 or December 31, 2018.
The
following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2019 (in thousands):
|
|
Strong Cinema
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
Screen system sales
|
|
$
|
2,819
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,819
|
|
Digital equipment sales
|
|
|
1,484
|
|
|
|
628
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
2,109
|
|
Field maintenance and monitoring services
|
|
|
2,218
|
|
|
|
2,773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(252
|
)
|
|
|
4,739
|
|
Installation services
|
|
|
670
|
|
|
|
2,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,788
|
|
Extended warranty sales
|
|
|
234
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
Advertising
|
|
|
-
|
|
|
|
-
|
|
|
|
1,080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,080
|
|
Other
|
|
|
428
|
|
|
|
19
|
|
|
|
13
|
|
|
|
123
|
|
|
|
(46
|
)
|
|
|
537
|
|
Total
|
|
$
|
7,853
|
|
|
$
|
5,538
|
|
|
$
|
1,093
|
|
|
$
|
123
|
|
|
$
|
(301
|
)
|
|
$
|
14,306
|
|
The
following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2018 (in thousands):
|
|
Strong Cinema
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
Screen system sales
|
|
$
|
4,018
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,018
|
|
Digital equipment sales
|
|
|
3,158
|
|
|
|
832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(216
|
)
|
|
|
3,774
|
|
Field maintenance and monitoring services
|
|
|
2,944
|
|
|
|
2,376
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(139
|
)
|
|
|
5,181
|
|
Installation services
|
|
|
328
|
|
|
|
1,360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,688
|
|
Extended warranty sales
|
|
|
342
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
342
|
|
Advertising
|
|
|
-
|
|
|
|
-
|
|
|
|
62
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62
|
|
Other
|
|
|
660
|
|
|
|
39
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
763
|
|
Total
|
|
$
|
11,450
|
|
|
$
|
4,607
|
|
|
$
|
62
|
|
|
$
|
64
|
|
|
$
|
(355
|
)
|
|
$
|
15,828
|
|
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 Cinema and Convergent customers. In
the Strong Cinema 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 over the term of the agreement in
proportion to the costs incurred in fulfilling performance obligations under the contract.
The
Company also performs time and materials-based maintenance and repair work for customers in the Strong Cinema and Convergent segments.
Revenue related to time and materials-based maintenance and repair work is recognized at a point in time when the performance
obligation has been fully satisfied.
Installation
services
The
Company performs installation services for both its Strong Cinema and Convergent customers and recognizes revenue upon completion
of the installations.
Extended
warranty sales
The
Company sells extended warranties to its Strong Cinema customers. When the Company is the primary obligor, revenue is recognized
on a gross basis over the term of the extended warranty in proportion to the costs incurred in fulfilling performance obligations
under the extended warranty. In third party extended warranty sales, the Company is not the primary obligor, and revenue is recognized
on a net basis at the time of the sale.
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 table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the
three months ended March 31, 2019 (in thousands):
|
|
Strong Cinema
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
Point in time
|
|
$
|
6,297
|
|
|
$
|
2,995
|
|
|
$
|
13
|
|
|
$
|
-
|
|
|
$
|
(255
|
)
|
|
$
|
9,050
|
|
Over time
|
|
|
1,556
|
|
|
|
2,543
|
|
|
|
1,080
|
|
|
|
123
|
|
|
|
(46
|
)
|
|
|
5,256
|
|
Total
|
|
$
|
7,853
|
|
|
$
|
5,538
|
|
|
$
|
1,093
|
|
|
$
|
123
|
|
|
$
|
(301
|
)
|
|
$
|
14,306
|
|
The
following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the
three months ended March 31, 2018 (in thousands):
|
|
Strong Cinema
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
Point in time
|
|
$
|
9,599
|
|
|
$
|
2,467
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(355
|
)
|
|
$
|
11,711
|
|
Over time
|
|
|
1,851
|
|
|
|
2,140
|
|
|
|
62
|
|
|
|
64
|
|
|
|
-
|
|
|
|
4,117
|
|
Total
|
|
$
|
11,450
|
|
|
$
|
4,607
|
|
|
$
|
62
|
|
|
$
|
64
|
|
|
$
|
(355
|
)
|
|
$
|
15,828
|
|
At March 31, 2019, 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 $0.8 million. The Company expects to recognize $0.7 million
of unearned revenue amounts throughout the rest of 2019 and immaterial amounts each year from 2020 through 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 both periods presented, there were no differences between average shares
used to compute basic and diluted loss per share for either of the three month periods ended March 31, 2019 and 2018. The following
table summarizes the weighted average shares used to compute basic and diluted loss per share:
|
|
Three Months Ended March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
14,438
|
|
|
|
14,341
|
|
Dilutive effect of stock options and certain non-vested
restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average shares outstanding
|
|
|
14,438
|
|
|
|
14,341
|
|
Options
to purchase 833,500 and 490,000 shares of common stock were outstanding as of March 31, 2019 and 2018, respectively, 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 20,994 and 129,525 common stock equivalents related to options and restricted
stock awards were excluded for the three months ended March 31, 2019 and 2018, respectively, as their inclusion would be anti-dilutive,
thereby decreasing the net losses per share.
5. Inventories
Inventories consist of the following (in
thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Raw materials and components
|
|
$
|
1,372
|
|
|
$
|
1,422
|
|
Work in process
|
|
|
187
|
|
|
|
-
|
|
Finished goods
|
|
|
2,056
|
|
|
|
2,068
|
|
|
|
$
|
3,615
|
|
|
$
|
3,490
|
|
The inventory balances
are net of reserves of approximately $1.6 million and $1.4 million as of March 31, 2019 and December 31, 2018, respectively.
6
.
Equity Method Investments
The
following summarizes our equity method investments (dollars in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Entity
|
|
Carrying Amount
|
|
|
Economic Interest
|
|
|
Carrying Amount
|
|
|
Economic Interest
|
|
1347 Property Insurance Holdings, Inc.
|
|
$
|
7,791
|
|
|
|
17.3
|
%
|
|
$
|
7,738
|
|
|
|
17.3
|
%
|
Itasca Capital, Ltd.
|
|
|
2,659
|
|
|
|
32.3
|
%
|
|
|
3,429
|
|
|
|
32.3
|
%
|
Total
|
|
$
|
10,450
|
|
|
|
|
|
|
$
|
11,167
|
|
|
|
|
|
The
following summarizes the income (loss) of equity method investees reflected in the condensed consolidated statements of operations
(in thousands):
|
|
Three Months Ended March
31,
|
|
Entity
|
|
2019
|
|
|
2018
|
|
1347 Property Insurance Holdings, Inc.
|
|
$
|
144
|
|
|
$
|
241
|
|
Itasca Capital, Ltd.
|
|
|
(841
|
)
|
|
|
103
|
|
BK Technologies Corporation
|
|
|
-
|
|
|
|
(354
|
)
|
Total
|
|
$
|
(697
|
)
|
|
$
|
(10
|
)
|
1347
Property Insurance Holdings, Inc. (“PIH”) is a publicly traded company that provides property and casualty insurance
in the States of Louisiana, Texas and Florida. The Company’s Chief Executive Officer is chairman of the board of directors
of PIH, and controls entities that, when combined with the Company’s ownership in PIH, own greater than 20% of PIH, providing
the Company with significant influence over PIH, but not controlling interest. The Company did not receive dividends from PIH
during the three month periods ended March 31, 2019 or 2018. On February 25, 2019, PIH announced a definitive agreement pursuant
to which FedNat Holding Company will acquire substantially all of PIH’s homeowners’ insurance operations. PIH
intends to maintain its Nasdaq listing and utilize the proceeds from the transaction to launch a new growth strategy focused
on reinsurance, investment management and new investment opportunities. PIH intends to provide additional details on the rollout
of this strategy prior to the expected closing of the transaction in the second quarter of 2019. Based on quoted market prices,
the market value of the Company’s ownership in PIH was $5.5 million at March 31, 2019.
Itasca
Capital, Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative
strategic investments. The Company’s Chief Executive Officer is chairman of the board of directors of Itasca. This board
seat, combined with the Company’s 32.3% ownership of Itasca, provide the Company with significant influence over Itasca,
but not controlling interest. The Company did not receive dividends from Itasca during the three month periods ended March 31,
2019 or 2018. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $1.8 million at March
31, 2019.
BK
Technologies Corporation (“BKTI”) is a publicly traded holding company that, through its wholly-owned
operating subsidiary BK Technologies, Inc., designs, manufactures and markets two-way land mobile radios, repeaters, base
stations and related components and subsystems. BK Technologies Corporation became the parent company of BK Technologies, Inc.
following the completion of a holding company reorganization on March 28, 2019. On September 9, 2018, the Company entered
into an agreement with Fundamental Global Investors, LLC (“FGI”), a related party, where the Company sold its shares
of common stock of BKTI to FGI. Due to the Company’s significant influence, but not controlling interest, in BKTI, the Company’s
investment in BKTI was accounted for using the equity method. Prior to the sale of the BKTI common stock, the Company received
dividends of $23 thousand during the three month periods ended March 31, 2018.
As
of March 31, 2019, the Company’s retained earnings included accumulated deficit from its equity method investees of $0.4
million.
The
summarized financial information presented below reflects the financial information of the Company’s equity method investees for the three months ended December 31, 2018 and 2017, consistent with the Company’s recognition of
the results of its equity method investments on a one-quarter lag.
|
|
2018
|
|
|
2017
|
|
For the three months ended December 31,
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,979
|
|
|
$
|
20,576
|
|
Operating income (loss)
|
|
$
|
246
|
|
|
$
|
(2,034
|
)
|
Net loss
|
|
$
|
(1,791
|
)
|
|
$
|
(2,557
|
)
|
7
.
Intangible Assets
Intangible
assets consisted of the following at March 31, 2019 (dollars in thousands):
|
|
Useful life
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not yet subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in development
|
|
|
|
|
$
|
159
|
|
|
$
|
-
|
|
|
$
|
159
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in service
|
|
5
|
|
|
|
2,226
|
|
|
|
(711
|
)
|
|
|
1,515
|
|
Product formulation
|
|
10
|
|
|
|
457
|
|
|
|
(383
|
)
|
|
$
|
74
|
|
Total
|
|
|
|
|
$
|
2,842
|
|
|
$
|
(1,094
|
)
|
|
$
|
1,748
|
|
Intangible
assets consisted of the following at December 31, 2018 (dollars in thousands):
|
|
Useful life
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not yet subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in development
|
|
|
|
|
$
|
119
|
|
|
$
|
-
|
|
|
$
|
119
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in service
|
|
5
|
|
|
|
2,188
|
|
|
|
(595
|
)
|
|
|
1,593
|
|
Product formulation
|
|
10
|
|
|
|
447
|
|
|
|
(364
|
)
|
|
|
83
|
|
Total
|
|
|
|
|
$
|
2,754
|
|
|
$
|
(959
|
)
|
|
$
|
1,795
|
|
Amortization
expense relating to intangible assets was $0.2 million for each of the three months ended March 31, 2019 and 2018.
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 2019
|
|
$
|
373
|
|
2020
|
|
|
489
|
|
2021
|
|
|
450
|
|
2022
|
|
|
224
|
|
2023
|
|
|
53
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,589
|
|
8
.
Goodwill
The
following represents a summary of changes in the Company’s carrying amount of goodwill for the three months ended March
31, 2019 (in thousands):
Balance as of December 31, 2018
|
|
$
|
875
|
|
Foreign currency translation
|
|
|
19
|
|
Balance as of March 31, 2019
|
|
$
|
894
|
|
9
.
Warranty Reserves
In
most instances, the Company’s digital projection products are covered by the manufacturing firm’s original warranty;
however, for certain customers the Company may grant warranties in excess of the manufacturer’s warranty. In addition, the
Company provides warranty coverage on screens it manufactures. The Company accrues for these costs at the time of sale. The following
table summarizes warranty activity for the three months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Warranty accrual at beginning of period
|
|
$
|
350
|
|
|
$
|
521
|
|
Charged to expense
|
|
|
67
|
|
|
|
84
|
|
Claims paid, net of recoveries
|
|
|
(33
|
)
|
|
|
(30
|
)
|
Foreign currency adjustment
|
|
|
6
|
|
|
|
(11
|
)
|
Warranty accrual at end of period
|
|
$
|
390
|
|
|
$
|
564
|
|
10
.
Debt
The
Company’s debt consists of the following (in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
Strong/MDI installment loan
|
|
$
|
3,162
|
|
|
$
|
3,152
|
|
Insurance note payable
|
|
|
178
|
|
|
|
-
|
|
Current portion of long-term debt
|
|
|
923
|
|
|
|
1,094
|
|
Total short-term debt
|
|
|
4,263
|
|
|
|
4,246
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Sale-leaseback financing
|
|
|
-
|
|
|
|
6,769
|
|
Equipment term loans
|
|
|
4,587
|
|
|
|
4,398
|
|
Total principal balance of long-term debt
|
|
|
4,587
|
|
|
|
11,167
|
|
Less: current portion
|
|
|
(923
|
)
|
|
|
(1,094
|
)
|
Less: unamortized debt issuance costs
|
|
|
(19
|
)
|
|
|
(20
|
)
|
Total long-term debt
|
|
|
3,645
|
|
|
|
10,053
|
|
Total short-term and long-term debt
|
|
$
|
7,908
|
|
|
$
|
14,299
|
|
Equipment
Term Loans
On May 22, 2018, the Company’s
subsidiary, Convergent, entered into an installment payment agreement with an equipment financing company in order to purchase
media players and related equipment in an aggregate amount of up to approximately $4.4 million. Installment payments under each
contract for purchase of the equipment are due monthly for a period of 60 months. The financing provided in the agreement is secured
by the equipment, and the obligations under the agreement are recorded as long-term debt on the Company’s condensed
consolidated balance sheet. In December 2018, Convergent entered into additional installment payment agreements with other
financing companies in order to purchase additional media players and related equipment. This round of financing totaled approximately
$0.6 million. Installment payments under each contract are due monthly for a period of 60 months. The financing under the agreements
is secured by the equipment. The borrowings under the agreements are recorded as long-term debt on the Company’s consolidated
balance sheet. Collectively, the Company had $4.6 million of outstanding borrowings under equipment term loan agreements
at March 31, 2019, which bear interest at a weighted-average fixed rate of 7.4%.
Strong/MDI
Installment Loan
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement with a bank consisting
of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for
up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. Amounts outstanding under the line of credit are payable
on demand and will bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans
will bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments, including interest, over
their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI
credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s
assets. The credit agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible
stockholders’ equity, less amounts receivable from affiliates and equity method investments) not exceeding 2 to 1, a current
ratio (excluding amounts due from related parties) of at least 1.5 to 1 and minimum “effective equity” of CDN$8.0
million. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$4.2 million of
principal outstanding on the 20-year installment loan as of March 31, 2019, which bears variable interest at 4.45%. Strong/MDI
was in compliance with its debt covenants as of March 31, 2019.
Sale-leaseback
Financing
On
June 29, 2018 the Company and Convergent completed a sale-leaseback of Convergent’s Alpharetta, Georgia office facility.
The transaction did not qualify for sale-leaseback accounting under the previous lease accounting standard and was accounted for
as a financing liability. Upon adoption of ASC 842 during the first quarter of 2019, the Company derecognized approximately $6.8
million of debt associated with the previous accounting as a failed sale-leaseback. See Note 2 for additional details.
Scheduled
repayments are as follows for the Company’s long-term debt outstanding as of March 31, 2019 (in thousands):
Remainder of 2019
|
|
$
|
683
|
|
2020
|
|
|
969
|
|
2021
|
|
|
1,041
|
|
2022
|
|
|
1,120
|
|
2023
|
|
|
762
|
|
Thereafter
|
|
|
12
|
|
Total
|
|
$
|
4,587
|
|
11.
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.
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 as of and for the three months ended March
31, 2019 (dollars in thousands):
Lease cost
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
49
|
|
Interest on lease liabilities
|
|
|
19
|
|
Operating lease cost
|
|
|
687
|
|
Short-term lease cost
|
|
|
6
|
|
Sublease income
|
|
|
(86
|
)
|
Net lease cost
|
|
$
|
675
|
|
Other information
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from finance leases
|
|
$
|
19
|
|
Operating cash flows from operating leases
|
|
$
|
590
|
|
Financing cash flows from finance leases
|
|
$
|
49
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
232
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
644
|
|
Weighted-average remaining lease term - finance leases (years)
|
|
|
4.3
|
|
Weighted-average remaining lease term - operating leases (years)
|
|
|
6.2
|
|
Weighted-average discount rate - finance leases
|
|
|
12.4
|
%
|
Weighted-average discount rate - operating leases
|
|
|
7.8
|
%
|
The
following table presents a maturity analysis of the Company’s finance and operating lease liabilities as of March 31, 2019
(in thousands):
|
|
Finance Leases
|
|
|
Operating Leases
|
|
Remainder 2019
|
|
$
|
216
|
|
|
$
|
1,912
|
|
2020
|
|
|
202
|
|
|
|
2,385
|
|
2021
|
|
|
202
|
|
|
|
2,287
|
|
2022
|
|
|
202
|
|
|
|
1,787
|
|
2023
|
|
|
187
|
|
|
|
656
|
|
Thereafter
|
|
|
6
|
|
|
|
3,117
|
|
Total lease payments
|
|
|
1,015
|
|
|
|
12,144
|
|
Less: Amount representing interest
|
|
|
(244
|
)
|
|
|
(2,269
|
)
|
Present value of lease payments
|
|
|
771
|
|
|
|
9,875
|
|
Less: Current maturities
|
|
|
(181
|
)
|
|
|
(1,833
|
)
|
Lease obligations, net of current portion
|
|
$
|
590
|
|
|
$
|
8,042
|
|
The
Company subleases certain office and warehouse space 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 2019
|
|
$
|
161
|
|
2020
|
|
|
163
|
|
2021
|
|
|
137
|
|
2022
|
|
|
23
|
|
2023
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total sublease payments
|
|
$
|
484
|
|
The
Company leases certain equipment to customers as a component of its Digital Signage as a Service (“DSaaS”) offering.
Under DSaaS, the Company provides support, maintenance and content management services in addition to the use of a media player
to the customer. The Company elected, as a lessor, 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 component if the nonlease components otherwise would be accounted for under Accounting Standards Codification
Topic 606 on revenue from contracts with customers, and both of the following conditions are met: 1) the timing and pattern of
transfer for the lease component and nonlease components associated with that lease component are the same and 2) the lease component,
if accounted for separately, would be classified as an operating lease in accordance with Topic 842. The combined component is
accounted for as a single performance obligation under Topic 606 if the nonlease component or components are the predominant component(s)
of the combined component. Otherwise, if the lease component is the predominant component, the combined component is accounted
for as an operating lease under ASC 842. In the case of the Company’s DSaaS contracts, the nonlease components are predominant;
therefore, revenue from DSaaS contracts is accounted for under Topic 606 and is included in net service revenues in the condensed
consolidated statements of operations.
12.
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 March
31, 2019 and December 31, 2018.
The
Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 2015 through 2017. In most
cases, the Company is subject to possible examinations by state or local jurisdictions based on the particular jurisdiction’s
statute of limitations.
13.
Stock Compensation
The
Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated
grant date fair values. Stock-based compensation expense included in selling and administrative expenses approximated $0.2 million
and $0.3 million for the three month periods ended March 31, 2019 and 2018, respectively.
The
Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s stockholders
and provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation
rights, restricted shares, restricted stock units, performance shares, performance units and other stock-based awards and cash-based
awards. Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company.
The total number of shares authorized for issuance under the 2017 Plan is 1,371,189 shares, with 1,082,656 shares remaining available
for grant at March 31, 2019.
Options
The
Company did not grant options during the three month period ended March 31, 2019 and granted a total of 387,500 options during
the three month period ended March 31, 2018. 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 three month period ended March 31, 2018 was $1.82.
The fair value of each stock option granted was estimated on the date of grant using a Black-Scholes valuation model with the
following weighted average assumptions:
|
|
2018
|
|
Expected dividend yield at date of grant
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
2.49
|
%
|
Expected stock price volatility
|
|
|
35.65
|
%
|
Expected life of options (in years)
|
|
|
6.0
|
|
The
risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility
is based on historical daily price changes of the Company’s stock for six years prior to the date of grant. The expected
life of options is the average number of years the Company estimates that options will be outstanding.
The
following table summarizes stock option activity for the three months ended March 31, 2019:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at December 31, 2018
|
|
|
867,000
|
|
|
$
|
5.06
|
|
|
|
8.3
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(27,500
|
)
|
|
|
5.19
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,000
|
)
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
833,500
|
|
|
$
|
5.06
|
|
|
|
8.0
|
|
|
$
|
-
|
|
Exercisable at March 31, 2019
|
|
|
287,500
|
|
|
$
|
5.12
|
|
|
|
7.5
|
|
|
$
|
-
|
|
The
aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money
options had been exercised and sold on the date indicated.
As
of March 31, 2019, 546,000 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards
was approximately $1.0 million, which is expected to be recognized over a weighted average period of 3.3 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 March 31, 2019, the total unrecognized compensation cost related to non-vested restricted stock awards was
approximately $0.7 million, which is expected to be recognized over a weighted average period of 1.6 years.
The
following table summarizes restricted stock share activity for the three months ended March 31, 2019:
|
|
Number of Restricted
Stock Shares
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-vested at December 31, 2018
|
|
|
46,667
|
|
|
$
|
6.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Shares vested
|
|
|
(23,333
|
)
|
|
|
6.50
|
|
Shares forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested at March 31, 2019
|
|
|
23,334
|
|
|
$
|
6.50
|
|
The
following table summarizes restricted stock unit activity for the three months ended March 31, 2019:
|
|
Number of Restricted
Stock Units
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-vested at December 31, 2018
|
|
|
277,498
|
|
|
$
|
3.33
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Shares vested
|
|
|
(75,833
|
)
|
|
|
3.87
|
|
Shares forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested at March 31, 2019
|
|
|
201,665
|
|
|
$
|
3.12
|
|
14.
Commitments, Contingencies and Concentrations
Litigation
The
Company is involved, from time to time, in certain legal disputes in the ordinary course of business operations. No such disputes,
individually or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.
Concentrations
The Company’s top
ten customers accounted for approximately 52% of total consolidated net revenues for the three months ended March 31, 2019. Trade
accounts receivable from these customers represented approximately 42% of net consolidated receivables at March 31, 2019. The
Company had one customer account for more than 10% of its net revenues during the three months ended March 31, 2019. In addition,
the Company had one customer account for more than 10% of net consolidated receivables at March 31, 2019. While the Company
believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at
will by either party. A significant decrease or interruption in business from the Company’s significant customers could
have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could
also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in
each of the countries in which the Company sells its products.
Financial
instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable.
The Company sells product to a large number of customers in many different geographic regions. To minimize credit risk, the Company
performs ongoing credit evaluations of its customers’ financial condition.
Insurance
Recoveries
During
February 2019, one portion of Strong/MDI’s Quebec, Canada facility sustained damage as a result of inclement weather. In
connection with the damage to the facility, during the three months ended March 31, 2019, the Company incurred costs of (i) $0.1
million to write off the net book value of property and equipment and inventories and (ii) $0.3 million of salaries, debris removal,
temporary facilities and other incremental operating expenses. The Company has property and casualty and business interruption
insurance and has been working with its insurance carrier with regard to the insurance claims for reimbursement of incurred costs
of the affected portion of the facility and compensation for the Company’s business interruption losses.
The
insurance company has informed the Company that is has established preliminary loss reserves for both property and casualty claims
and business interruption claims totaling in excess of CDN$5.0 million. Those claims reserves are estimates based on preliminary
information and are subject to change as the insurance carrier completes its analyses and continues their claims review process
over the next several months. The ultimate amount of insurance proceeds to be received by the Company could be significantly different
than the insurance company’s reserve estimates. During the quarter ended March, 31, 2019, the insurance carrier advanced
$0.2 million of insurance proceeds to the Company. The insurance carrier has also informed the Company that a second advance payment
of CDN$1.5 million is in process, which the Company expects to receive in the second quarter of 2019.
For
the three months ended March 31, 2019, the Company recorded total insurance recoveries of its incurred costs totaling $0.4 million,
of which $0.2 million had been received prior to March 31, 2019 and $0.2 million which was included in Accounts Receivable on
our condensed consolidated balance sheet. Those recoveries offset the operating costs detailed above, and effectively offset the
incremental costs incurred by the Company in the first quarter. Recovery of lost revenue and profit under the business interruption
coverage will be reflected in future periods as contingencies are resolved and the amounts are confirmed and received from the
insurer.
15.
Business Segment Information
The
Company conducts its operations through three primary business segments: Strong Cinema, Convergent and Strong Outdoor. Strong
Cinema is one of the largest manufacturers of premium projection screens and also manufactures customized screen support systems,
distributes other products and provides technical support services to the cinema, amusement park and other markets. Convergent
delivers digital signage solutions and related services to large multi-location organizations in the United States and Canada.
Strong Outdoor provides outdoor advertising and experiential marketing to corporate customers. The Company’s operating segments
were determined based on the manner in which management organizes segments for making operating decisions and assessing performance.
During the fourth quarter 2018, the Company separated its former Digital Media segment into separate Convergent and Strong
Outdoor segments. All prior periods have been recast in our segment reporting to reflect the current segment organization.
Summary
by Business Segments
|
|
Three Months Ended March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Strong Cinema
|
|
$
|
7,853
|
|
|
$
|
11,450
|
|
Convergent
|
|
|
5,538
|
|
|
|
4,607
|
|
Strong Outdoor
|
|
|
1,093
|
|
|
|
62
|
|
Other
|
|
|
123
|
|
|
|
64
|
|
Total segment net revenues
|
|
|
14,607
|
|
|
|
16,183
|
|
Eliminations
|
|
|
(301
|
)
|
|
|
(355
|
)
|
Total net revenues
|
|
|
14,306
|
|
|
|
15,828
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
Strong Cinema
|
|
|
2,415
|
|
|
|
3,385
|
|
Convergent
|
|
|
1,569
|
|
|
|
666
|
|
Strong Outdoor
|
|
|
(1,416
|
)
|
|
|
(1,265
|
)
|
Other
|
|
|
123
|
|
|
|
64
|
|
Total segment gross profit
|
|
|
2,691
|
|
|
|
2,850
|
|
Eliminations
|
|
|
(46
|
)
|
|
|
-
|
|
Total gross profit
|
|
|
2,645
|
|
|
|
2,850
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Strong Cinema
|
|
|
1,159
|
|
|
|
2,325
|
|
Convergent
|
|
|
752
|
|
|
|
(1,025
|
)
|
Strong Outdoor
|
|
|
(2,012
|
)
|
|
|
(1,497
|
)
|
Other
|
|
|
(237
|
)
|
|
|
(87
|
)
|
Total segment operating loss
|
|
|
(338
|
)
|
|
|
(284
|
)
|
Unallocated administrative expenses
|
|
|
(2,238
|
)
|
|
|
(2,800
|
)
|
Loss from operations
|
|
|
(2,576
|
)
|
|
|
(3,084
|
)
|
Other (expense) income, net
|
|
|
(736
|
)
|
|
|
7
|
|
Loss before income taxes and equity method investment loss
|
|
$
|
(3,312
|
)
|
|
$
|
(3,077
|
)
|
(In thousands)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
Strong Cinema
|
|
$
|
24,764
|
|
|
$
|
27,009
|
|
Convergent
|
|
|
14,290
|
|
|
|
14,024
|
|
Strong Outdoor
|
|
|
6,516
|
|
|
|
3,454
|
|
Corporate assets
|
|
|
15,987
|
|
|
|
15,150
|
|
Total
|
|
$
|
61,557
|
|
|
$
|
59,637
|
|
Summary
by Geographical Area
|
|
Three Months Ended March 31,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
Net revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,864
|
|
|
$
|
12,830
|
|
Canada
|
|
|
798
|
|
|
|
1,400
|
|
China
|
|
|
212
|
|
|
|
541
|
|
Mexico
|
|
|
3
|
|
|
|
556
|
|
Latin America
|
|
|
29
|
|
|
|
270
|
|
Europe
|
|
|
280
|
|
|
|
158
|
|
Asia (excluding China)
|
|
|
58
|
|
|
|
73
|
|
Other
|
|
|
62
|
|
|
|
-
|
|
Total
|
|
$
|
14,306
|
|
|
$
|
15,828
|
|
(In thousands)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
46,038
|
|
|
$
|
42,780
|
|
Canada
|
|
|
15,519
|
|
|
|
16,857
|
|
Total
|
|
$
|
61,557
|
|
|
$
|
59,637
|
|
Net
revenues by business segment are to unaffiliated customers. Net revenues by geographical area are based on destination of sales.
Identifiable assets by geographical area are based on location of facilities.