Notes to the Consolidated Financial Statements
1.
Business Description and Basis of Presentation
Business
Description
Ballantyne
Strong, Inc. (“Ballantyne Strong,” or the “Company”), a Delaware corporation, is a holding company with
business operations in the entertainment industry and investments in public and privately held companies. The Company conducts
its operations primarily through its Strong Entertainment operating segment. In addition, the Company holds minority investment
positions in one privately held company and two publicly traded companies.
In
August 2020, the Company completed the sale of its Strong Outdoor business segment. As a result of the divestiture, the Company
has presented Strong Outdoor’s operating results as a discontinued operation for all periods presented. In addition, on
February 1, 2021 the Company completed the sale of its Convergent business segment. As a result of meeting the held for sale criteria
as of December 31, 2020, the Company has presented Convergent’s financial position and operating results as a discontinued
operation for all periods presented. See Note 3 for additional details.
Basis
of Presentation
The
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
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.
2.
Summary of Significant Accounting Policies
Revenue
Recognition
The
Company accounts for revenue using the following steps:
|
●
|
Identify
the contract, or contracts, with a customer;
|
|
●
|
Identify
the performance obligations in the contract;
|
|
●
|
Determine
the transaction price;
|
|
●
|
Allocate
the transaction price to the identified performance obligations; and
|
|
●
|
Recognize
revenue when, or as, the Company satisfies the performance obligations.
|
The
Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered
into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends
on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance
obligations, the items are analyzed to determine whether they are distinct, whether the items have value on a standalone basis
and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is
allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations.
The standalone selling price is based on an observable price for services sold to other comparable customers, when available,
or an estimated selling price using a cost-plus margin approach. The Company estimates the amount of total contract consideration
it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement
based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The
Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant
reversal in the amount of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration
is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client
and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to
the overall arrangement.
As
discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the
terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring
goods or providing services. The Company does not have any material extended payment terms, as payment is due at or shortly after
the time of the sale. 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, or receives cash, in
advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company
has satisfied the related performance obligation.
The
Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable
costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets
and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected
to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred.
The Company did not have any deferred contract costs as of December 31, 2020 or December 31, 2019.
Screen
system sales
The
Company typically 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. For contracts that are long-term in nature, the
Company believes that the use of the percentage-of-completion method is appropriate as the Company has the ability to make reasonably
dependable estimates of the extent of progress towards completion, contract revenues, and contract costs. Under the percentage-of-completion
method, revenue is recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related
to the contract. 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 its customers. These contracts are generally
12 months in length. Revenue related to service contracts is recognized ratably over the term of the agreement.
In
addition to selling service contracts, the Company also performs discrete time and materials-based maintenance and repair work
for its customers. Revenue related to time and materials-based maintenance and repair work is recognized at the point in time
when the performance obligation has been fully satisfied.
Installation
services
The
Company performs installation services for its customers and recognizes revenue upon completion of the installations.
Extended
warranty sales
The
Company sells extended warranties to its customers. When the Company is the primary obligor, revenue is recognized on a gross
basis ratably over the term of the extended warranty. In third party extended warranty sales, the Company is not the primary obligor,
and revenue is recognized on a net basis at the time of the sale.
Cash
and Cash Equivalents
All
short-term, highly liquid financial instruments are classified as cash equivalents in the consolidated balance sheets and statements
of cash flows. Generally, these instruments have maturities of three months or less from date of purchase. As of December 31,
2020, $2.5 million of the $4.4 million in cash and cash equivalents was held by our foreign subsidiary.
Restricted
Cash
Restricted
cash represents amounts held in a collateral account for the Company’s corporate travel and purchasing credit
card program.
Investments
The
Company applies the equity method of accounting to investments when it has significant influence, but not controlling interest,
in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors
such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany
transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under
the line item captioned “equity method investment income (loss)” in our condensed consolidated statements of operations.
The Company’s equity method investments are reported at cost and adjusted each period for the Company’s share of the
investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income or loss is
recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from equity method
investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. Investments in unconsolidated
entities in which the Company is not able to exercise significant influence (“Cost Method Investments”) are accounted
for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar investment of the same issuer. Dividends on cost method investments
received are recorded as income.
The
Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an
investment may not be recoverable. Management reviewed the underlying net assets of the investees as of December 31, 2020 and
determined that the Company’s proportionate economic interest in the investees indicate that the investments were not other
than temporarily impaired. The carrying value of our equity method and cost method investments is reported as “investments”
on the consolidated balance sheets. Notes 3 and 7 contain additional information on our equity method and cost method investments.
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for doubtful
accounts based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis
that projects the ultimate collectability of the account. As such, these factors may change over time causing the allowance level
and bad debt expense to be adjusted accordingly. Since many of Strong Entertainment’s customers have been negatively impacted
by COVID-19, the Company recorded $0.6 million of bad debt expense during 2020 as a result of the increased uncertainty related
to collection of trade accounts receivable from these customers. The accounts receivable balances on the consolidated balance
sheets are net of an allowance for doubtful accounts of $1.0 million and $0.3 million as of December 31, 2020 and 2019, respectively.
Past
due accounts are written off when our efforts have been unsuccessful in collecting amounts due.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories include appropriate elements of material,
labor and manufacturing overhead. Inventory balances are net of reserves on slow moving or obsolete inventory based on management’s
review of inventories on hand compared to estimated future usage and sales, technological changes and product pricing.
Business
Combinations
The
Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the financial statements
reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities
assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price
over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often
required in estimating the fair value of assets acquired, particularly intangible assets. As a result, in the case of significant
acquisitions, the Company normally obtains the assistance of third-party valuation specialists in estimating fair values of tangible
and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions
about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions
are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which
could affect the accuracy or validity of the estimates and assumptions.
Intangible
Assets
The
Company’s intangible assets consist primarily of costs incurred to develop or obtain software, as well as costs incurred
for upgrades and enhancements resulting in new or enhanced functionality. The Company evaluates its intangible assets for impairment
when events or circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible assets with
definite lives are amortized over their respective estimated useful lives to their estimated residual values. Significant judgments
and assumptions are required in the impairment evaluations.
Goodwill
Goodwill
is not amortized and is tested for impairment at least annually, or whenever events or changes in circumstances indicate the carrying
amount of the asset may be impaired. The annual impairment test is performed as of December 31 each year. Significant judgment
is involved in determining if an indicator of impairment has occurred. The Company may consider indicators such as deterioration
in general economic conditions, adverse changes in the markets in which the reporting unit operates, increases in input costs
that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among
others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of
goodwill.
The
Company may first review for goodwill impairment by assessing qualitative factors to determine whether any impairment may exist.
For a reporting unit in which the Company concludes, based on the qualitative assessment, that it is more likely than not that
the fair value of the reporting unit is less than its carrying amount (or if the Company elects to skip the optional qualitative
assessment), the Company is required to perform a quantitative impairment test, which includes measuring the fair value of the
reporting unit and comparing it to the reporting unit’s carrying amount. If the fair value of a reporting unit exceeds its
carrying value, the goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair
value, the Company must record an impairment loss for the amount that the carrying value of the reporting unit, including goodwill,
exceeds the fair value of the reporting unit.
Goodwill
was recorded in connection with the acquisition of Peintures Elite, Inc. in 2013. A qualitative assessment was performed for the
year ended December 31, 2020 and it was determined that no events had occurred since the acquisition that would indicate an impairment
was more likely than not.
Property,
Plant and Equipment
Significant
expenditures for the replacement or expansion of property, plant and equipment are capitalized. Depreciation of property, plant
and equipment is provided over the estimated useful lives of the respective assets using the straight-line method. For financial
reporting purposes, assets are depreciated over the estimated useful lives of 20 years for buildings and improvements, the lesser
of the lease term or the estimated useful life for leasehold improvements, 3 to 10 years for machinery and equipment, 7 years
for furniture and fixtures and 3 years for computers and accessories. The Company generally uses accelerated methods of depreciation
for income tax purposes. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The recoverability of property, plant and equipment is based on management’s
estimates of future undiscounted cash flows and these estimates may vary due to a number of factors, some of which may be outside
of management’s control. To the extent that the Company is unable to achieve management’s forecasts of future income,
it may become necessary to record impairment losses for any excess of the net book value of property, plant and equipment over
their fair value.
The
Company incurs maintenance costs on all of its major equipment. Repair and maintenance costs are expensed as incurred.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate at each
interim period based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. In assessing whether the deferred tax assets
are realizable, management considers whether it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
The
Company’s uncertain tax positions are evaluated in a two-step process, whereby 1) the Company determines whether it is more
likely than not that the tax positions will be sustained based on the technical merits of the position and 2) for those tax positions
that meet the more likely than not recognition threshold, the Company would recognize the largest amount of tax benefit that is
greater than fifty percent likely to be realized upon ultimate settlement with the related tax authority. The Company accrues
interest and penalties related to uncertain tax positions in the consolidated statements of operations as income tax expense.
Other
Taxes
Sales
taxes assessed by governmental authorities, including sales, use and excise taxes, are recorded on a net basis. Such taxes are
excluded from revenues and are shown as a liability on the balance sheet until remitted to the appropriate taxing authorities.
Research
and Development
Research
and development related costs are charged to operations in the period incurred. Such costs amounted to
$0.3
million and $0.4 million for the years ended December 31, 2020 and 2019, respectively, and are included within administrative
expenses on the consolidated statements of operations.
Advertising
Costs
Advertising
and promotional costs are expensed as incurred and amounted to approximately $50 thousand and $0.2 million for the years ended
December 31, 2020 and 2019, respectively, and are included within selling expenses on the consolidated statements of operations.
Fair
Value of Financial and Derivative 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 and liabilities measured at fair value based upon the level within
the fair value hierarchy in which the fair value measurements fall, as of December 31, 2020 and 2019.
Fair
values measured on a recurring basis at December 31, 2020 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
4,435
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,435
|
|
Restricted cash
|
|
|
352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
352
|
|
Notes receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
4,787
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,787
|
|
Fair
values measured on a recurring basis at December 31, 2019 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
4,951
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,951
|
|
Restricted cash
|
|
|
351
|
|
|
|
-
|
|
|
|
-
|
|
|
|
351
|
|
Notes receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
5,302
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,302
|
|
The
Company’s short-term debt is recorded at historical cost. The carrying values of all other financial assets and liabilities,
including accounts receivable, accounts payable, accrued expenses and short-term debt reported in the consolidated balance sheets
equal or approximate their fair values due to the short-term nature of these instruments. Based on quoted market prices, the fair
value of the Company’s equity method investments was $12.8 million at December 31, 2020 (see Note 7).
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).
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 earnings
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 restricted stock units. However, because the Company
reported losses from continuing operations in both years presented, there were no differences between weighted-average shares
used to compute basic and diluted loss per share for either of the years ended December 31, 2020 and 2019.
Options
to purchase 884,500 and 787,000 shares of common stock were outstanding as of December 31, 2020 and 2019, respectively,
but were not included in the computation of diluted loss per share as the exercise price of such options was greater than the
average market price of the common shares for the respective periods. An additional 73,868 and 137,578 common stock equivalents
related to options and restricted stock units were excluded for the years ended December 31, 2020 and 2019, respectively, as their
inclusion would be anti-dilutive, thereby decreasing the net losses per share.
Stock
Compensation Plans
The
Company recognizes compensation expense for all stock-based payment awards based on estimated fair values on the date of grant.
The Company uses the straight-line amortization method over the vesting period of the awards. The Company has historically issued
shares upon exercise of stock options or vesting of restricted stock from new stock issuances. 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. The fair value
of stock options granted is calculated using the Black-Scholes option pricing model. No stock-based compensation cost was capitalized
as a part of inventory in
2020
and 2019.
Post-Retirement
Benefits
The
Company recognizes the overfunded or underfunded position of a defined benefit postretirement plan as an asset or liability in
the balance sheet, measures the plan’s assets and its obligations that determine its funded status as of each balance sheet
date and recognizes the changes in the funded status through comprehensive income (loss) in the year in which the changes occur.
Foreign
Currency Translation
For
the Company’s foreign subsidiary, the environment in which the business conducts operations is considered the functional
currency, generally the local currency. The assets and liabilities of the foreign subsidiary are translated into the United States
dollar at the foreign exchange rates in effect at the end of the period. Revenue and expenses of the Company’s foreign subsidiary
are translated using an average of the foreign exchange rates in effect during the period. Translation adjustments are not included
in determining net earnings but are presented in comprehensive loss within the consolidated statements of comprehensive income
(loss). Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the consolidated statements of operations as incurred. If the Company disposes
of its investment in a foreign entity, any gain or loss on currency translation balance recorded in accumulated other comprehensive
income would be recognized as part of the gain or loss on disposition.
Warranty
Reserves
In
most instances, digital products are covered by the manufacturing firm’s 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 years ended December 31 (in thousands):
|
|
2020
|
|
|
2019
|
|
Warranty accrual at beginning of year
|
|
$
|
169
|
|
|
$
|
350
|
|
Charged to expense
|
|
|
(26
|
)
|
|
|
(73
|
)
|
Claims paid, net of recoveries
|
|
|
(64
|
)
|
|
|
(121
|
)
|
Foreign currency adjustment
|
|
|
-
|
|
|
|
13
|
|
Warranty accrual at end of year
|
|
$
|
79
|
|
|
$
|
169
|
|
Contingencies
The
Company accrues for contingencies when its assessments indicate that it is probable that a liability has been incurred and an
amount can be reasonably estimated. The Company’s estimates are based on currently available facts and its estimates of
the ultimate outcome or resolution. Actual results may differ from the Company’s estimates, resulting in an impact, positive
or negative, on earnings.
Recently
Adopted Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-15, “Intangibles- Goodwill and Other- Internal Use Software (Topic 350): Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU requires customers in a cloud computing
arrangement (i.e., hosting arrangement) that is a service contract to follow the internal use software guidance in ASC 350-40
to determine which implementation costs to capitalize or expense. The standard is effective for annual periods beginning after
December 15, 2019, and interim periods within those fiscal years. The adoption of the new standard on January 1, 2020 did not
have an impact on the Company’s consolidated financial statements and related disclosures.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure
Requirements for Fair Value Measurement.” This ASU improves the effectiveness of fair value measurement disclosures by eliminating,
adding and modifying certain disclosure requirements for fair value measurements as part of its disclosure framework project.
Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair
value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant
unobservable inputs for Level 3 fair value measurements. The standard is effective for annual periods beginning after December
15, 2019, and interim periods within those fiscal years. The adoption of the new standard on January 1, 2020 did not have an impact
on the Company’s consolidated financial statements and related disclosures.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” This ASU will require the measurement of all expected credit losses for financial assets,
including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and
supportable forecasts. The guidance was initially effective for the Company for annual reporting periods beginning after December
15, 2019 and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments
– Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which,
among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies
as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods
within those years. Early adoption is permitted. The Company believes the adoption of this ASU will not significantly impact its
results of operations and financial position.
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
This ASU removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to
reduce complexity in accounting for income taxes. The effective date of the standard will be for annual periods beginning after
December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis,
modified retrospective basis and prospective basis, depending on the amendment. The Company early adopted the ASU, effective as
of the year ended December 31, 2020. The adoption did not have a material impact on the Company’s consolidated financial
statements.
In
January 2020, the FASB issued ASU 2020-01, “Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815.”
This ASU clarifies the interaction between accounting standards related to equity securities, equity method investments and certain
derivatives. The effective date of the standard will be for annual periods beginning after December 15, 2020, and interim periods
within those fiscal years. The Company does not expect the adoption of the new standard to have a material impact on its condensed
consolidated financial statements and related disclosures.
In
April 2020, the FASB issued a question-and-answer document to address stakeholder questions on the application of the lease accounting
guidance for lease concessions related to the effects of the COVID-19 pandemic. The guidance will allow concessions related to
the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications. Instead,
any such concessions can be accounted for as if no change was made to the contract or as variable lease payments. As a result
of the COVID-19 pandemic, the Company received certain lease concessions in the form of rent deferrals during 2020. The Company
chose to implement the policy election provided by the FASB to record rent concessions as if no modifications to leases contracts
were made, and thus no changes to the lease obligations were recorded in respect to these concessions. As of December 31, 2020,
the Company had outstanding deferred rent of $0.1 million, the majority of which will be paid over the remaining term of the leases.
3.
Discontinued Operations
The
major classes of assets and liabilities included as part of discontinued operations are as follows (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Total
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Total
|
|
Accounts receivable, net
|
|
$
|
3,065
|
|
|
$
|
-
|
|
|
$
|
3,065
|
|
|
$
|
3,740
|
|
|
$
|
-
|
|
|
$
|
3,740
|
|
Inventories, net
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
|
|
554
|
|
|
|
-
|
|
|
|
554
|
|
Other current assets
|
|
|
371
|
|
|
|
-
|
|
|
|
371
|
|
|
|
255
|
|
|
|
320
|
|
|
|
575
|
|
Total current assets of discontinued operations
|
|
|
3,748
|
|
|
|
-
|
|
|
|
3,748
|
|
|
|
4,549
|
|
|
|
320
|
|
|
|
4,869
|
|
Property, plant and equipment, net
|
|
|
3,172
|
|
|
|
-
|
|
|
|
3,172
|
|
|
|
4,157
|
|
|
|
491
|
|
|
|
4,648
|
|
Intangible assets, net
|
|
|
753
|
|
|
|
-
|
|
|
|
753
|
|
|
|
923
|
|
|
|
20
|
|
|
|
943
|
|
Operating lease right-of-use assets
|
|
|
212
|
|
|
|
-
|
|
|
|
212
|
|
|
|
211
|
|
|
|
-
|
|
|
|
211
|
|
Finance lease right-of-use assets
|
|
|
2,235
|
|
|
|
-
|
|
|
|
2,235
|
|
|
|
2,556
|
|
|
|
-
|
|
|
|
2,556
|
|
Other long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
|
|
94
|
|
Total long-term assets of discontinued operations
|
|
|
6,372
|
|
|
|
-
|
|
|
|
6,372
|
|
|
|
7,847
|
|
|
|
605
|
|
|
|
8,452
|
|
Total assets of discontinued operations
|
|
$
|
10,120
|
|
|
$
|
-
|
|
|
$
|
10,120
|
|
|
$
|
12,396
|
|
|
$
|
925
|
|
|
$
|
13,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
449
|
|
|
$
|
-
|
|
|
$
|
449
|
|
|
$
|
461
|
|
|
$
|
304
|
|
|
$
|
765
|
|
Accrued expenses
|
|
|
812
|
|
|
|
-
|
|
|
|
812
|
|
|
|
668
|
|
|
|
-
|
|
|
|
668
|
|
Current portion of long-term debt
|
|
|
1,075
|
|
|
|
-
|
|
|
|
1,075
|
|
|
|
998
|
|
|
|
-
|
|
|
|
998
|
|
Current portion of operating lease obligation
|
|
|
108
|
|
|
|
-
|
|
|
|
108
|
|
|
|
123
|
|
|
|
125
|
|
|
|
248
|
|
Current portion of finance lease obligation
|
|
|
859
|
|
|
|
-
|
|
|
|
859
|
|
|
|
693
|
|
|
|
-
|
|
|
|
693
|
|
Deferred revenue and customer deposits
|
|
|
598
|
|
|
|
-
|
|
|
|
598
|
|
|
|
1,808
|
|
|
|
275
|
|
|
|
2,083
|
|
Total current liabilities of discontinued operations
|
|
|
3,901
|
|
|
|
-
|
|
|
|
3,901
|
|
|
|
4,751
|
|
|
|
704
|
|
|
|
5,455
|
|
Long-term debt, net of current portion
|
|
|
2,340
|
|
|
|
-
|
|
|
|
2,340
|
|
|
|
3,019
|
|
|
|
-
|
|
|
|
3,019
|
|
Operating lease obligation, net of current portion
|
|
|
107
|
|
|
|
-
|
|
|
|
107
|
|
|
|
133
|
|
|
|
147
|
|
|
|
280
|
|
Finance lease obligation, net of current portion
|
|
|
1,530
|
|
|
|
-
|
|
|
|
1,530
|
|
|
|
1,881
|
|
|
|
-
|
|
|
|
1,881
|
|
Other long-term liabilities
|
|
|
89
|
|
|
|
-
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total long-term liabilities of discontinued operations
|
|
|
4,066
|
|
|
|
-
|
|
|
|
4,066
|
|
|
|
5,033
|
|
|
|
147
|
|
|
|
5,180
|
|
Total liabilities of discontinued operations
|
|
$
|
7,967
|
|
|
$
|
-
|
|
|
$
|
7,967
|
|
|
$
|
9,784
|
|
|
$
|
851
|
|
|
$
|
10,635
|
|
The
major line items constituting the net income (loss) from discontinued operations are as follows (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Total
|
|
|
Convergent
|
|
|
Strong Outdoor
|
|
|
Total
|
|
Net revenues
|
|
$
|
18,330
|
|
|
$
|
1,587
|
|
|
$
|
19,917
|
|
|
$
|
20,028
|
|
|
$
|
5,247
|
|
|
$
|
25,275
|
|
Cost of revenues
|
|
|
9,927
|
|
|
|
1,488
|
|
|
|
11,415
|
|
|
|
13,356
|
|
|
|
5,901
|
|
|
|
19,257
|
|
Gross profit
|
|
|
8,403
|
|
|
|
99
|
|
|
|
8,502
|
|
|
|
6,672
|
|
|
|
(654
|
)
|
|
|
6,018
|
|
Selling and administrative expenses
|
|
|
4,206
|
|
|
|
1,661
|
|
|
|
5,867
|
|
|
|
4,605
|
|
|
|
2,660
|
|
|
|
7,265
|
|
Loss on disposal of assets
|
|
|
(33
|
)
|
|
|
(64
|
)
|
|
|
(97
|
)
|
|
|
(1
|
)
|
|
|
(38
|
)
|
|
|
(39
|
)
|
Income (loss) from operations
|
|
|
4,164
|
|
|
|
(1,626
|
)
|
|
|
2,538
|
|
|
|
2,066
|
|
|
|
(3,352
|
)
|
|
|
(1,286
|
)
|
Other (expense) income
|
|
|
(584
|
)
|
|
|
698
|
|
|
|
114
|
|
|
|
(451
|
)
|
|
|
429
|
|
|
|
(22
|
)
|
Income (loss) from discontinued operations
|
|
|
3,580
|
|
|
|
(928
|
)
|
|
|
2,652
|
|
|
|
1,615
|
|
|
|
(2,923
|
)
|
|
|
(1,308
|
)
|
Gain on Firefly transaction
|
|
|
-
|
|
|
|
5,264
|
|
|
|
5,264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income tax benefit (expense)
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(134
|
)
|
|
|
-
|
|
|
|
(134
|
)
|
Total net income (loss) from discontinued operations
|
|
$
|
3,582
|
|
|
$
|
4,336
|
|
|
$
|
7,918
|
|
|
$
|
1,481
|
|
|
$
|
(2,923
|
)
|
|
$
|
(1,442
|
)
|
Convergent
As
part of a transaction that closed in February 2021, the Company divested its Convergent business segment. The Company’s
Convergent business segment delivered digital signage solutions and related services to large multi-location organizations in
the United States and Canada.
On
February 1, 2021, the Company entered into an Equity Purchase Agreement (together with the other related documents defined therein,
the “Purchase Agreement”), and closed the transactions contemplated by the Purchase Agreement, with SageNet LLC (“SageNet”).
The purchase price (the “Purchase Price”) pursuant to the Purchase Agreement was (i) $15.0 million in cash and (ii)
$2.5 million in the form of a subordinated promissory note delivered by SageNet in favor of the Company. Additionally, a portion
of the Purchase Price was placed in escrow by SageNet, the release of which is contingent upon certain events and conditions specified
in the Purchase Agreement. The Purchase Price is also subject to adjustment based on closing working capital of Convergent. As
further consideration, SageNet also assumed approximately $5.7 million of third-party debt of Convergent, bringing the total enterprise
value for Convergent’s equity interests to approximately $23.2 million. The Company expects to record a gain of approximately
$15.0 million during the first quarter of 2021 related to the sale of Convergent.
Strong
Outdoor
As
part of transactions in May 2019 and August 2020, the Company divested its Strong Outdoor business segment. The Company’s
Strong Outdoor business segment provided outdoor advertising and experiential marketing to advertising agencies and corporate
accounts, primarily in New York City.
On
May 21, 2019, Strong Digital Medica, LLC (“SDM”) entered into a Taxicab Advertising Collaboration Agreement (the “Commercial
Agreement”) and a Unit Purchase Agreement (the “Unit Purchase Agreement”) with Firefly Systems, Inc. (“Firefly”),
pursuant to which SDM agreed to make available to Firefly 300 digital taxi tops and the parties agreed to coordinate the fulfilling
of SDM’s agreements with the Metropolitan Taxicab Board of Trade, Inc. (“MTBOT”) and Creative Mobile Media,
LLC (“CMM”), each dated February 8, 2018. Firefly agreed to fulfill the digital taxi top advertising obligations under
the MTBOT agreement and CMM agreement, and SDM agreed to fulfill the non-digital taxi top advertising obligations under the MTBOT
agreement and CMM agreement. The Company is a party to the Unit Purchase Agreement and agreed to guarantee the payment obligations
of SDM under the Commercial Agreement. As consideration for entering into these agreements, the Company received $4.8 million
of Firefly’s Series A-2 preferred shares (the “Firefly Series A-2 Shares”). The Firefly Series A-2 Shares, including
those subsequently issued pursuant to an earn-out provision, were subject to a repurchase option for a period of three years to
cover SDM’s indemnity obligations and other post-closing covenants under the Commercial Agreement and the Unit Purchase
Agreement. As part of the Asset Purchase Agreement (as defined and described below), Firefly no longer has an option to repurchase
any of the Firefly Series A-2 Shares held by SDM.
The
300 digital tops the Company has made available to Firefly are subject to a master equipment lease agreement the Company entered
into during 2017. Pursuant to the master lease agreement and the Unit Purchase Agreement, the Company will remain the primary
obligor until such time as the lease expires. In addition, of the $4.8 million worth of Firefly Series A-2 Shares received, $1.2
million worth of such shares were eligible for repurchase by Firefly if the Company did not exercise the purchase option contained
within the master lease agreement. Accordingly, the Company had deferred recognizing an investment related to these Firefly Series
A-2 Shares eligible for repurchase until such time it was reasonably certain the Company would exercise the purchase option. The
transaction, in effect, transferred control of the underlying asset to Firefly. As additional consideration for the right to use
the digital taxi tops, Firefly agreed to pay for certain of Company’s operating expenses associated with the non-digital
taxi tops. The Company concluded the payments that Firefly made on its behalf were considered variable payments and were not included
in the calculation of the selling profit. Therefore, the Company recorded the benefit and the related operating expenses in the
period when the changes in facts and circumstances on which the variable lease payments were based occurred. As part of the Asset
Purchase Agreement (as defined and described below) the Taxicab Advertising Collaboration Agreement dated May 21, 2019 was terminated,
which relieved the Company of its obligation to exercise the purchase option contained within the master lease agreement. As a
result, the Company recognized an additional $1.2 million investment during the year ended December 31, 2020 related to the Firefly
Series A-2 Shares that were previously eligible for repurchase by Firefly.
The
Unit Purchase Agreement contained an earnout provision pursuant to which SDM obtained additional Firefly Series A-2 Shares. The
earnout period was from May 22, 2019 through June 30, 2020. SDM was eligible to earn additional Firefly Series A-2 Shares equivalent
to the cash collections under certain digital top contracts that were in place at the closing of the transaction. The Company
received the shares earned pursuant to the earnout provision on August 3, 2020. In connection with the additional Firefly Series
A-2 Shares that were received pursuant to the earnout, the Company recorded an additional $0.7 million gain on the Firefly transaction
during the year ended December 31, 2020.
On
August 3, 2020, SDM entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Firefly, pursuant
to which SDM agreed to sell certain assets primarily related to its Strong Outdoor operating business to Firefly and continue
to make available 300 digital taxi tops to Firefly. SDM retained certain accounts receivable as well as liabilities other than
executory obligations under transferred contracts to the extent such liabilities are required to be performed following closing
or constitute certain deferred revenue. The transaction closed on the same day.
As
consideration for entering into the Asset Purchase Agreement, SDM received approximately $0.6 million in cash consideration and
approximately $3.2 million of Firefly Series A-3 preferred shares (the “Firefly Series A-3 Shares”). In connection
with the closing of the transactions contemplated by the Asset Purchase Agreement, (i) SDM received approximately $1.1 million
worth of Firefly’s Series A-2 Shares, which constituted the remaining shares to be issued pursuant to the Unit Purchase
Agreement, (ii) Firefly no longer has an option to repurchase any of the Series A-2 Shares held by SDM, (iii) accounts payable
to Firefly were cancelled and forgiven, and (iv) the Taxicab Advertising Collaboration Agreement dated May 21, 2019 was terminated,
which relieved the Company of its obligation to exercise the purchase option contained within the master lease agreement. The
Company recorded a gain of approximately $5.3 million during the third quarter of 2020 as a result of the transaction. As of December
31, 2020, SDM held approximately $5.7 million worth of Firefly Series A-2 Shares, which included the shares issued to SDM as part
of the May 2019 transaction and $7.4 million worth of Firefly Series A-3 Shares.
As
contemplated by the Asset Purchase Agreement, Firefly Series A-2 Shares are held by SDM, and the previously issued Firefly Series
A-2 Shares held by Fundamental Global Venture Partners, LP (“FGVP”), an investment fund that was managed by
Fundamental Global Investors, LLC in which SDM was the sole limited partner, were transferred to SDM. The Asset Purchase
Agreement includes customary representations and warranties. SDM agreed to indemnify Firefly for excluded liabilities related
to the transferred business.
The
Company entered into a Master Services Agreement (the “Master Services Agreement”) with Firefly, pursuant to which
the Company agreed to provide certain support services to Firefly, including remote equipment monitoring and diagnostics of screens
until no later than December 31, 2022 and transition advertising instruction and integration services, content management services,
ad-hoc reporting and analysis, wireless service, advertising content management services, and mapping data until no later than
six months from closing. As consideration for entering into the Master Services Agreement, the Company received $2.0 million in
cash consideration.
The
components of the gain on the sale of the Strong Outdoor business to Firefly during the year ended December 31, 2020 are as follows
(in thousands):
|
|
|
|
Firefly Series A-3 preferred shares received
|
|
$
|
3,200
|
|
Cash received
|
|
|
571
|
|
Removal of Firefly’s share repurchase option related to digital top lease
|
|
|
1,171
|
|
Forgiven accounts payable to Firefly
|
|
|
739
|
|
Book value of liabilities transferred to Firefly
|
|
|
191
|
|
Book value of assets transferred to Firefly
|
|
|
(608
|
)
|
Net gain from sale of discontinued operations
|
|
$
|
5,264
|
|
4.
Revenue
The
following tables disaggregate the Company’s revenue by major source for the years ended December 31, 2020 and December 31,
2019 (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
|
Strong Entertainment
|
|
|
Other
|
|
|
Total
|
|
|
Strong Entertainment
|
|
|
Other
|
|
|
Total
|
|
Screen system sales
|
|
$
|
8,929
|
|
|
$
|
-
|
|
|
$
|
8,929
|
|
|
$
|
15,357
|
|
|
$
|
-
|
|
|
$
|
15,357
|
|
Digital equipment sales
|
|
|
5,174
|
|
|
|
-
|
|
|
|
5,174
|
|
|
|
8,523
|
|
|
|
-
|
|
|
|
8,523
|
|
Extended warranty sales
|
|
|
466
|
|
|
|
-
|
|
|
|
466
|
|
|
|
746
|
|
|
|
-
|
|
|
|
746
|
|
Other product sales
|
|
|
1,418
|
|
|
|
-
|
|
|
|
1,418
|
|
|
|
1,822
|
|
|
|
-
|
|
|
|
1,822
|
|
Total product sales
|
|
|
15,987
|
|
|
|
-
|
|
|
|
15,987
|
|
|
|
26,448
|
|
|
|
-
|
|
|
|
26,448
|
|
Field maintenance and monitoring services
|
|
|
3,763
|
|
|
|
-
|
|
|
|
3,763
|
|
|
|
8,061
|
|
|
|
-
|
|
|
|
8,061
|
|
Installation services
|
|
|
728
|
|
|
|
-
|
|
|
|
728
|
|
|
|
2,120
|
|
|
|
-
|
|
|
|
2,120
|
|
Other service revenues
|
|
|
151
|
|
|
|
871
|
|
|
|
1,022
|
|
|
|
245
|
|
|
|
401
|
|
|
|
646
|
|
Total service revenues
|
|
|
4,642
|
|
|
|
871
|
|
|
|
5,513
|
|
|
|
10,426
|
|
|
|
401
|
|
|
|
10,827
|
|
Total
|
|
$
|
20,629
|
|
|
$
|
871
|
|
|
$
|
21,500
|
|
|
$
|
36,874
|
|
|
$
|
401
|
|
|
$
|
37,275
|
|
The
following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the
years ended December 31, 2020 and December 31, 2019 (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
|
Strong Entertainment
|
|
|
Other
|
|
|
Total
|
|
|
Strong Entertainment
|
|
|
Other
|
|
|
Total
|
|
Point in time
|
|
$
|
17,214
|
|
|
$
|
-
|
|
|
$
|
17,214
|
|
|
$
|
30,630
|
|
|
$
|
-
|
|
|
$
|
30,630
|
|
Over time
|
|
|
3,415
|
|
|
|
871
|
|
|
|
4,286
|
|
|
|
6,244
|
|
|
|
401
|
|
|
|
6,645
|
|
Total
|
|
$
|
20,629
|
|
|
$
|
871
|
|
|
$
|
21,500
|
|
|
$
|
36,874
|
|
|
$
|
401
|
|
|
$
|
37,275
|
|
At
December 31, 2020, the unearned revenue amount associated with maintenance and monitoring services and extended warranty sales
in which the Company is the primary obligor was $2.2 million. The Company expects to recognize $1.5 million of unearned revenue
amounts during 2021 and $0.7 million during 2022. The amount expected to be recorded during 2021 includes $0.5 million related
to long-term projects that the Company’s uses the percentage-of-completion method to recognize revenue.
5.
Inventories
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Raw materials and components
|
|
$
|
1,584
|
|
|
$
|
1,584
|
|
Work in process
|
|
|
141
|
|
|
|
210
|
|
Finished goods
|
|
|
539
|
|
|
|
531
|
|
|
|
$
|
2,264
|
|
|
$
|
2,325
|
|
The
inventory balances are net of reserves of approximately $0.4 million as of both December 31, 2020 and 2019. The inventory reserves
primarily related to the Company’s finished goods inventory.
6.
Property, Plant and Equipment
Property,
plant and equipment include the following (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Land
|
|
$
|
51
|
|
|
$
|
50
|
|
Buildings and improvements
|
|
|
6,824
|
|
|
|
6,696
|
|
Machinery and other equipment
|
|
|
4,635
|
|
|
|
4,136
|
|
Office furniture and fixtures
|
|
|
946
|
|
|
|
1,980
|
|
Construction in progress
|
|
|
154
|
|
|
|
429
|
|
Total properties, cost
|
|
|
12,610
|
|
|
|
13,291
|
|
Less: accumulated depreciation
|
|
|
(7,086
|
)
|
|
|
(7,379
|
)
|
Net property, plant and equipment
|
|
$
|
5,524
|
|
|
$
|
5,912
|
|
Depreciation
expense approximated $0.8 million for each of the years ended December 31, 2020 and 2019.
7.
Investments
The
following summarizes our investments (dollars in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Carrying Amount
|
|
|
|
Economic Interest
|
|
|
|
Carrying Amount
|
|
|
|
Economic Interest
|
|
Equity Method Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FG Financial Group, Inc.
|
|
$
|
4,370
|
|
|
|
20.9
|
%
|
|
$
|
6,897
|
|
|
|
17.2
|
%
|
GreenFirst Forest Products Inc.
|
|
|
2,697
|
|
|
|
29.6
|
%
|
|
|
2,800
|
|
|
|
32.3
|
%
|
Total Equity Method Investments
|
|
|
7,067
|
|
|
|
|
|
|
|
9,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Method Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firefly Systems, Inc.
|
|
|
13,100
|
|
|
|
|
|
|
|
3,614
|
|
|
|
|
|
Total Investments
|
|
$
|
20,167
|
|
|
|
|
|
|
$
|
13,311
|
|
|
|
|
|
Equity
Method Investments
The
following summarizes the loss of equity method investees reflected in the consolidated statements of operations (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Entity
|
|
|
|
|
|
|
FG Financial Group, Inc.
|
|
$
|
(2,451
|
)
|
|
$
|
(1,232
|
)
|
GreenFirst Forest Products Inc.
|
|
|
(226
|
)
|
|
|
(779
|
)
|
Total
|
|
$
|
(2,677
|
)
|
|
$
|
(2,011
|
)
|
FG
Financial Group, Inc. (“FGF”) (formerly 1347 Property Insurance Holdings, Inc.) is implementing business plans to
operate as a diversified insurance, reinsurance and investment management holding company. In September 2020, FGF entered
into an agreement pursuant to which FGF purchased 1.1 million shares of its outstanding common stock from an existing
shareholder. The purchase of the 1.1 million shares decreased the number of outstanding shares of FGF and increased the
Company’s ownership interest to approximately 21%. The Company’s Chairman and former Chief Executive Officer is
the chairman of the board of directors of FGF, and the Company’s former Co-Chairman is co-chairman of the board of
directors of FGF. As of December 31, 2020, these two individuals were affiliated with entities that, when combined with the
Company’s ownership in FGF, own greater than 50% of FGF. Since FGF does not depend on the Company for continuing
financial support to maintain operations, the Company has determined that FGF is not a variable interest entity, and
therefore, the Company is not required to determine the primary beneficiary of FGF for potential consolidation. The equity
method investment loss from FGF during the year ended December 31, 2020 was primarily the result of FGF’s non-cash
losses associated with the change in fair value of its investment in the common stock of FedNat Holding Company (Nasdaq:
FNHC). The Company did not receive dividends from FGF during the years ended December 31, 2020 or 2019. Based on quoted
market prices, the market value of the Company’s ownership in FGF was $4.4 million at December 31, 2020.
GreenFirst
Forest Products Inc. (“GreenFirst”) (formerly Itasca Capital Ltd.) is a publicly-traded Canadian company that has
recently completed an investment in a sawmill and related assets. In October 2020, GreenFirst completed a private placement financing
pursuant to which GreenFirst issued 2.0 million shares of its common stock. The issuance of the 2.0 million shares decreased the
Company’s ownership interest to approximately 30%. The Company’s Chairman and former Chief Executive Officer is chairman
of the board of directors of GreenFirst, and the Company’s former Co-Chairman is also a member of the board of directors
of GreenFirst. These board seats, combined with the Company’s 29.6% ownership of GreenFirst, provide the Company with significant
influence over GreenFirst, but not a controlling interest. The Company did not receive dividends from GreenFirst during the years
ended December 31, 2020 or 2019. Based on quoted market prices, the market value of the Company’s ownership in GreenFirst
was $8.4 million at December 31, 2020.
As
of December 31, 2020, the Company’s retained earnings included an accumulated deficit from its equity method investees of
$4.0 million.
The
summarized financial information presented below reflects the aggregated financial information of FGF and GreenFirst as of and
for the twelve months ended September 30 of each year, consistent with the Company’s policy to recognize 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. Because FGF does not present a classified balance sheet, major components of its assets and
liabilities are presented instead of current and noncurrent assets and liabilities. Dollar amounts presented below are in thousands.
For the twelve months ended September 30,
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue (1)
|
|
$
|
(12,573
|
)
|
|
$
|
1,609
|
|
Operating loss
|
|
$
|
(18,012
|
)
|
|
$
|
(1,074
|
)
|
Net loss
|
|
$
|
(12,873
|
)
|
|
$
|
(9,568
|
)
|
(1) FGF records realized and unrealized gains and losses on investments in net investment income (loss), which is included in the revenue line above.
|
As of September 30,
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents - FGF
|
|
$
|
15,233
|
|
|
$
|
1,803
|
|
Equity and limited liability investments - FGF
|
|
|
18,387
|
|
|
|
3,994
|
|
Other assets - FGF
|
|
|
3,336
|
|
|
|
19,591
|
|
Assets of discontinued operations - FGF
|
|
|
-
|
|
|
|
138,700
|
|
Current assets - GFP
|
|
|
10,086
|
|
|
|
970
|
|
Noncurrent assets - GFP
|
|
|
-
|
|
|
|
9,342
|
|
Total assets - FGF and GFP
|
|
$
|
47,042
|
|
|
$
|
174,400
|
|
|
|
|
|
|
|
|
|
|
Other liabilities - FGF
|
|
$
|
562
|
|
|
$
|
5,596
|
|
Liabilities of discontinued operations - FGF
|
|
|
-
|
|
|
|
102,809
|
|
Current liabilities - GFP
|
|
|
549
|
|
|
|
73
|
|
Total liabilities - FGF and GFP
|
|
$
|
1,111
|
|
|
$
|
108,478
|
|
Cost
Method Investment
The
Company received preferred shares of Firefly in connection with the transactions with Firefly in May 2019 and August 2020. See
Note 3 for additional details. In addition, on August 3, 2020, Strong/MDI entered into a Stock Purchase Agreement (the “Stock
Purchase Agreement”) with Firefly, pursuant to which Strong/MDI agreed to purchase $4.0 million worth of Firefly Series
A-3 Shares at the initial closing, which took place on the same day. As contemplated by the Stock Purchase Agreement and ancillary
agreements, the Company and its affiliated entities will have the right to designate a director to be elected to the board of
directors of Firefly, subject to holding, together with its affiliates, approximately $7.2 million worth of Firefly Series A-3
Shares and other conditions. The Company and its affiliated entities currently hold $7.4 million of Firefly Series A-3
Shares and have designated Kyle Cerminara, Chairman of the Company’s board of directors and a principal of the Company’s
largest shareholder, to Firefly’s board of directors.
8.
Intangible Assets
Intangible
assets consisted of the following at December 31, 2020 (dollars in thousands):
|
|
Useful life
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in service
|
|
5
|
|
$
|
1,248
|
|
|
$
|
(928
|
)
|
|
$
|
320
|
|
Product formulation
|
|
10
|
|
|
477
|
|
|
|
(444
|
)
|
|
|
33
|
|
Total
|
|
|
|
$
|
1,725
|
|
|
$
|
(1,372
|
)
|
|
$
|
353
|
|
Intangible
assets consisted of the following at December 31, 2019 (dollars in thousands):
|
|
Useful life
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in service
|
|
5
|
|
$
|
1,169
|
|
|
$
|
(634
|
)
|
|
$
|
535
|
|
Product formulation
|
|
10
|
|
|
471
|
|
|
|
(415
|
)
|
|
|
56
|
|
Total
|
|
|
|
$
|
1,640
|
|
|
$
|
(1,049
|
)
|
|
$
|
591
|
|
Intangible
assets with definite lives are amortized over their useful lives. The Company recorded amortization expense relating to intangible
assets of $0.3 million during each of the years ended December 31, 2020 and 2019.
The
following table shows the Company’s estimated future amortization expense related to intangible assets currently subject
to amortization for the next five years (in thousands):
2021
|
|
|
$
|
287
|
|
2022
|
|
|
|
48
|
|
2023
|
|
|
|
10
|
|
2024
|
|
|
|
4
|
|
2025
|
|
|
|
4
|
|
Thereafter
|
|
|
|
-
|
|
Total
|
|
|
$
|
353
|
|
9.
Goodwill
All
of the Company’s goodwill is related to the Strong Entertainment segment. The following represents a summary of changes
in the Company’s carrying amount of goodwill (in thousands):
Balance as of December 31, 2019
|
|
$
|
919
|
|
Foreign currency translation adjustment
|
|
|
19
|
|
Balance as of December 31, 2020
|
|
$
|
938
|
|
10.
Accrued Expenses
The
major components of current accrued expenses are as follows (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Employee-related
|
|
$
|
1,520
|
|
|
$
|
1,857
|
|
Legal and professional fees
|
|
|
57
|
|
|
|
92
|
|
Warranty obligation
|
|
|
79
|
|
|
|
169
|
|
Interest and taxes
|
|
|
98
|
|
|
|
68
|
|
Post-retirement benefit obligation
|
|
|
11
|
|
|
|
10
|
|
Lease expenses
|
|
|
143
|
|
|
|
-
|
|
Deferred business interruption proceeds
|
|
|
-
|
|
|
|
926
|
|
Other
|
|
|
274
|
|
|
|
626
|
|
Total
|
|
$
|
2,182
|
|
|
$
|
3,748
|
|
The
major components of other long-term liabilities are as follows (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Post-retirement benefit obligation
|
|
$
|
96
|
|
|
$
|
116
|
|
Deferred revenue
|
|
|
15
|
|
|
|
38
|
|
Deferred payroll taxes
|
|
|
112
|
|
|
|
-
|
|
Total
|
|
$
|
223
|
|
|
$
|
154
|
|
11.
Income Taxes
Loss
from continuing operations before income taxes consists of (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
(12,046
|
)
|
|
$
|
(12,751
|
)
|
Foreign
|
|
|
5,039
|
|
|
|
6,238
|
|
Total
|
|
$
|
(7,007
|
)
|
|
$
|
(6,513
|
)
|
Income
tax expense from continuing operations consists of (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
|
14
|
|
|
|
53
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
14
|
|
|
|
53
|
|
Foreign:
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,040
|
|
|
|
1,984
|
|
Deferred
|
|
|
204
|
|
|
|
111
|
|
Total
|
|
|
1,244
|
|
|
|
2,095
|
|
Total
|
|
$
|
1,258
|
|
|
$
|
2,148
|
|
Income
tax expense from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate
to pretax loss from continuing operations as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected federal income tax benefit
|
|
$
|
(1,477
|
)
|
|
$
|
(1,339
|
)
|
State income taxes, net of federal benefit
|
|
|
11
|
|
|
|
42
|
|
Foreign tax rate differential
|
|
|
256
|
|
|
|
349
|
|
Change in state tax rate
|
|
|
254
|
|
|
|
145
|
|
Change in valuation allowance
|
|
|
2,279
|
|
|
|
(556
|
)
|
GILTI inclusion
|
|
|
366
|
|
|
|
991
|
|
Return to provision
|
|
|
(417
|
)
|
|
|
1,384
|
|
Foreign dividend inclusion
|
|
|
169
|
|
|
|
245
|
|
Deferred tax adjustments
|
|
|
-
|
|
|
|
677
|
|
Other
|
|
|
(183
|
)
|
|
|
210
|
|
Total
|
|
$
|
1,258
|
|
|
$
|
2,148
|
|
Deferred
tax assets and liabilities were comprised of the following (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
536
|
|
|
$
|
813
|
|
Non-deductible accruals
|
|
|
551
|
|
|
|
773
|
|
Inventory reserves
|
|
|
159
|
|
|
|
222
|
|
Stock compensation expense
|
|
|
576
|
|
|
|
446
|
|
Warranty reserves
|
|
|
19
|
|
|
|
44
|
|
Uncollectible receivable reserves
|
|
|
151
|
|
|
|
313
|
|
Net operating losses
|
|
|
9,770
|
|
|
|
10,272
|
|
Fair value adjustment to notes receivable
|
|
|
551
|
|
|
|
568
|
|
Tax credits
|
|
|
1,699
|
|
|
|
1,699
|
|
Disallowed interest expense
|
|
|
505
|
|
|
|
682
|
|
Equity in income of equity method investments
|
|
|
872
|
|
|
|
253
|
|
Other
|
|
|
376
|
|
|
|
152
|
|
Total deferred tax assets
|
|
|
15,765
|
|
|
|
16,237
|
|
Valuation allowance
|
|
|
(15,143
|
)
|
|
|
(15,314
|
)
|
Net deferred tax assets after valuation allowance
|
|
|
622
|
|
|
|
923
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,295
|
|
|
|
1,315
|
|
Cash repatriation
|
|
|
2,426
|
|
|
|
2,257
|
|
Total deferred tax liabilities
|
|
|
3,721
|
|
|
|
3,572
|
|
Net deferred tax liability
|
|
$
|
(3,099
|
)
|
|
$
|
(2,649
|
)
|
During
the year ended December 31, 2020, the Company sold the assets of its Strong Outdoor business segment. In addition, the Company
has classified its Convergent Media Systems business segment as available for sale. See Note 3 for additional details. The tax
expense/benefit for these business segments have been allocated to discontinued operations; however, the Company has sufficient
net operating losses to offset taxable income/loss from these discontinued operations, all of which is offset by a valuation allowance.
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 jurisdiction in
recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the
available objective evidence including recent updates to the taxing jurisdictions generating income, the Company concluded that
a valuation allowance of $15.1 million and $15.3 million should be recorded against the Company’s U.S. tax jurisdiction
deferred tax assets as of December 31, 2020 and 2019, respectively. The overall change in valuation allowance was a reduction
of $0.2 million; however some changes in valuation allowance were allocated to discontinued operations. The effective tax rate
above relates only to continuing operations.
The
Company recorded a deferred tax liability related to withholding tax on the repatriation of earnings from its Canadian subsidiary
of $2.4 million and $2.3 million as of December 31, 2020 and 2019, respectively.
A
provision of Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was the implementation of the Global Intangible-Low
Taxed Income Tax, or “GILTI.” The Company has elected to account for the impact of GILTI in the period in which the
tax actually applies to the Company. During the year ended December 31, 2020, the Company incurred an estimated $1.7 million of
additional taxable income as a result of this provision. This increase in taxable income was incorporated into the overall net
operating loss and valuation allowance.
The
Company’s gross net operating loss carryforwards for Federal tax purposes total approximately $41.9 million and $42.4 million
at December 31, 2020 and 2019 respectively, expiring at various times in 2033 through 2037 for Federal losses generated through
December 31, 2017. As a result of the 2017 Tax Act, all Federal net operating losses that are generated beginning January 1, 2018
and beyond will carryforward indefinitely. The Company has foreign tax credit carryforwards of approximately $1.7 million as of
December 31, 2020 that expire in 2024. Utilization of these losses may be limited in the event certain changes in ownership occur.
In
March of 2020, The Coronavirus Aid, Relief, and Economic Security Act was enacted and made significant changes to Federal
tax laws, including certain changes that were retroactive to the 2019 tax year. Changes in tax laws are accounted for in the period
of enactment and the retroactive effects are recognized in these financial statements. There were no material income tax consequences
of this enacted legislation on the reporting period of these financial statements.
The
Company is subject to possible examinations not yet initiated for Federal purposes for the fiscal years 2017, 2018 and 2019. In
most cases, the Company has examinations open for state or local jurisdictions based on the particular jurisdiction’s
statute of limitations.
Estimated
amounts related to underpayment of income taxes, including interest and penalties, are classified as a component of income tax
expense in the consolidated statements of operations and were not material for the years ended December 31, 2020, 2019, 2018,
and 2017. Amounts accrued for estimated underpayment of income taxes were zero as of December 31, 2020 and 2019.
12.
Debt
The
Company’s short-term debt consists of the following (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
Strong/MDI 20-year installment loan
|
|
$
|
2,906
|
|
|
$
|
3,080
|
|
Strong/MDI 5-year equipment loan
|
|
|
393
|
|
|
|
-
|
|
Total short-term debt
|
|
$
|
3,299
|
|
|
$
|
3,080
|
|
Strong/MDI
Installment Loans
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and
restated May 15, 2018, with a bank consisting of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base
requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$0.5 million. Amounts
outstanding under the line of credit are payable on demand and bear interest at the prime rate established by the lender. Amounts
outstanding under the installment loans bear interest at the lender’s prime rate plus 0.5% and are payable in monthly installments,
including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at
any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially
all of Strong/MDI’s assets. The credit agreement requires Strong/MDI to maintain a ratio of liabilities to “effective
equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments) not
exceeding 2 to 1, a current ratio (excluding amounts due from related parties) of at least 1.5 to 1 and minimum “effective
equity” of CDN$8.0 million. There was CDN$3.7 million, or approximately $2.9 million, of principal outstanding on the 20-year
installment loan as of December 31, 2020, which bears variable interest at 2.95%. There was CDN$0.5 million, or approximately
$0.4 million, of principal outstanding on the 5-year installment loan as of December 31, 2020, which also bears variable interest
at 2.95%. Strong/MDI was in compliance with its debt covenants as of December 31, 2020.
13.
Stock Compensation
The
Company recognizes compensation expense for all stock-based payment awards based on estimated grant date fair values. Stock-based
compensation expense included in selling and administrative expenses approximated $1.1 million for each of the years ended December
31, 2020 and 2019.
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.
On December 17, 2019, the Company’s stockholders approved the amendment and restatement of the 2017 Plan to (i) increase
the number of shares of the Company’s common stock authorized for issuance under the 2017 Plan by 1,975,000 shares and (ii)
extend the expiration date of the 2017 Plan by approximately two years, until October 27, 2029. As of December 31, 2020, 2,190,349
shares were available for issuance under the amended and restated 2017 Plan.
Stock
Options
The
Company granted a total of 125,000 and 295,000 options during the years ended December 31, 2020 and 2019, 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
the grant.
The
weighted average grant date fair value of stock options granted during the years ended December 31, 2020 and 2019 was $0.84 and
$1.38, respectively. The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes valuation
model with the following weighted average assumptions:
|
|
2020
|
|
|
2019
|
|
Expected dividend yield at date of grant
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
0.45
|
%
|
|
|
1.62% - 1.98
|
%
|
Expected stock price volatility
|
|
|
57.7
|
%
|
|
|
47.9% - 50.6
|
%
|
Expected life of options (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
The
risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected
volatility was 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 2020:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at December 31, 2019
|
|
|
1,107,000
|
|
|
$
|
4.47
|
|
|
|
7.9
|
|
|
$
|
148
|
|
Granted
|
|
|
125,000
|
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(100,500
|
)
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(122,000
|
)
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
1,009,500
|
|
|
$
|
3.99
|
|
|
|
7.3
|
|
|
$
|
51
|
|
Exercisable at December 31, 2020
|
|
|
434,000
|
|
|
$
|
4.72
|
|
|
|
6.3
|
|
|
$
|
-
|
|
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. No options were exercised in 2020 or 2019.
As
of December 31, 2020, 575,500 stock option awards were non-vested. Unrecognized compensation costs related to all stock options
outstanding amounted to $0.7 million at December 31, 2020, which is expected to be recognized over a weighted-average period of
2.9 years.
Restricted
Stock Shares and Restricted Stock Units
The
Company awarded a total of 315,634 and 417,378 restricted stock units during the years ended December 31, 2020 and 2019,
respectively. 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. The weighted average grant date fair value of restricted stock units granted during the
years ended December 31, 2020 and 2019 was $1.58 and $2.95, respectively. The fair value of restricted stock awards that
vested during each of the years ended December 31, 2020 and 2019 was $0.4 million.
The
following table summarizes restricted stock share activity for 2020:
|
|
Number of Restricted
Stock Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested at December 31, 2019
|
|
|
23,334
|
|
|
$
|
6.50
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Shares vested
|
|
|
(23,334
|
)
|
|
|
6.50
|
|
Shares forfeited
|
|
|
-
|
|
|
|
|
|
Non-vested at December 31, 2020
|
|
|
-
|
|
|
|
|
|
The
following table summarizes restricted stock unit activity for 2020:
|
|
Number of Restricted Stock Units
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested at December 31, 2019
|
|
|
522,379
|
|
|
$
|
3.14
|
|
Granted
|
|
|
315,634
|
|
|
|
1.58
|
|
Shares vested
|
|
|
(191,621
|
)
|
|
|
3.21
|
|
Shares forfeited
|
|
|
(41,705
|
)
|
|
|
(2.03
|
)
|
Non-vested at December 31, 2020
|
|
|
604,687
|
|
|
$
|
2.38
|
|
As
of December 31, 2020, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately
$1.0 million, which is expected to be recognized over a weighted average period of 1.9 years.
14.
Compensation and Benefit Plans
Retirement
Plan
The
Company sponsors a defined contribution 401(k) plan (the “Plan”) for all eligible employees. Pursuant to the
provisions of the Plan, employees may defer up to 100% of their compensation. The Company will match 50% of the amount
deferred up to 6% of their compensation. The contributions made to the Plan by the Company were approximately $0.1 million
and $0.2 million for the years ended December 31, 2020 and 2019, respectively.
15.
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 operations
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 (dollars in thousands):
|
|
Year Ended
|
|
Lease cost
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
892
|
|
|
$
|
420
|
|
Interest on lease liabilities
|
|
|
338
|
|
|
|
184
|
|
Operating lease cost
|
|
|
1,269
|
|
|
|
1,342
|
|
Short-term lease cost
|
|
|
58
|
|
|
|
34
|
|
Sublease income
|
|
|
(342
|
)
|
|
|
(386
|
)
|
Net lease cost
|
|
$
|
2,215
|
|
|
$
|
1,594
|
|
|
|
Year Ended
|
|
Other information
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from finance leases
|
|
$
|
338
|
|
|
$
|
173
|
|
Operating cash flows from operating leases
|
|
$
|
1,036
|
|
|
$
|
1,662
|
|
Financing cash flows from finance leases
|
|
$
|
892
|
|
|
$
|
339
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
-
|
|
|
$
|
7
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
-
|
|
|
$
|
644
|
|
Derecognition of right-of-use asset in connection with Firefly transaction
|
|
$
|
-
|
|
|
$
|
3,394
|
|
|
|
As of
December 31, 2020
|
|
Weighted-average remaining lease term - finance leases (years)
|
|
|
1.9
|
|
Weighted-average remaining lease term - operating leases (years)
|
|
|
7.2
|
|
Weighted-average discount rate - finance leases
|
|
|
13.0
|
%
|
Weighted-average discount rate - operating leases
|
|
|
5.0
|
%
|
The
following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of December
31, 2020 (in thousands):
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2021
|
|
$
|
824
|
|
|
$
|
1,230
|
|
2022
|
|
|
706
|
|
|
|
1,168
|
|
2023
|
|
|
656
|
|
|
|
-
|
|
2024
|
|
|
669
|
|
|
|
-
|
|
2025
|
|
|
682
|
|
|
|
-
|
|
Thereafter
|
|
|
1,765
|
|
|
|
-
|
|
Total lease payments
|
|
|
5,302
|
|
|
|
2,398
|
|
Less: Amount representing interest
|
|
|
(866
|
)
|
|
|
(292
|
)
|
Present value of lease payments
|
|
|
4,436
|
|
|
|
2,106
|
|
Less: Current maturities
|
|
|
(619
|
)
|
|
|
(1,015
|
)
|
Lease obligations, net of current portion
|
|
$
|
3,817
|
|
|
$
|
1,091
|
|
On March 2, 2021, the
Company received a notice of default and demand (the “Default Notice”) from Huntington Technology Finance, Inc. (“Huntington”).
The Default Notice alleges the occurrence of an event of default under the terms of the Master Equipment Lease Agreement dated
May 19, 2017 (the “Lease Agreement”) pursuant to which the Company’s subsidiaries lease certain digital taxi
top advertising signs.
The Company has made
all required payments to Huntington during the term of the Lease Agreement and expects to continue to make monthly payments on
a timely basis. The Default Notice does not allege that the Company has failed to make any payment or incurred any economic or
payment default. Rather, the Default Notice alleges that the Company violated certain technical covenants in the Lease Agreement.
Huntington has demanded accelerated payment of the outstanding principal balance plus lessor profit and a fair market value buyout
of the assets under lease within ten days of the receipt of the Default Notice.
The Company disputes
Huntington’s assertion that an event of default has occurred under the Lease Agreement and believes that many of the assertions
made in the Default Notice are false and that the claims made in the Default Notice are therefore baseless. Accordingly, on March
3, 2021, the Company provided a written response to Huntington detailing the Company’s position that Huntington’s
allegations of an event of default under the Lease Agreement are unfounded, asserting the Company’s good faith belief that
the Company has abided by the terms, conditions and covenants of the Lease Agreement.
16.
Commitments, Contingencies and Concentrations
Concentrations
The
Company’s top ten customers accounted for approximately 54% of 2020 consolidated net revenues. Trade accounts
receivable from these customers represented approximately 53% of net consolidated receivables at December 31, 2020. None of
the Company’s customers accounted for more than 10% of both its consolidated net revenues during 2020 and its net
consolidated receivables as of December 31, 2020. 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.
Litigation
The
Company is involved, from time to time, in certain legal disputes in the ordinary course of business. No such disputes, individually
or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.
Insurance
Recoveries
During
February 2019, one portion of Strong/MDI’s Quebec, Canada facility sustained damage as a result of inclement weather. The
Company has property and casualty and business interruption insurance and has made claims for reimbursement of incurred costs
of the affected portion of the facility and compensation for the Company’s business interruption losses.
Through
December 31, 2020, the Company received insurance proceeds of $5.5 million, which included $2.3 million related
to the property and casualty claim and $3.2 million related to our business interruption claim. Any additional future claims
payments associated with the Company’s property and casualty losses are at the discretion of the insurance carrier based
on its continuing claims analysis. During the third quarter of 2020, the Company reached a settlement with its insurance company
which resolved all contingencies related to its business interruption claim, which resulted in an insurance recovery gain of approximately
$2.7 million during the year ended December 31, 2020.
17.
Business Segment Information
The
Company conducts its operations primarily through its Strong Entertainment business segment which manufactures and distributes
premium large format projection screens and provides technical support services and other related products and services to the
cinema exhibition industry, theme parks, schools, museums and other entertainment-related markets. Strong Entertainment also distributes
and supports third party products, including digital projectors, servers, library management systems, menu boards and sound systems.
The Company’s operating segments were determined based on the manner in which management organizes segments for making operating
decisions and assessing performance.
Summary
by Business Segments
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
$
|
20,629
|
|
|
$
|
36,874
|
|
Other
|
|
|
871
|
|
|
|
401
|
|
Total net revenues
|
|
|
21,500
|
|
|
|
37,275
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
|
4,646
|
|
|
|
12,159
|
|
Other
|
|
|
763
|
|
|
|
296
|
|
Total gross profit
|
|
|
5,409
|
|
|
|
12,455
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
|
2
|
|
|
|
6,665
|
|
Other
|
|
|
(86
|
)
|
|
|
(788
|
)
|
Total segment operating income
|
|
|
(84
|
)
|
|
|
5,877
|
|
Unallocated administrative expenses
|
|
|
(6,575
|
)
|
|
|
(8,592
|
)
|
Unallocated loss on disposal of assets
|
|
|
(25
|
)
|
|
|
-
|
|
Loss from operations
|
|
|
(6,684
|
)
|
|
|
(2,715
|
)
|
Other income (expense), net
|
|
|
2,354
|
|
|
|
(1,787
|
)
|
Loss from continuing operations before income taxes and equity method investment loss
|
|
$
|
(4,330
|
)
|
|
$
|
(4,502
|
)
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
$
|
468
|
|
|
$
|
1,599
|
|
Unallocated
|
|
|
77
|
|
|
|
171
|
|
Total capital expenditures from continuing operations
|
|
$
|
545
|
|
|
$
|
1,770
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment:
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
$
|
870
|
|
|
$
|
896
|
|
Unallocated
|
|
|
181
|
|
|
|
213
|
|
Total depreciation, amortization and impairment from continuing operations
|
|
$
|
1,051
|
|
|
$
|
1,109
|
|
(In thousands)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
$
|
21,408
|
|
|
$
|
21,659
|
|
Corporate assets
|
|
|
23,971
|
|
|
|
22,654
|
|
Discontinued operations
|
|
|
10,120
|
|
|
|
13,320
|
|
Total
|
|
$
|
55,499
|
|
|
$
|
57,633
|
|
Summary
by Geographical Area
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Net revenues
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
17,603
|
|
|
$
|
28,956
|
|
Canada
|
|
|
1,010
|
|
|
|
2,616
|
|
China
|
|
|
793
|
|
|
|
2,163
|
|
Mexico
|
|
|
78
|
|
|
|
88
|
|
Latin America
|
|
|
446
|
|
|
|
848
|
|
Europe
|
|
|
547
|
|
|
|
1,190
|
|
Asia (excluding China)
|
|
|
668
|
|
|
|
937
|
|
Other
|
|
|
355
|
|
|
|
477
|
|
Total
|
|
$
|
21,500
|
|
|
$
|
37,275
|
|
(In thousands)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
34,924
|
|
|
$
|
37,508
|
|
Canada
|
|
|
20,575
|
|
|
|
20,125
|
|
Total
|
|
$
|
55,499
|
|
|
$
|
57,633
|
|
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.
17.
Subsequent Event
On
February 3, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) in connection
with a public offering (the “Offering”) pursuant to which the Company agreed to issue and sell approximately 3.3 million
shares of its common stock, at a public offering price of $2.30 per share. The Offering closed on February 8, 2021. The net proceeds
from the Offering were approximately $6.7 million, after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company.
Pursuant
to the Underwriting Agreement, the Company also issued warrants to purchase up to approximately 0.2 million shares of its common
stock. The warrants are exercisable at any time, in whole or in part, from August 2, 2021 until February 3, 2026 at a price per
share of $2.875. The warrants also provide for one “piggyback” registration right with respect to the registration
of the shares of common stock underlying the warrants and customary anti-dilution provisions. The piggyback registration rights
last 4.5 years from the initial exercise date of August 2, 2021.