Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
1.
Nature of Operations
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, 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 also operates its Digital Ignition technology
incubator and co-working facility in Alpharetta, Georgia. 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, and in February 2021, the Company completed the sale
of its Convergent business segment. As a result of these divestitures, the Company has presented Strong Outdoor’s and Convergent’s
operating results as discontinued operations for all periods presented. See Note 3 for additional details.
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, 2020.
The
condensed consolidated balance sheet as of December 31, 2020 was derived from the Company’s audited consolidated balance sheet
as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management,
reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results
of operations and cash flows for the respective interim periods. Certain prior period balances have been reclassified to conform to current
period presentation. The results for interim periods are not necessarily indicative of trends or results expected for a full year.
Unless
otherwise indicated, all references to “dollars” and “$” in this Quarterly Report on Form 10-Q are to, and amounts
are presented in, U.S. dollars.
Use
of Management Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results and changes in facts and circumstances
may alter such estimates and affect results of operations and financial position in future periods.
Significant
uncertainty remains surrounding the COVID-19 global pandemic and the extent and duration of the impacts that it may have on the Company,
as well as its customers, suppliers, and employees. While cinema and theme park operators in the United States and other parts of the
world are in process of returning to “normal”, there continue to be spikes in COVID-19 cases and new variants in various
parts of the world that could impact the pace of recovery in our markets. Accordingly, there continues to be a heightened potential for
future reserves against trade receivables, inventory write downs and impairments of long-lived assets, goodwill, intangible assets and
investments. In the current environment, assumptions about future financial and operational performance, supply chain pricing and availability
and customer creditworthiness have greater variability than normal, which could in the future significantly affect the valuation of the
Company’s assets, both financial and non-financial. As an understanding of the longer-term impacts of COVID-19 on the Company’s
customers and business develops, there is heightened potential for changes in these views over the remainder of 2021, and potentially
beyond.
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.
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 nonmarketable 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 March 31, 2021 and determined that the Company’s
proportionate economic interest in the investees indicate that the investments were not impaired. The carrying value of our equity method
and cost method investments is reported as “investments” on the condensed consolidated balance sheets. Notes 3 and 7 contain
additional information on our equity method and cost method investments.
Fair
Value of Financial Instruments
Assets
and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation
of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified
and disclosed in one of the following three categories:
|
●
|
Level
1 – inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities
|
|
●
|
Level
2 – inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either
directly or indirectly
|
|
●
|
Level
3 – inputs to the valuation techniques are unobservable for the assets or liabilities
|
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, 2021 and December 31, 2020.
Fair
values measured on a recurring basis at March 31, 2021 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
22,317
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,317
|
|
Restricted cash
|
|
|
150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
Total
|
|
$
|
22,467
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,467
|
|
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
|
|
Total
|
|
$
|
4,787
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,787
|
|
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 $20.6 million at March
31, 2021 (see Note 7).
Recently
Adopted Accounting Pronouncements
In
December 2019, the Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“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 is 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 this ASU effective January 1, 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 is annual periods beginning after December 15, 2020, and interim periods within those fiscal years.
The adoption did not have a material impact on the Company’s consolidated financial statements.
Recently
Issued Accounting Pronouncements
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 allows 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 March 31, 2021, the Company had outstanding deferred rent of $0.1
million, which will be paid over the remaining term of the leases.
3.
Discontinued Operations
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”).
Pursuant to the Purchase Agreement, a subsidiary of Ballantyne Strong sold 100% of the issued and outstanding limited liability company
membership interests (the “Equity Interests”) in Convergent, LLC (“Convergent”) to SageNet. The purchase price
for the Equity Interests (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 (the “SageNet Promissory
Note”). Per the terms of the SageNet Promissory Note, the Company will receive twelve consecutive equal quarterly payments of principal,
plus accrued interest thereon, commencing on March 31, 2022. The Company has elected to record the SageNet Promissory Note using its
historical cost basis. 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 recorded a gain
of $14.9 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 Media, LLC (“SDM”), an indirect subsidiary of Ballantyne Strong, 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.
Additionally, 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. Ballantyne Strong 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,
Ballantyne Strong received $4.8 million worth 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 which 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 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. Ballantyne Strong 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, Ballantyne Strong 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 worth 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
had an option to repurchase any of the Series A-2 Shares held by SDM; (iii) all accounts payable to Firefly were cancelled and forgiven;
and (iv) the Commercial Agreement dated May 21, 2019 was terminated, which relieved Ballantyne Strong of its obligation to exercise the
purchase option contained within the master lease agreement. Ballantyne Strong recorded a gain of approximately $5.3 million during the
third quarter of 2020 as a result of the transaction. As of March 31, 2021, 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. Additionally, 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. In connection with the Asset Purchase Agreement, SDM agreed to indemnify Firefly for excluded liabilities
related to the transferred business.
Ballantyne
Strong entered into a Master Services Agreement (the “Master Services Agreement”) with Firefly, pursuant to which Ballantyne
Strong agreed to provide certain support services to Firefly, including remote equipment monitoring and diagnostics of screens, until
no later than December 31, 2022, and to provide 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, Ballantyne Strong received $2.0 million in cash consideration.
The
major classes of assets and liabilities included as part of discontinued operations as of December 31, 2020 are as follows (in
thousands):
|
|
December
31, 2020
|
|
|
|
Convergent
|
|
|
Strong
Outdoor
|
|
|
Total
|
|
Accounts receivable, net
|
|
$
|
3,065
|
|
|
$
|
-
|
|
|
$
|
3,065
|
|
Inventories, net
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
Other current
assets
|
|
|
371
|
|
|
|
-
|
|
|
|
371
|
|
Total current assets
of discontinued operations
|
|
|
3,748
|
|
|
|
-
|
|
|
|
3,748
|
|
Property, plant and equipment, net
|
|
|
3,172
|
|
|
|
-
|
|
|
|
3,172
|
|
Intangible assets, net
|
|
|
753
|
|
|
|
-
|
|
|
|
753
|
|
Operating lease right-of-use assets
|
|
|
212
|
|
|
|
-
|
|
|
|
212
|
|
Finance lease right-of-use
assets
|
|
|
2,235
|
|
|
|
-
|
|
|
|
2,235
|
|
Total
long-term assets of discontinued operations
|
|
|
6,372
|
|
|
|
-
|
|
|
|
6,372
|
|
Total
assets of discontinued operations
|
|
$
|
10,120
|
|
|
$
|
-
|
|
|
$
|
10,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
449
|
|
|
$
|
-
|
|
|
$
|
449
|
|
Accrued expenses
|
|
|
812
|
|
|
|
-
|
|
|
|
812
|
|
Current portion of long-term debt
|
|
|
1,075
|
|
|
|
-
|
|
|
|
1,075
|
|
Current portion of operating lease obligation
|
|
|
108
|
|
|
|
-
|
|
|
|
108
|
|
Current portion of finance lease obligation
|
|
|
859
|
|
|
|
-
|
|
|
|
859
|
|
Deferred revenue
and customer deposits
|
|
|
598
|
|
|
|
-
|
|
|
|
598
|
|
Total current liabilities
of discontinued operations
|
|
|
3,901
|
|
|
|
-
|
|
|
|
3,901
|
|
Long-term debt, net of current portion
|
|
|
2,340
|
|
|
|
-
|
|
|
|
2,340
|
|
Operating lease obligation, net of current
portion
|
|
|
107
|
|
|
|
-
|
|
|
|
107
|
|
Finance lease obligation, net of current
portion
|
|
|
1,530
|
|
|
|
-
|
|
|
|
1,530
|
|
Other long-term
liabilities
|
|
|
89
|
|
|
|
-
|
|
|
|
89
|
|
Total
long-term liabilities of discontinued operations
|
|
|
4,066
|
|
|
|
-
|
|
|
|
4,066
|
|
Total
liabilities of discontinued operations
|
|
$
|
7,967
|
|
|
$
|
-
|
|
|
$
|
7,967
|
|
The
major line items constituting the net income (loss) from discontinued operations are as follows (in thousands):
|
|
Three
Months Ended March 31, 2021
|
|
|
Three
Months Ended March 31, 2020
|
|
|
|
Convergent
|
|
|
Strong
Outdoor
|
|
|
Total
|
|
|
Convergent
|
|
|
Strong
Outdoor
|
|
|
Total
|
|
Net revenues
|
|
$
|
1,472
|
|
|
$
|
-
|
|
|
$
|
1,472
|
|
|
$
|
4,963
|
|
|
$
|
1,197
|
|
|
$
|
6,160
|
|
Cost of revenues
|
|
|
746
|
|
|
|
-
|
|
|
|
746
|
|
|
|
2,940
|
|
|
|
836
|
|
|
|
3,776
|
|
Gross profit
|
|
|
726
|
|
|
|
-
|
|
|
|
726
|
|
|
|
2,023
|
|
|
|
361
|
|
|
|
2,384
|
|
Selling and administrative
expenses
|
|
|
1,241
|
|
|
|
-
|
|
|
|
1,241
|
|
|
|
1,101
|
|
|
|
704
|
|
|
|
1,805
|
|
(Loss) income from
operations
|
|
|
(515
|
)
|
|
|
-
|
|
|
|
(515
|
)
|
|
|
922
|
|
|
|
(343
|
)
|
|
|
579
|
|
Gain on Convergent transaction
|
|
|
14,937
|
|
|
|
-
|
|
|
|
14,937
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain on Firefly transaction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270
|
|
|
|
270
|
|
Other expense
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
(184
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
Income (loss) from
discontinued operations
|
|
|
14,383
|
|
|
|
-
|
|
|
|
14,383
|
|
|
|
738
|
|
|
|
(73
|
)
|
|
|
665
|
|
Income tax expense
|
|
|
(58
|
)
|
|
|
-
|
|
|
|
(58
|
)
|
|
|
(58
|
)
|
|
|
-
|
|
|
|
(58
|
)
|
Total
net income (loss) from discontinued operations
|
|
$
|
14,325
|
|
|
$
|
-
|
|
|
$
|
14,325
|
|
|
$
|
680
|
|
|
$
|
(73
|
)
|
|
$
|
607
|
|
4.
Revenue
The
Company accounts for revenue using the following steps:
|
●
|
Identify
the contract, or contracts, with a customer;
|
|
●
|
Identify
the performance obligations in the contract;
|
|
●
|
Determine
the transaction price;
|
|
●
|
Allocate
the transaction price to the identified performance obligations; and
|
|
●
|
Recognize
revenue when, or as, the Company satisfies the performance obligations.
|
The
Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered
into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends
on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance
obligations, the items are analyzed to determine 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 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 March 31, 2021 or December 31, 2020.
The
following tables disaggregate the Company’s revenue by major source and by operating segment for the three months ended
March 31, 2021 and March 31, 2020 (in thousands):
|
|
Three
Months Ended March 31, 2021
|
|
|
Three
Months Ended March 31, 2020
|
|
|
|
Strong
Entertainment
|
|
|
Other
|
|
|
Total
|
|
|
Strong
Entertainment
|
|
|
Other
|
|
|
Total
|
|
Screen system sales
|
|
$
|
2,047
|
|
|
$
|
-
|
|
|
$
|
2,047
|
|
|
$
|
2,956
|
|
|
$
|
-
|
|
|
$
|
2,956
|
|
Digital equipment sales
|
|
|
1,175
|
|
|
|
-
|
|
|
|
1,175
|
|
|
|
1,649
|
|
|
|
-
|
|
|
|
1,649
|
|
Extended warranty sales
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
159
|
|
|
|
-
|
|
|
|
159
|
|
Other product
sales
|
|
|
274
|
|
|
|
-
|
|
|
|
274
|
|
|
|
468
|
|
|
|
-
|
|
|
|
468
|
|
Total product
sales
|
|
|
3,528
|
|
|
|
-
|
|
|
|
3,528
|
|
|
|
5,232
|
|
|
|
-
|
|
|
|
5,232
|
|
Field maintenance and monitoring services
|
|
|
863
|
|
|
|
-
|
|
|
|
863
|
|
|
|
1,804
|
|
|
|
-
|
|
|
|
1,804
|
|
Installation services
|
|
|
71
|
|
|
|
-
|
|
|
|
71
|
|
|
|
257
|
|
|
|
-
|
|
|
|
257
|
|
Other service
revenues
|
|
|
10
|
|
|
|
300
|
|
|
|
310
|
|
|
|
20
|
|
|
|
101
|
|
|
|
121
|
|
Total service
revenues
|
|
|
944
|
|
|
|
300
|
|
|
|
1,244
|
|
|
|
2,081
|
|
|
|
101
|
|
|
|
2,182
|
|
Total
|
|
$
|
4,472
|
|
|
$
|
300
|
|
|
$
|
4,772
|
|
|
$
|
7,313
|
|
|
$
|
101
|
|
|
$
|
7,414
|
|
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 Strong Entertainment 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 customers in the Strong Entertainment segment. 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 Strong Entertainment customers and recognizes revenue upon completion of the installations.
Extended
warranty sales
The
Company sells extended warranties to its Strong Entertainment customers. When the Company is the primary obligor, revenue is recognized
on a gross basis ratably over the term of the extended warranty. In third party extended warranty sales, the Company is not the
primary obligor, and revenue is recognized on a net basis at the time of the sale.
Timing
of Revenue Recognition
The
following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the
three months ended March 31, 2021 and 2020 (in thousands):
|
|
Three
Months Ended March 31, 2021
|
|
|
Three
Months Ended March 31, 2020
|
|
|
|
Strong
Entertainment
|
|
|
Other
|
|
|
Total
|
|
|
Strong
Entertainment
|
|
|
Other
|
|
|
Total
|
|
Point in time
|
|
$
|
3,756
|
|
|
$
|
4
|
|
|
$
|
3,760
|
|
|
$
|
5,715
|
|
|
$
|
4
|
|
|
$
|
5,719
|
|
Over time
|
|
|
716
|
|
|
|
296
|
|
|
|
1,012
|
|
|
|
1,598
|
|
|
|
97
|
|
|
|
1,695
|
|
Total
|
|
$
|
4,472
|
|
|
$
|
300
|
|
|
$
|
4,772
|
|
|
$
|
7,313
|
|
|
$
|
101
|
|
|
$
|
7,414
|
|
At
March 31 2021, the unearned revenue amount associated with long-term projects that the Company uses the percentage-of-completion
method to recognize revenue, maintenance and monitoring services and extended warranty sales in which the Company is the primary
obligor was $2.0 million. The Company expects to recognize $1.3 million of unearned revenue amounts during the remainder of 2021
and $0.7 million during 2022.
5.
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 from continuing operations in all periods presented, there were no differences
between average shares used to compute basic and diluted loss per share for the three months ended March 31, 2021 and 2020. The
following table summarizes the weighted average shares used to compute basic and diluted loss per share (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted average shares
outstanding
|
|
|
16,835
|
|
|
|
14,625
|
|
Dilutive effect
of stock options and certain non-vested restricted stock units
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted
average shares outstanding
|
|
|
16,835
|
|
|
|
14,625
|
|
Options
to purchase 514,500 and 1,057,000 shares of common stock were outstanding as of March 31, 2021 and March 31, 2020, respectively,
but were not included in the computation of diluted loss per share as the options’ exercise prices were greater than the
average market price of the common shares for each period. An additional 142,557 and 86,725 common stock equivalents related to
options and restricted stock awards were excluded for the three months ended March 31, 2021 and March 31, 2020, respectively,
as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.
6.
Inventories
Inventories
consisted of the following (in thousands):
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Raw materials and components
|
|
$
|
1,485
|
|
|
$
|
1,584
|
|
Work in process
|
|
|
289
|
|
|
|
141
|
|
Finished goods
|
|
|
566
|
|
|
|
539
|
|
|
|
$
|
2,340
|
|
|
$
|
2,264
|
|
The
inventory balances were net of reserves of approximately $0.4 million as of both March 31, 2021 and December 31, 2020.
7.
Investments
The
following summarizes our investments (dollars in thousands):
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
|
Carrying
Amount
|
|
|
Economic
Interest
|
|
|
Carrying
Amount
|
|
|
Economic
Interest
|
|
Equity
Method Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FG Financial Group, Inc.
|
|
$
|
3,954
|
|
|
|
20.8
|
%
|
|
$
|
4,370
|
|
|
|
20.9
|
%
|
GreenFirst Forest
Products Inc.
|
|
|
2,378
|
|
|
|
29.6
|
%
|
|
|
2,697
|
|
|
|
29.6
|
%
|
Total Equity Method
Investments
|
|
|
6,332
|
|
|
|
|
|
|
|
7,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
Method Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firefly Systems,
Inc.
|
|
|
13,152
|
|
|
|
|
|
|
|
13,100
|
|
|
|
|
|
Total
Investments
|
|
$
|
19,484
|
|
|
|
|
|
|
$
|
20,167
|
|
|
|
|
|
Equity
Method Investments
The
following summarizes the (loss) income of equity method investees reflected in the condensed consolidated statements of operations
(in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Entity
|
|
|
|
|
|
|
FG Financial Group, Inc.
|
|
$
|
(416
|
)
|
|
$
|
1,417
|
|
GreenFirst
Forest Products Inc.
|
|
|
(353
|
)
|
|
|
(48
|
)
|
Total
|
|
$
|
(769
|
)
|
|
$
|
1,369
|
|
FG
Financial Group, Inc.
FG
Financial Group, Inc. (“FGF”) (formerly 1347 Property Insurance Holdings, Inc.) is a reinsurance and investment management
holding company focused on opportunistic collateralized and loss capped reinsurance, while allocating capital to special purpose acquisition
companies (each, a “SPAC”) and SPAC sponsor-related businesses. 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, D. Kyle Cerminara, is the chairman of the board of directors of FGF. As of March 31, 2021, Mr. Cerminara
was 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 Company did not receive dividends from FGF during the three months ended March 31, 2021 or 2020. Based on quoted market prices, the
market value of the Company’s ownership in FGF was $4.8 million at March 31, 2021.
GreenFirst
Forest Products, Inc.
GreenFirst
Forest Products Inc. (“GreenFirst”) (formerly Itasca Capital Ltd.) is a publicly-traded Canadian company focused on
environmentally sustainable forest management and lumber production. The Company’s Chairman, Mr. Cerminara, is chairman
of the board of directors of GreenFirst, and the Company’s former Co-Chairman, Lewis M. Johnson, 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 three months ended March 31, 2021 or 2020. Based on quoted market prices, the market value of the Company’s
ownership in GreenFirst was $15.7 million at March 31, 2021.
On
April 12, 2021, GreenFirst announced that it had entered into an asset purchase agreement (the “GreenFirst Purchase Agreement”)
pursuant to which it will acquire a portfolio of forest and paper product assets (the “Assets”) at a purchase price
of approximately US$214 million. GreenFirst announced that it intends to file a prospectus to conduct a backstopped rights offering
(the “Rights Offering”) to finance a portion of the purchase price for the Assets. Pursuant to its announcement, GreenFirst
intends to issue three rights (each a “Right”) for each of its outstanding shares of common stock (each a “Common
Share”) with each Right being exercisable, at a subscription price of CDN$1.50, to acquire a subscription receipt (each
a “Subscription Receipt”). Each Subscription Receipt would, upon the closing of the transactions contemplated by the
Agreement and without any further consideration, automatically be exchanged into a Common Share. On April 10, 2021, the Company
entered into a commitment letter (the “Commitment”) with GreenFirst pursuant to which the Company agreed to participate
in the Rights Offering expected to be conducted by GreenFirst. By entering into the Commitment, the Company committed to exercise
the Canadian dollar equivalent of approximately US$1.6 million of the Rights offered in the Rights Offering. The Commitment will
terminate, and the Company will be released from its obligations under the Commitment if the Rights Offering is not completed
by September 30, 2021, or such later date as agreed to between GreenFirst and the purchaser committed to backstop the Rights Offering.
As
of March 31, 2021, the Company’s retained earnings included an accumulated deficit from its equity method investees of approximately
$4.8 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, 2020 and 2019, consistent with the Company’s recognition of the results of its equity
method investments on a one-quarter lag (in thousands):
For the three months
ended December 31,
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue (1)
|
|
$
|
(243
|
)
|
|
$
|
4,340
|
|
Operating (loss) income
|
|
$
|
(3,178
|
)
|
|
$
|
3,977
|
|
Net (loss) income
|
|
$
|
(3,181
|
)
|
|
$
|
8,121
|
|
(1) FGF records realized and
unrealized gains and losses on investments in net investment income (loss), which is included in the revenue line above.
|
Cost
Method Investment
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, the Company’s Canadian subsidiary, Strong/MDI Screen Systems,
Inc. (“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. The Company and its affiliated
entities 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.
Property, Plant and Equipment, Net
Property, plant and equipment,
net consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Land
|
|
$
|
51
|
|
|
$
|
51
|
|
Buildings and improvements
|
|
|
6,960
|
|
|
|
6,824
|
|
Machinery and other equipment
|
|
|
4,688
|
|
|
|
4,635
|
|
Office furniture and fixtures
|
|
|
864
|
|
|
|
946
|
|
Construction in progress
|
|
|
134
|
|
|
|
154
|
|
Total properties, cost
|
|
|
12,697
|
|
|
|
12,610
|
|
Less: accumulated depreciation
|
|
|
(7,267
|
)
|
|
|
(7,086
|
)
|
Property, plant and equipment, net
|
|
$
|
5,430
|
|
|
$
|
5,524
|
|
9.
Goodwill
The
following represents a summary of changes in the Company’s carrying amount of goodwill for the three months ended March
31, 2021 (in thousands):
Balance as of December
31, 2020
|
|
$
|
938
|
|
Foreign currency
translation adjustment
|
|
|
12
|
|
Balance as
of March 31, 2021
|
|
$
|
950
|
|
10.
Debt
The
Company’s short-term debt consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
Strong/MDI
20-year installment loan
|
|
$
|
2,883
|
|
|
$
|
2,906
|
|
Strong/MDI 5-year
equipment loan
|
|
|
378
|
|
|
|
393
|
|
Insuranace
note payable
|
|
|
413
|
|
|
|
-
|
|
Total
short-term debt
|
|
$
|
3,674
|
|
|
$
|
3,299
|
|
Strong/MDI
Installment Loans and Revolving Credit Facility
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and
restated May 15, 2018, with a bank consisting of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base
requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$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. As of March 31, 2021, there was CDN$3.6 million, or approximately $2.9 million, of principal
outstanding on the 20-year installment loan, which bears variable interest at 2.95%. As of March 31, 2021, there was CDN$0.5 million,
or approximately $0.4 million, of principal outstanding on the 5-year installment loan, which also bears variable interest at
2.95%. Strong/MDI was in compliance with its debt covenants as of March 31, 2021.
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 Accounting Standards Codification Topic 842, “Leases,”
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):
Lease cost
|
|
Three
Months Ended
|
|
|
|
March
31, 2021
|
|
|
March
31, 2020
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization
of right-of-use assets
|
|
$
|
242
|
|
|
$
|
282
|
|
Interest on lease
liabilities
|
|
|
66
|
|
|
|
95
|
|
Operating lease cost
|
|
|
233
|
|
|
|
304
|
|
Short-term lease cost
|
|
|
15
|
|
|
|
14
|
|
Sublease income
|
|
|
(72
|
)
|
|
|
(97
|
)
|
Net
lease cost
|
|
$
|
484
|
|
|
$
|
598
|
|
Other information
|
|
|
|
|
|
|
|
|
March
31, 2021
|
|
|
March
31, 2020
|
|
Cash paid for amounts included in
the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating
cash flows from finance leases
|
|
$
|
66
|
|
|
$
|
95
|
|
Operating cash
flows from operating leases
|
|
$
|
211
|
|
|
$
|
274
|
|
Financing cash
flows from finance leases
|
|
$
|
242
|
|
|
$
|
212
|
|
Right-of-use assets obtained in exchange
for new finance lease liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Right-of-use assets obtained in exchange
for new operating lease liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
As
of
March
31, 2021
|
|
Weighted-average remaining
lease term - finance leases (years)
|
|
|
1.7
|
|
Weighted-average remaining lease
term - operating leases (years)
|
|
|
7.0
|
|
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 finance and operating lease liabilities as of March 31, 2021
(in thousands):
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Remainder of 2021
|
|
$
|
611
|
|
|
$
|
922
|
|
2022
|
|
|
706
|
|
|
|
1,168
|
|
2023
|
|
|
656
|
|
|
|
-
|
|
2024
|
|
|
669
|
|
|
|
-
|
|
2025
|
|
|
683
|
|
|
|
-
|
|
Thereafter
|
|
|
1,766
|
|
|
|
-
|
|
Total lease payments
|
|
|
5,091
|
|
|
|
2,090
|
|
Less: Amount
representing interest
|
|
|
(812
|
)
|
|
|
(226
|
)
|
Present value of lease payments
|
|
|
4,279
|
|
|
|
1,864
|
|
Less: Current
maturities
|
|
|
(607
|
)
|
|
|
(1,047
|
)
|
Lease obligations,
net of current portion
|
|
$
|
3,672
|
|
|
$
|
817
|
|
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 alleged 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 did not
allege that the Company has failed to make any payment or incurred any economic or payment default. Rather, the Default Notice
alleged that the Company violated certain technical covenants in the Lease Agreement. Huntington 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 disputed Huntington’s assertion that an event of default had 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, and asserting the Company’s good faith belief that the Company has abided by the terms, conditions, and covenants
of the Lease Agreement. In order to resolve the situation and avoid the potential costs of a lengthy legal dispute, on April 2,
2021, the Company entered into an Agreement of Forbearance and Conditional Sale (the “Settlement Agreement”) with
Huntington and CCA Financial, LLC. The amounts payable by the Company pursuant to the Settlement Agreement include only payments
contractually due under the Lease Agreement and do not include any additional penalties, interest, or liquidation damages. The
Company agreed to accelerate payment of the $2.1 million remaining payments contractually due under the Lease Agreement and to
exercise its option to purchase the leased assets for $1.0 million. The $2.1 million plus sales tax owed under the Lease Agreement
was paid upon execution of the Settlement Agreement and the lease equipment buyout will be paid in twelve monthly installments
from June 1, 2021 to May 1, 2022. Upon payment in full, the Lease Agreement and all obligations thereunder will terminate.
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, 2021 and December 31, 2020.
During
the quarter ended March 31, 2021, the Company sold its Convergent business segment. As a result, this business segment is categorized
as discontinued operations for the periods presented. The Company has sufficient net operating losses to offset Federal taxable
income/loss from these discontinued operations as well as the tax effects related to the gain on sale of discontinued operations.
State income tax expense related to the operations and sale of this entity has been allocated to discontinued operations.
The
Tax Cuts and Jobs Act of 2017 provides for a territorial tax system, which began in 2018. It includes the global intangible low-taxed
income (“GILTI”) provision. The GILTI provisions require the Company to include in its U.S. income tax return foreign
subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. As a result of the GILTI
provisions, the Company’s inclusion of taxable income was incorporated into the overall net operating loss and valuation
allowance for the three months ended March 31, 2021 and comparative March 31, 2020, as well as December 31, 2020.
Changes
in tax laws may affect recorded deferred tax assets and liabilities and the Company’s effective tax rate in the future.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES
Act made significant changes to Federal tax laws, including certain changes that are retroactive to the 2019 tax year. The effects
of these changes relate to deferred tax assets and net operating losses; all of which are offset by valuation allowance. There
were no material income tax consequences of this enacted legislation on the reporting period of these condensed consolidated financial
statements.
The
Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 2017 through 2019. 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 based on estimated grant date fair values. Stock-based
compensation expense included in selling and administrative expenses approximated $0.3 million for each of the three months ended
March 31, 2021 and 2020.
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 March 31, 2021, 2,431,856
shares were available for issuance under the amended and restated 2017 Plan.
Stock
Options
The
following table summarizes stock option activity for the three months ended March 31, 2021:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding at December
31, 2020
|
|
|
1,009,500
|
|
|
$
|
3.99
|
|
|
|
7.3
|
|
|
$
|
51
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(142,000
|
)
|
|
|
4.14
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(178,000
|
)
|
|
|
5.05
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2021
|
|
|
689,500
|
|
|
$
|
3.69
|
|
|
|
7.3
|
|
|
$
|
144
|
|
Exercisable
at March 31, 2021
|
|
|
343,000
|
|
|
$
|
4.69
|
|
|
|
6.2
|
|
|
$
|
7
|
|
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, 2021, 346,500 stock option awards were non-vested. Unrecognized compensation cost related to non-vested stock options
was approximately $0.4 million, which is expected to be recognized over a weighted average period of 2.8 years.
Restricted
Stock Units
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
following table summarizes restricted stock unit activity for the three months ended March 31, 2021:
|
|
Number
of Restricted Stock Units
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Non-vested at December
31, 2020
|
|
|
604,687
|
|
|
$
|
2.38
|
|
Granted
|
|
|
78,493
|
|
|
|
2.01
|
|
Shares vested
|
|
|
(212,699
|
)
|
|
|
3.12
|
|
Shares
forfeited
|
|
|
-
|
|
|
|
|
|
Non-vested
at March 31, 2021
|
|
|
470,481
|
|
|
$
|
2.17
|
|
As
of March 31, 2021, the total unrecognized compensation cost related to non-vested restricted stock unit awards was approximately
$1.0 million, which is expected to be recognized over a weighted average period of 1.9 years.
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.
The Company is named as a
defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product
liability claims based principally on allegations of past distribution of commercial lighting products containing wiring that may have
contained asbestos. Each case names dozens of corporate defendants in addition to the Company. In the Company’s experience, a large percentage
of these types of claims have never been substantiated and have been dismissed by the courts. The Company has not suffered any adverse
verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. When appropriate, the
Company may settle certain claims. The Company does not expect the resolution of these cases to have a material adverse effect on the
Company’s financial condition, results of operations or cash flows.
Concentrations
The
Company’s top ten customers accounted for approximately 56% of consolidated net revenues during the three months ended March
31, 2021. Trade accounts receivable from these customers represented approximately 35% of net consolidated receivables at March
31, 2021. None of the Company’s customers accounted for more than 10% of both its consolidated net revenues during the three
months ended March 31, 2021 and its net consolidated receivables as of March 31, 2021. 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 and the
SageNet Promissory Note. 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.
15.
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
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Strong
Entertainment
|
|
$
|
4,472
|
|
|
$
|
7,313
|
|
Other
|
|
|
300
|
|
|
|
101
|
|
Total net revenues
|
|
|
4,772
|
|
|
|
7,414
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
|
889
|
|
|
|
1,795
|
|
Other
|
|
|
271
|
|
|
|
72
|
|
Total gross profit
|
|
|
1,160
|
|
|
|
1,867
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
Strong Entertainment
|
|
|
(247
|
)
|
|
|
(374
|
)
|
Other
|
|
|
(13
|
)
|
|
|
(206
|
)
|
Total segment operating
income
|
|
|
(260
|
)
|
|
|
(580
|
)
|
Unallocated administrative
expenses
|
|
|
(1,497
|
)
|
|
|
(1,921
|
)
|
Loss from operations
|
|
|
(1,757
|
)
|
|
|
(2,501
|
)
|
Other income,
net
|
|
|
81
|
|
|
|
420
|
|
Loss from continuing
operations before income taxes and equity method investment loss
|
|
$
|
(1,676
|
)
|
|
$
|
(2,081
|
)
|
(In
thousands)
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
Strong
Entertainment
|
|
$
|
24,084
|
|
|
$
|
21,408
|
|
Corporate assets
|
|
|
41,180
|
|
|
|
23,971
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
10,120
|
|
Total
|
|
$
|
65,264
|
|
|
$
|
55,499
|
|
Summary
by Geographical Area
|
|
Three
Months Ended March 31,
|
|
(In
thousands)
|
|
2021
|
|
|
2020
|
|
Net revenues
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
4,149
|
|
|
$
|
5,851
|
|
Canada
|
|
|
197
|
|
|
|
408
|
|
China
|
|
|
2
|
|
|
|
201
|
|
Mexico
|
|
|
16
|
|
|
|
78
|
|
Latin America
|
|
|
42
|
|
|
|
276
|
|
Europe
|
|
|
51
|
|
|
|
194
|
|
Asia (excluding
China)
|
|
|
132
|
|
|
|
258
|
|
Other
|
|
|
183
|
|
|
|
148
|
|
Total
|
|
$
|
4,772
|
|
|
$
|
7,414
|
|
(In
thousands)
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
46,830
|
|
|
$
|
34,924
|
|
Canada
|
|
|
18,434
|
|
|
|
20,575
|
|
Total
|
|
$
|
65,264
|
|
|
$
|
55,499
|
|
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.